España in the works

‘2010 will be as bad, if not worse. The market has suffered a dramatic change, and that will last. Many law firms in Spain have been built for a market that’s no longer there.’

As outlooks go, Perez-Llorca senior partner Pedro Pérez-Llorca’s is pretty bleak. Given that transactional work accounts for 60% of his firm’s business, such a negative stance is understandable, expected even. But the reality is that the events of the past 12 months have made pessimism a marketwide phenomenon in Spain.

It’s a stark contrast to recent years, when firms feasted on a rich diet of transactional work, much of which was generated by a superheated real estate market that made the UK property boom seem like a barely audible pop.

That strength would soon be revealed as a weakness, however, with the country’s reliance on the sector – construction formerly accounting for 16% of GDP – leaving it dangerously exposed to the global property meltdown. Spain reportedly now has as many unsold homes as the US, and formally entered into recession in January this year. It’s been downhill ever since.

No sector presents so clear an indication of Spain’s changing fortunes as its financial institutions.

Having learnt a hard lesson during the Banesto crisis of 1993, when one of the country’s largest banks almost collapsed due to a shortfall in equity, the Spanish government had already implemented a strict regulatory framework to keep its banks in check. Specific restrictions on complex mortgage-backed securities meant that the major Spanish banks had minimal exposure to US subprime debt, and when the banking system throughout Europe started to fall apart, the Spanish banks held firm. It would prove to be a temporary reprieve, however, with worsening conditions in their domestic markets leaving them saddled with burgeoning NPL portfolios and, in many instances, desperately short of liquidity.

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