Spain: There May be (more) Trouble Ahead ..
September 1st, 2009
When France and Germany reported strong GDP figures, some economists declared the end of the recession, and blue skies ahead. Others pointed out that, as none of the fundamental contributors to economic wealth have improved, its very unlikely that we’re witnessing the end of the recession.
If anything, they commented, the figures from France and Germany are a seasonal blip or temporary responses to costly and finite government stimuli.
Hence, news stories such as Significant Risk of Double-Dip Recession. Economists are concerned that if the current improvement can’t be sustained, the economy will dip a second time – forming a ‘W’ shaped graph as opposed to a ‘U’ (bumping along the bottom for a while) or a ‘V’ (a sharp and decisive return to growth).
In Europe, the problem is further complicated by the fact that 16 countries are closely-coupled by the Euro and a central economic policy. Euro Feeling the Strain spells out the problem and predicts that weaker economic Euro participants such as Portugal, Ireland, Greece and Spain will drag down the stronger nations such as France and Germany.
Consequently, if you have been thinking about exchanging Euros or Sterling recently, you will have noticed wild fluctuations in rates as detailed last week in Euro Weekly Update – our weekly Euro watch from Moneycorp.
Against this backdrop of economic uncertainty, Spain’s banking practices came under increased scrutiny this week. Unlike in Ireland and the UK, no Spanish banks have been nationalised to date. Some of the smaller building societies have been merged, but none are under direct government control – yet.
Santander and BBVA – two of Spain’s biggest banks – have so far seemed immune to the woes of lesser banks around the world, due, they say, to tougher government legislation which shielded them from exposure to the ripple effects of the US sub prime malarkey.
If you only read one article today, read this one: The Hidden Truth Behind Spanish Banking ‘Strength’ – which references another story about a new report from earlier in the week: Spanish Banks Worst in Europe.
The long and short of it is this: While it is true that the Spanish banks have avoided the worst of the US sub prime mess, they have created one of their own – one which may be far worse.
We’ve already commented that Spain’s banks are fast becoming the country’s biggest landlords and estate agents because of the amount of unsold property and the number of property developers and constructors who have gone to the wall – leaving behind unfinished properties and outstanding debts.
Rather than take these bad debts ‘on the chin’, Spanish banks are using every trick in their accounting book to revalue these ‘assets’, doing anything they can not to declare a debt as ‘bad’. In a desperate attempt to keep their day to day balance sheets looking healthy, they have created a fictitious asset base of dubious value.
Doesn’t this resemble the makings of the US sub prime crisis? Didn’t that start with systematic investment in assets with dubious valuations?
While there is undoubtedly a storm brewing here in Spain, think how France and Germany (and the other stronger nations) are feeling about this particular economic millstone they’ll soon be lumbered with. Spain no longer stands or falls alone, and these banking practices are enough to cause severe problems throughout Europe.
Edward Hugh has more information on this aspect in Spain Economy Watch.
While Spanish banks put ‘bad debt’ at 4% of the total (4% is very high – pre 2007, the average was under 1%) – insiders believe that the actual figure is closer to an incredible 10%.
With 20% of Spanish Mortgages Now High Risk it’s easy to see how a higher proportion of bad debt is more plausible than a lower one.
My intention isn’t to depress you, but these irregularities won’t get solved on their own and fessing up to reality is an essential step in solving any problem. Unfortunately, Santander and BBVA have chosen the most endearing and infuriating of Spanish approaches – the “Don’t worry, everything will be OK” way.
Certainly Spain isn’t alone in this general malaise – nor is it the worst effected. In this table of countries charting surplus and deficit as a proportion of GDP, Spain is near the bottom – but the UK, Ireland and a handful of other countries are faring much worse.
So, bizarre as it may sound, despite my previous comments, the question remains: Is Spanish property a safe bet now?
The short answer is ‘maybe’. Maybe, if you can secure a substantial discount from the 2007 Spanish property peak. Maybe, if you can negotiate a good Euro exchange rate. Maybe, if your investment goals are longer term. Maybe, if your local investment options are limited or you want to diversify.
Martin Dell, Kyero.com
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