MADRID The failure of Spain's largest real estate company Martinsa Fadesa (MFAD.MC) may be the first in a string of high-profile property sector collapses that hammer banks and propel the economy towards recession.
Martinsa filed for administration on Monday in Spain's biggest ever corporate default, highlighting the huge debt piles held by other Spanish property companies following years of easy credit which helped fuel the now defunct real estate boom.
Spain's five largest publicly traded real estate companies are sitting on combined debts of around 30 billion euros ($47.86 billion) and firms such as Colonial (COL.MC) are also being pursued by creditors to renegotiate loans.
More failures were considered inevitable, and even necessary, given Spain's heavy economic dependence on the construction and real estate sectors and reluctance among banks and Spain's Socialist government to grant bailouts, industry leaders and economists said.
"With Fadesa being as large as it is, it's difficult to escape the perception that its fall will create a domino effect through the sector, and then through the economy," said Jose Garcia Zarate at the 4Cast consultancy in London.
LEFT TO DIE?
Spain's residential construction and property sectors have been amongst the hardest hit in Europe and have suffered simultaneous blows from the end of a decade-long boom and the global credit crunch.
Smaller Spanish property firms have been seeking creditor protection since last year, but Martinsa Fadesa was the first large publicly traded company to buckle under tighter lending conditions and a 30 percent drop in house sales this year.
Spain's largest real estate firms all suffered double-digit stock value declines on Tuesday as investors speculated which would be next to cease debt payments.
Worst hit was Renta Corp (REN.MC), down 17 percent, followed by Urbas (UBS.MC) with a 14 percent loss and Colonial (COL.MC), off nearly 12 percent.
Spanish Prime Minister Jose Luis Rodriguez Zapatero has refused to rescue the property sector after years of overbuilding that has created a glut of up to 1.5 million surplus new homes.
Zapatero made good his word on Monday as Spain's ICO state credit agency refused to grant Martinsa a 150 million euro loan it needed to meet a debt payment, a decision that helped lead it to file for administration.
The socialist government is keen to flush away Spain's weakest property and residential construction firms and slim down sectors which previously drove nearly a fifth of the economy -- over twice the average in euro zone countries.
Only a third of Spanish real estate companies that existed in late 2007 may be left in business, Spain's Ahorro Corp said in a research note.
"It's more than likely the government is looking for a faster correction, and will only help surviving firms once this is over," Ahorro Corp said.
ALL SPAIN WILL SUFFER
Members of Spain's G-14 property organization, which lobbies on behalf of the country's largest real estate firms, said the government had to help companies or see the wider economy suffer.
"This is not only impacting real estate but other sectors like banking," said Jose Manuel Galindo head of Madrid's property developer group Asprima.
Spanish banks are excluding high-risk borrowers and beefing up debt collection efforts to call in loans, leading to estimates that bad debt levels could more than double to around 4 percent by late next year.
The banks have high reserve and provision levels due to especially stringent capital restrictions laid down by the Bank of Spain and 14 straight years of Spanish growth, and this is expected to help them weather an economic downturn seem lasting until at least 2010.
Caja Madrid, La Caixa and Banco Popular (POP.MC) on Tuesday said they had sufficient provisions to cover exposure to Martinsa, which totals around 2.1 billion euros.
Popular's shares still fell 7.5 percent on concerns earnings would suffer as they restrict lending to ramp up bad debt provisions.
Economists said Spain could benefit from a short, sharp shock to its housing sector.
"When a country goes through a situation like this, it can be seen as some kind of cleansing process," said economist Susana Garcia, at Deutsche Bank in London.
(Additional reporting by Carlos Ruano, Clara Vilar and Elena Moya)
(Editing by Erica Billingham)