the biggest corporate failure in Spanish history, Martinsa-Fadesa on Tuesday filed a petition for court administration after accumulating debts of EUR 7 billion.
Anecdotal evidence apart - the number of creditors affected in this recourse to court administration is the largest in Spanish economic history - the disaster is clearly due to the profound recession that the Spanish property market is now going through, after two decades of the real estate bubble, in which building companies embarked on a dizzy spiral of indebtedness and excessive construction.
They believed that they were looking at an endless party, but they have now come up against the financial institutions' difficulties in maintaining the necessary flow of loans in a situation of worldwide tightening of liquidity.It would not be fair to take a too distant view of the causes of this particular cataclysm. In trying to understand the reasons for the crash in the building industry, there is a need to keep in mind the long list of absurdities committed in recent years by property developers.One of the main causes is to be found in the obvious imprudence with which the construction industry has been managed.More than a few construction company executives - among others, the president of Martinsa, Fernando Martín - persistently denied that prices of construction company shares were going to fall, or that a contraction of the market was around the corner, even after the disturbing summer of 2007.With such a lack of perception, combined with indigestible deals such as the purchase of Fadesa, it can come as no surprise that Martinsa, with assets of more than EUR 10 billion and a debt amounting to nearly EUR 7 billion, had erred in its calculations and found that it now cannot obtain a EUR 150 million credit.
The financial institution creditors have examined the accounts of Martinsa and have determined that it does not generate sufficient income to back new loans.
This is a rigorous market analysis that ought to have been carried out during the 10 fat years. Had this been done, the firm might now be in a position to weather the storm.The other source of unease now apparent in this crisis is the painful situation of the financial market.The abnormal restriction of credit may mean the coup de grâce for businesses that rely on assets inflated by speculation, as seems to have been the case of Martinsa, but it will also tend to stifle the regular financing of solvent companies.This is the exact point at which the responsibility of the government comes into the picture.It is not a question of the public sector coming to the rescue of the property developers, though there may be many firms as sick as Martinsa.The rules of the game demand that excesses in supply and prices must be paid for.But the government must recognise the real gravity of this crisis. And one of the best ways of doing so is to consider how the drought of credit may be corrected.That way, the innocent will not have to pay for the misbehaviour of the guilty.