ITC – Spain: Supreme Court Decision on Banks/Tax

The Spanish Supreme Court ended the session on the Spanish mortgage tax (Impuesto sobre Actos Juridicos Documentados) yesterday without reaching a decision. The session will pick up today at 10:00 local. El Pais quotes sources saying that today’s session will last for several hours.

The issue relates to a tax on the value of the mortgage and who should pay it: the borrower or the bank. The amount of tax differs between regions but is typically 1% of the mortgage. Until now it has been the borrower who paid the tax and so if the court overturns that situation, the banks could be on the hook to make good the tax payment for the past 4 years. On October 16 a previous hearing concluded that the banks should pay the tax going forward and retro-actively for 4 years but the decision was suspended 2 days later until the Supreme court could hear the case. The Oct 16 decision hurt bank stocks (€6bn cut from Spanish bank valuations in a day including Bankia -7%, Banco Sabdell -6% & Caixa -5.5%) and rightly or wrongly created a spillover to Spanish govt bonds.

We have seen various estimates of the cost of this decision ranging from €1.5bn up to €24bn (this higher number is based upon extreme assumptions).

As a second and smaller effect, Spanish mortgages are normally floating off 12m Euribor and a temporary interruption to the flow of mortgages may also nudge the relationship between 3m/6m and 12m Euribor; Spanish banks would normally pay 12m in basis swap market when they issue debt.

For a more in depth at the Supreme Court decision, this link is useful:

Also useful for background: