Robert Tornabell: Spain's 90s Greed is at the Root of its Banking Crisis

Spain's banking crisis did not come out of the blue. In the 1990s the Spanish suffered a bout of collective madness. Interest rates fell from 14% (with the peseta) to 4% (with the euro) in a matter of weeks. In 1998 the centre-right government passed a law that significantly increased the amount of land for development. Developers got rich, selling the idea that everyone was going to win because property would always go up – never down – in value. German banks financed Spain's savings and commercial banks, which needed extra funds for high-risk mortgages. Greed made us rich for a while – but then it made us poor, and jeopardised our future.

 

This is now a country with a million unsold properties; hundreds of housing developments left unfinished by construction companies and real estate promoters, especially along the Mediterranean coast but also in city centres; 4.7 million people unemployed and an unemployment rate of 24.5% overall, and 50% in the 18–25 age bracket – and that's without including the student population. The situation of "extreme difficulty" described this week by the prime minister, Mariano Rajoy, has at its root the flats that the banks accumulated when people started defaulting on their mortgages.

 

As in other countries that experienced bubbles, such as the US and Ireland, it began with a fondness for real estate speculation and a belief that property values would never cease to rise. To be sure, the euro was an incentive for foreign investors eager for a piece of the real estate pie, but this could not stop the bubble from bursting and housing prices from dropping. We should have distinguished currency value from property value; some foreign investors preferred to invest in euros instead of risking their money in countries such as the Balkans...