Fitch Ratings has downgraded six sets of Spanish mortgage securities issued by Banco Santander, heightening concerns that the damage from Spain's property crash is spreading to the country's strongest lenders.
The loans were "sliced and diced" and packaged in an identical way to sub-prime mortgage bonds in the US, belying claims by the Spanish government that the country had avoided the sort of lending practices seen in Anglo-Saxon economies.
The cluster of residential property securities, worth €4.06bn (£3.27bn), were all based on mortgages that exceeded 80pc of the house value, and many were 95pc or even 100pc. They were all issued in 2007 at the height of the property boom. Fitch downgraded the lower tier A, BBB, and BB tranches of the securities. The upper levels remain stable.
Santander said it had kept an entire block of €1.23bn of loans - known as Hipotecario 4 - on its books after the security was issued in October. By then the market had frozen. The second block of €2.83bn issued earlier in 2007 was partially sold, mostly to investors in Northern Europe.
The pattern that emerges is eerily similar to the final stage of the US sub-prime debacle. The big difference is that the Bank of Spain prohibited the use of structured investment vehicles (SIVs).
Fitch said the loss provisions on the debt suggested a write-off of 35pc against book value. "What they are effectively saying is that property prices in Spain are going to fall by almost that much," said Andy Brewer, the agency's senior director for structured credit.
The arrears rate on the most recent vintages has reached 7pc to 8pc, with high levels of default among foreign residents. Fitch said it suspected that British and other North European owners of second homes in Spain were throwing in the towel.
This may create serious legal complications. British owners may assume that they can walk away from a Spanish property that has fallen into negative equity. In fact, they can be pursued for the assets and income in Britain until the outstanding debt is paid off.
A one-third fall in Spanish property prices goes far beyond the sort of correction expected by most economists in Spain, and would cause havoc to the banking system. Official data shows that prices have fallen 3.9pc over the past year, although property developers say the actual drop has been much sharper.
Santander itself is a well-capitalized lender with global operations and can almost certainly cope with any losses, but the smaller regional banks and "cajas" would face serious stress under such a scenario.
Santander's overall arrears rate on its Spanish property loans is now 2.5pc. The bank's non-performing loans ratio is 1.34pc, which is low compared to other European banks.
Sources close to the bank say the writedowns on the securities are based on rising arrears caused by high interest rates and job losses.
Source: Telegraph