The Spanish Financial System: Facing up to the Real Estate Crisis and Credit Crunch

Finance linked to construction and the housing industry has been the most dynamic element of credits and loans granted by Spanish financial institutions. In fact, 60 per cent of the credit granted to the private sector residents is related to the activity in the real estate sector. The rise in the interest rate during the last two years, the over-valuation in house prices, the evident excess of housing supply and the growing debt levels of Spanish families are responsible for ending the period of long and rapid growth in the sector. In the face of the resultant uncertainty the most optimistic analysts predicted a smooth slow-down with a limited impact on the financial system and the growth of the economy. The subprime mortgage crisis that arose in the summer of 2007 has set off a re-evaluation of the credit risk and this has brought a tightening of the terms for granting credit. A contraction in the supply of credit does not guarantee that the slowdown will be smooth. The question lies in estimating the scale of the financial crisis and the crisis in the housing sector, and assessing whether the Spanish financial system is strong enough to face up to this new situation.