In Banco Santander, a Microcosm of Spain’s Troubles

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Spain’s big bank — Banco Santander (NYSE: STD) — said its fourth-quarter profits fell 98%. It took a $2.4 billion charge because of its wrecked real estate portfolio. It also set aside cash to cover bad loans. There are concerns that the bank will have to be rescued by the government, which hardly has the money for what surely would be a multibillion bailout.

Banco Santander is a symbol of what is wrong throughout Spain’s economy, and what must be done to repair it.

The bank has a massive real estate portfolio. Real estate values have collapsed in Spain, perhaps worse than in the U.S. The reasons are similar to America’s — overbuilding early last decade and an unemployment rate that has risen to levels that are both troubling and unlikely to be reversed.

It is widely believed that the fortunes of Europe’s largest banks and Europe’s most troubled countries are inexorably linked. Banks hold sovereign debt in nations that must be bailed out. Private investors, which include banks, will be asked to write down part of the value of those loans. Banco Santander’s trouble is even worse than just the drop in value of government paper. Real estate values in Spain will not improve. The solutions to the nation’s unemployment rate of more than 22% seem beyond the ability of Spain’s financially troubled government to effect.

As the European Union looks to a possible rescue of Spain, its debt and deficit are not at the top of the list of its problems as they may be in a country like Greece. Greek banks are certainly in trouble, but Banco Santander may be the single best example of a financial firm that helped cause the problems in its own country. It lent against assets the value of which could never have been sustained. Now, the Spanish government is left to clean up the mess.

Douglas A. McIntyre