Financial Times: Spain facing the fall...

Spain sees credit surge brought to rude halt

By Leslie Crawford in Madrid (Financial Times)

Published: January 8 2008 17:55 | Last updated: January 8 2008 17:55

Only last September, José Luis Rodríguez Zapatero, the Spanish prime minister, announced that Spain had joined the “Champions’ League” of world economies. Europe’s fifth largest economy was growing so robustly, and creating so many jobs, it would soon be richer than Germany in per capita terms, Mr Zapatero predicted.

That euphoria was short-lived. December saw a spike in inflation, a rise in unemployment and a slowdown in the economy, as the international credit squeeze gripped Spain. The government recently lowered its estimate for economic growth in 2008 from 3.3 per cent to 3.1 per cent, a figure many economists consider is still too optimistic. Inflation last month of 4.3 per cent was at the highest level in more than a decade.

Worse, house prices in many parts of the country have started falling, further undermining confidence in the economy. Some over-indebted families now owe more to their banks than their houses are worth.

International financial gridlock has brought Spain’s credit-fuelled surge to a rude halt. Families and businesses are feeling the pain. Suddenly, Mr Zapatero’s Socialist party is less confident about winning a general election called for March 9.

The mood is especially sombre in provincial towns such as Igualada, a prosperous textile and leather manufacturing centre near Barcelona in the north-east.

“I’ve been a bank manager for 28 years and I have never lived through a situation as dramatic as this,” says the branch manager of a regional savings bank, who asked not to be named. “House prices in this town have fallen by 20 per cent, there is no demand, and no mortgage finance. Savings banks have cut off funding. Before the credit crunch, I used to do 12 mortgages a month. Since August, my branch has approved only one new loan.”

He says that for the first time, clients are handing in the keys of their homes and walking away from their debt problems. “With the fall in house prices, families are giving up. They don’t see the point of struggling on with their mortgage payments.” Repossessions, he says, are on the rise.

Some property developments have been stopped, and Igualada, a busy town of 38,000 people, is dotted with idle construction sites and foundation holes....

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