Banks financed 74% of Repsol purchase by construction firms

Banks financed 74% of Repsol purchase by construction firms

On 17 October 2006, an anonymous analysis hit a nerve: BBVA and Santander were placing billions in real estate assets on the market. The fine print was devastating. The country's two largest banks had just acknowledged, without saying it out loud, that the housing bubble had stopped inflating. They were selling the problem before someone put a price on it.

Later, the discussion moved from apartments to balance sheets. The thesis that gained ground: brick didn't deflate, it moved. Indebted construction firms bought energy stakes with bank loans guaranteed by the very shares acquired. The money was still in overvalued housing. Only the label in the books changed. And with one figure in front: 75% of the operation was put up by the banks. In the specific case of Repsol, Santander financed 74%.

The LBO: buying energy with money that wasn't their own

That move had a technical name: leveraged buyout. The country's major construction firms went after the energy sector with loans. The acquisition was financed by issuing debt and letting the acquired company respond with its own borrowing capacity. Translated: the guarantor of the purchase was the purchase itself.

85% of Repsol shares and 100% of Europistas served as collateral. As if an individual asked for a mortgage and put up as guarantee the house they haven't finished paying for. The one holding the frying pan wasn't the buyer. It was the banks.

From there arose the suspicion that ran through the entire legislature: that construction firms weren't buying energy out of strategic conviction, but because someone had put a beer tap in their hand. Some argued that the financial system had absorbed the energy dividend through the back door. Others, more down-to-earth, replied that if they wanted to buy companies, they could have done so three years earlier at half the price. They jumped in headfirst in 2007, when everything was already expensive.

The loan guarantee was the very shares purchased. If the asset fell, the collateral fell, and the creditor was left with the brick again. A bank doesn't lend a billion to lose it: it lends to keep something if the debtor doesn't pay.

Why did no one call the crisis a crisis?

Here a concept that was repeated endlessly came in: officialization. As long as there was no official recognition, there was no official problem. On the stock market, the fallen price is seen in real time. In housing, no: without confession from the affected party, there's no diagnosis. That asymmetry allowed politicians and supervisors to talk about a slowdown when the data already spoke of something else.

The criticism pointed to the dual role of the Banco de España. The same body that was supposed to supervise the banks appeared simultaneously as regulator and as a party interested in the adjustment happening slowly. Two phases were mentioned: first deny, then admit drop by drop and always on Fridays.

The problem, according to this reading, was that the official narrative didn't square with the arithmetic. GDP grew 0.4% quarter-on-quarter —1.6% annualized if the figure was stretched— with recession, unemployment and a brutal housing stock. And yet it was maintained that prices would not correct violently. When someone claims that a market cannot fall with the force with which it has risen, they are describing a wish, not an analysis.

The Socimi: the parking lot for apartments nobody wanted

If the banks couldn't sell the apartments, they needed a place to store them without it being noticed. Real estate investment companies appeared in this analysis as that parking lot. Vehicles that valued their properties once every three years. Plenty of time not to recognize the fall and to keep maintaining the appraisal type inherited from the years of euphoria.

The mechanism was circular: the bank refinanced the insolvent developer to avoid recognizing the writedown; it kept the collateral at a fictional price; and it prepared structures to bury the stock off-balance-sheet. The crisis wasn't resolved. It was postponed, which isn't the same but looks a lot like it in the short term.

The Japanese mirror was the most cited: after the 1990 crash, the government propped up banks with liquidity and allowed them to keep valuing uncollectible assets at fictitious prices. Deferred defaults can be hidden for a decade. But only until someone decides to look them in the face.

The 'capitulation' and the date set on the calendar

All this led to a word that worked as a mantra: capitulation. The moment when prices would truly fall into place. The date being floated was 31 December 2010, a border more symbolic than a forecast, though most repeated it as if it were printed.

Some maintained that capitulation was inevitable and that, once it peine, the country would move toward something better. Others replied that the adjustment was already being paid with jobs and wages, not with balance sheets, and that the owners of the collateral had every interest in the world in holding the cake. The longer the party lasted, the more they secured their wealth.

BBVA's calculation went that way. The entity valued the properties guaranteeing doubtful loans to developers with a 65% discount, that is, it appraised them at 35% of their original value. The default rate on those loans reached 17%. Santander, by contrast, presented its provisions as voluntary, something it granted itself. Two ways of saying the same thing with different shame.

The two million households that would pay for the party

As for who paid, the math was eloquent. Of the 16 million households, an estimate circulating at the time held that the crisis would only truly hit two million. One million were considered highly exposed by the Banco de España itself. The problem wasn't just the volume of debt: it was its concentration. Large mortgages signed by young people with salaries that weren't going to rise.

Add the floor of social protection. Unemployment benefit limited in amount and duration; when it ends, it ends. And labour reform, cheaper dismissal, flirting with de-budgeting the pension system. From there was born the MFBH-P, the acronym with which the idea of injecting Social Security reserve funds into the stock market was baptized.

The Reserve Fund, the well-known piggy bank, amounted to €62 billion, almost all placed in public debt. The discussion was whether it would end up converted into asset purchases to prop up prices or into another piece on the board. The debate wasn't academic: it affected the piggy bank of those who hadn't retired yet.

Cheap money as anesthesia

When the Federal Reserve cut rates to 2%, in Spain it was read as a relief. Cheap money again. If rates return to the floor, the adjustment is postponed, debtors breathe and prices hold a little longer. But cheap money doesn't correct overvaluation: it only buys time for the one who already owed. And time, in a bubble, is paid at compound interest.

In parallel, an uncomfortable recommendation circulated: whoever could, should spend two or three years out of the country. It wasn't an apocalyptic prophecy, they said, but a simple matter of defence: in a recession with unemployment and wage deflation, being abroad saves you from the blows. Others replied that was giving up and that the way out wasn't emigrating, but producing and exporting.

A curiosity nobody expected

In the middle of the row, a detail rescued from Wikipedia provided the counterpoint. Caja Madrid, Spain's oldest savings bank, had been founded on 3 December 1702 as a Monte de Piedad by Francisco Piquer, an Aragonese priest. Three centuries financing popular credit and pawn redemption, and in 2010 there was public discussion about whether it had to be rescued itself.

In that same stretch appeared the intervention of CCM, with a prior JP Morgan report pointing to it as a candidate, and the echo of earlier operations in which analysts saw less a fight for the shareholder and more a reordering of the savings banks. The socialist savings bank, the savings bank of the independent report, the savings bank being dismembered. Each expression had its sponsor.

The adjustment paid with wages

As the calendar advanced, the focus shifted from the real estate crash to the social bill. The wage moderation pact was read as what it was: a silent capitulation of labour income. The promise to make private pension plans more flexible, so they could be cashed without leaving employment, pointed in the same direction. Goodbye to sharing between generations; welcome to every man for himself.

The summary, according to the most sceptical voices, was simple: in a country with high debt and ridiculous savings, the adjustment always lands on the same spot. Those with a paid-off apartment and a stable paycheck barely notice. Those who signed a 40-year mortgage on a tight salary notice everything.

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When a bubble deflates on someone else's balance sheet, the bill takes time to arrive, but it arrives with interest. With the data on the table, the uncomfortable question isn't when the price per square metre fell, but who paid first: the household that signed the mortgage, the bank that financed the energy purchase with the guarantee of the very asset bought, or the saver who one day discovers that their retirement was invested in sustaining the whole scheme.