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Bank of Spain Underestimates Lenders’ Shortfall, Idealista Says

March 23 (Bloomberg) -- Spanish lenders face a capital shortfall that’s “substantially” higher than an estimate by the Bank of Spain because they haven’t accounted for all of their real-estate losses, according to Jesus Encinar, founder and chief executive officer of Idealista.com.

As much as 15.2 billion euros ($21 billion) is needed by Spanish banks to meet new capital requirements, the central bank said on March 10. Encinar, 40, said the eventual shortfall may be between 80 billion euros and 100 billion euros. A spokesman for the Bank of Spain declined to comment on his estimate.

“Property portfolios are still mostly valued at prices dating from the boom, rather than current values,” Encinar said during an interview at his office in Madrid. Home prices in some parts of Spain have dropped about 40 percent since the market’s peak in 2007, according to his 10-year-old company, the country’s largest property website.

The Bank of Spain published its estimate after the lenders reported they have about 320 billion euros in property assets and loans to the real estate and construction industries. The central bank’s announcement set in motion a timetable that gives lenders as long as a year to raise funds or risk being taken over by a government bailout fund.

Savings banks alone have taken on land worth 23 billion euros after borrowers defaulted on their loans, according to data from the Bank of Spain. Land prices have fallen as much as 80 percent in the past four years and the valuations used by lenders are “pure fantasy,” Encinar said.

Lower Rating

Moody’s Investors Service cut its credit rating for Spain to Aa2 before the Bank of Spain’s announcement. Lenders may need as much as 50 billion euros to comply with the new balance-sheet rules, the ratings company said. Silvio Peruzzo, an economist at Royal Bank of Scotland Group Plc in London, estimates the shortfall is about 52 billion euros.

On March 15, Spanish Finance Minister Elena Salgado said that estimates of lenders’ capital needs by rating companies aren’t comparable with those of the Bank of Spain and the firms should explain their methodology.

While the Bank of Spain does a “simple subtraction” to see how much capital is needed to meet the new rules, the rating companies make “presumptions on the amounts our lenders would need to cope with certain eventualities.”

Banks have until September to meet core capital requirements of 8 percent for listed lenders or 10 percent for banks without shareholders that also depend on wholesale financing. They can seek an extension until the first quarter of 2012 if they commit to listing shares.

Inflated Prices

Banks and other financial-services companies advertise homes at prices that are as much as 12 percent higher than privately owned properties, according to Idealista. In return, they offer better mortgage terms, Encinar said. In some cases, banks only grant mortgages for homes that they own.

“We tried to inform the banks about the market value of their properties, but they won’t reduce prices because it would affect the data that the banks are giving to the Bank of Spain,” he said.

About 30,000 of the 767,889 homes advertised on Idealista.com are owned by banks, the company said.

Residential property prices have declined about 15 percent in large Spanish cities since the top of the market, Idealista estimates. In some coastal areas, they’ve dropped as much as 40 percent.

“Prices are falling too slowly, which seems to be what the Bank of Spain wants in order to prevent banks from going out of business and having to be seized,” Encinar said.

More Foreclosures?

An increase in interest rates would make the situation even worse for lenders, he said. This could lead to more foreclosed homes that banks will have to take onto their balance sheets on top of the “second wave” of property and land assets handed over by developers that can no longer refinance debt.

European Central Bank President Jean-Claude Trichet said March 3 that the ECB’s key interest rate could rise from 1 percent as early as next month.

Spanish homeowners are particularly vulnerable to rate rises because 97 percent of outstanding mortgages have variable interest rates, according to the Spanish Mortgage Association. In a typical week this year, 5,000 sellers have lowered the price of their home on Idealista.com. That climbed to 8,000 after Trichet’s comments.

“If the banks, the government and the Bank of Spain were more realistic, they would help to restore confidence,” Encinar said. “Until then, all we can do is plaster over the problem.”

To contact the reporter on this story: Sharon Smyth in Madrid at ssmyth2@bloomberg.net.

To contact the editor responsible for this story: Andrew Blackman at ablackman@bloomberg.net.

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