If you value your life, don't get caught standing next to a Spanish bank in the early part of next week. London-based Fitch Ratings downgraded Spain's sovereign debt on Friday May 28, after markets had already closed; but they were simply taking note of a fact which Lyndon LaRouche has been warning about for months: That the entire Spanish banking system is a goner, and as it implodes, it will bring down the entire British banking system with it.
Spain's banks are muy bankrupt—both its commercial banking segment, with about $1.8 trillion in assets, and its savings bank sector (or "cajas"), which is about the same size. Between them, they have over $540 billion in exposure to the Construction and Property Development sector—i.e., real estate speculation—where the speculative binge over the last two decades barreled ahead at about twice the rate of Britain's, and three times that of the United States.
Today, about 37% of that $540 billion in bank real estate exposure has gone sour, according to official statistics just published by the central bank, the Bank of Spain. The worst of it has either been written off outright (1% of the total) or foreclosed on (13%). But there is an additional 10% which is classified as "doubtful," which means that nothing has been paid on it for more than 90 days. The banks have not yet foreclosed on these loans, only because they don't want to carry more trash on their books—much as is happening in the U.S. And on top of all that, there is still another 13% considered "substandard loans," meaning they are rapidly heading towards 90 days, too.
In a fraud that is reminiscent of Lyndon LaRouche's description of the U.S. auto sector in the 1950s, Spain's banks are engaging in cheap accounting sleight-of-hand to try to keep the reality of their bankruptcy at bay. Not only are they not calling in non-performing debt, in order to be able to still show it as assets on their books; they have also deferred losses where foreclosures have occurred, by taking direct control of the physical houses and property instead—on a massive scale. The largest Spanish banks, such as Santander and BBVA, have set up specialist real estate units to manage "NPAs" (non-performing assets) and try to sell houses directly to consumers.
How extensive is this? Well, a Barclays Capital report published in February says that NPAs as a percentage of loans to the real estate sector, officially stand at 17% for BBVA, and 8% for Santander. But when you adjust the NPA ratio to include acquired real estate physical assets, BBVA's ratio rises to 23%, and Santander's jumps to a staggering 29%!
So when all this blows, the shock front will spread far and wide—emphatically including London. About 42% of all Spanish debt is held by foreigners: The public debt component is 38% held abroad, and the financial sector's debt is 80% foreign owned. Of those foreign holdings, nearly 15% are in London banks; only German and French banks are more exposed.
But that's only part of the story. The "Spanish" banking system itself is, in large measure, a financial and political subsidiary of the City of London. The two largest commercial banks in Spain, Santander and BBVA, control 29% and 27% respectively of the entire banking system's assets. Santander is run top-down by the Royal Family's Royal Bank of Scotland, and BBVA also has historical ties into British finance.
As the fuse on the bomb burns down quickly, what would London have the Spanish government do about this mess? Further destroy the physical economy, and lay off millions of more workers in a country that already has the highest official unemployment rate in Europe, at 20%. And that will make the country ungovernable, to put it mildly.
More on this aspect of the story will follow.