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Madrid: Banks in Spain are being penalised as fallout from the US subprime market makes its way to the country that contributes most to Europe's economic growth.
Lack of demand forced at least five Spanish financial institutions, including Banco Santander SA and Ahorro Corporacion Financiera SV, to cancel mortgage-backed bond sales between August and November, and no bank in the country has done a deal since then, data compiled by Bloomberg show. The difference in yields between AAA rated mortgage-backed notes and benchmark interest rates has more than quadrupled since July, leaving Spain with the widest spread in Europe, UniCredit SpA says.
Losses from rising home foreclosures in the US are making bondholders more wary as Moody's Investors Service forecasts a 15-fold surge in Spanish mortgage defaults this year. Spain's interest rates have doubled since 2004, hurting the bulk of borrowers who have adjustable rates. Home prices are falling for the first time in a decade, and household debt is 130 per cent of income, twice the ratio in 2000, Bank of Spain data show.
Concerns
"The subprime crisis is raising concerns about overheated property markets, especially Spain," said Raphael Gallardo, a strategist at Axa Investment Managers in Paris who helps oversee 600 billion euros ($876 billion) of assets. "The real estate bubble is bursting. A lot of investors in Spanish mortgage- backed bonds may be hurt."
Spanish home loans account for 30 per cent of the euro area's $1.2 trillion of outstanding mortgage-backed bonds, and the country's banks are Europe's second-biggest issuers after the UK, according to Milan-based UniCredit, Italy's biggest bank. Since July, banks have publicly sold 2.55 billion euros of mortgage-backed debt, a fraction of the more than 72 billion euros sold in the first half, UniCredit data show.
Lenders sell pools of mortgages to investors to transfer the risk of borrower defaults and reduce the amount of capital they're required to hold as a cushion against losses. About two- thirds of the debt is sold to international investors, according to the Bank of Spain.
"Investors are concerned that the Spanish housing market will collapse as the U.S. market is doing now," said Meyrick Chapman, a London-based rates strategist at UBS AG, Europe's biggest bank.
Santander, Spain's big-gest lender, scrapped a one billion- euro sale of asset-backed bonds in September. Ahorro Corporacion Financiera, the Madrid investment group owned by 43 Spanish savings banks known as Cajas, and Madrid-based Banco Popular SA, the country's third-largest bank, cancelled a combined $4.8 billion of sales in dollars and euros the same month.
Caja Madrid, the nation's second-biggest savings bank, and Madrid-based Bankinter SA, the sixth-largest bank by market value, intended to sell a total 900 million euros of the debt.
The price of mortgage-backed securities issued by Santander in April drop-ped to 97.4 per cent of face value from about 100 at the end of June, data compiled by Bloomberg show.
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