The stock market has already started cooling off from overbought conditions, but the weakening euro, increasing bond yields, and widening spreads have markets on edge yet again. After listening to a Planet Money segment on the financial problems in Spain called “A Theme Park, An Airport And The Next Banking Crisis” by Chana Joffe-Walt, I received a stark reminder of the lingering risks in the financial markets emanating from Europe.
Joffe-Walt talks about the Spanish banking crisis from the perspective of Angel Borges. Spain has called upon his consulting services to help save the Spanish banking system. I was particularly fascinated by Joffe-Walt’s description of the cajas de ahorros:
At the center of Spain’s banking crisis are regional banks called cajas de ahorros. More than half of Spanish banking deposits are in cajas. And they’re not run by bankers, but by local politicians and priests.
The cajas were safe, boring banks until a few years back, when Spain joined the euro. That allowed cajas to borrow money at very low rates, and lend it out to borrowers who wanted to profit from Spain’s real estate bubble.
Cajas bankrolled huge housing and office projects, way outside of their local areas…
…Which brings us to the part of the story you already know: It all fell apart. The real estate bubble popped, and cajas were left holding the bag.
The podcast below contains the full story:
Note well that EWP, the iShares MSCI Spain Index Fund ETF, is breaking down again and looks ready to retest its 52-week lows sooner than later. The index finished 2010 down a stomach-churning 24%.
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Disclosure: Long EWP put, net short the euro.