Spain Crumbles

Neil Unmack is constructive about Spain in general, and Spanish banks in particular: Santander knows its own loan book better than anyone, he says, and if it’s happy to buy back billions of euros of its own bonds at 82% of par, it probably knows something the market doesn’t.

On the other hand the notorious Variant Perception report on Spain and its banks, quoting Edward Hugh at some length, makes for very sobering reading. Read in the light of the report, Santander’s buy-back begins to look more like an act of desperation than one of strength — and one which bondholders would do well to tender into.

It’s undeniable that the implosion of Spain’s formerly-hot construction sector is going to blow holes in a lot of balance sheets; the only question is where and when. The gist of the Variant Perception report is simple: the problems of Spain’s construction industry and homeowners have become the problems of Spain’s lenders, and the problems of Spain’s lenders are going to a major problem for all of Europe, going forwards. Meanwhile, Spain will become Ireland-but-worse, as real interest rates soar thanks to deflation and extreme levels of unemployment, combined with low wages, depress the entire economy for the foreseeable future.

That said, it’s important to draw a distinction between Spanish banks in Spain, which are largely domestic savings banks, and Spanish banks as they exist in the imagination of the international capital markets (Santander and BBVA). Santander is a well-managed and internationally-diversified bank, which does retail banking extremely well. BBVA owns the largest bank in Mexico, Bancomer, and has built an extremely strong franchise stretching from Texas, through Mexico and central America, and down through the Andes. While neither bank will be immune to a national disaster in its country of origin, their international holdings will help to soften the blow.

At heart, however, the situation in Spain will be familiar to many US observers: consumers augmented their low wages by making huge amounts of money in a soaring property market. And now that the property market has stopped soaring, they’re left with hundreds of billions of euros in loans, an enormous percentage of which will end up in default. The problem in Spain is exacerbated by the fact that much of the property bubble was concentrated in the beach-home market on the coast, where the willingness of homeowners to pay mortgages on underwater properties is much lower than historical data would suggest.

The problems in Spain have taken longer to emerge than those in the US or Ireland for two reasons. Firstly, Spanish lending standards were generally tighter than in Anglophone countries, giving banks more of a cushion to absorb losses or refinance souring loans. And secondly, the massive influx of liquidity which hit the world in 2008 as a response to the global economic crisis is helping to hide the scale of the problem in Spain: it’s worth noting that Santander is tendering for more than $23 billion in mortgage-backed bonds “through its normal liquidity facilities”. But neither of these two factors is sufficient to withstand an economic crisis like the one facing Spain. My feeling is that the pessimists (and the other Neil) are right — the situation in the country is going to get much worse, and spill over into the rest of Europe, long before it gets better. We haven’t hit bottom yet.

Comments

[markfl:]

"The problems in Spain have taken longer to emerge than those in the US or Ireland for two reasons." Indications are that there more shoes left to drop seekingalpha.com/artic... in the US financial sector, and the "end game" for that sector of the American economy has not yet played out.

Aug 25 08:10 AM

[doubleguns:]

Spain also relied very heavily on tourism that has fallen off a cliff adding to the unemployment and depressing the beach areas further.

The second leg of the "W" is coming for US. Europe can only watch in horror as they realize they are next to be slaughtered.

Aug 25 09:25 AM

[Falconflight:]

Excellent, apprceciate some insight into Europe, we are woefully ignorant about our counterpart's situation.

Aug 25 11:18 AM

[Graham and ...:]

Spain got its share of the "Anglo Saxon disease"--an overheated property market.

Aug 25 08:07 PM

[EnronX:]

Isn't Spain's unemployment rate already considerable higher than just about any of it's other Euro cousins....the question is how will that exacerbate things further?

From what I've seen personally, it's not my friends unwillingness to pay for their properties that are underwater, its the fact they lost their jobs and unemployment $ just isn't enough to cover P&I and taxes.

Aug 26 01:26 AM

[weargue:]

Spain is not crumbling. they're better off than we are.
You base your opinion on too small a problem.

Banks in Spain are buying the US banks.
US regulators on Friday closed Texas lender Guaranty Bank and sold its assets to Banco Bilbao Vizcaya Argentaria , allowing Spain's second-largest bank to ...
news.yahoo.com/s/nm/20...

Aug 26 08:50 AM

[Mowog:]

I wonder how this will affect the flow of illegal immigrants into Spain. I expect greater restrictions and tougher policies on immigrants. Perhaps there will appear more Spaniards willing to do jobs they once were not willing to do (but were willing to pay a Moroccan to do).

Aug 26 09:55 AM

[geewow:]

Reaganomics, and Alan Greenspan's laissez-faire neo-liberal capitalism has poisoned the economies of many countries. World industrial production, consumer spending, and wages of average workers will continue to suffer dragging down these economies as those at the top continue take what they don't deserve. That appears to be the design plan.

eye-on-washington.blog...

Aug 26 10:13 AM

[jimboy:]

As an Americophile Brit living in Spain I am always watching and comparing the three economies and I would lump their prospects together towards the bottom of Western world's recession league table. The key indicator is balance of payments - all three have had chronic deficits implying a severe inability to save, invest and stay competitive. A big difference is that in the US and UK cheap money appeared most visibly in a bloated financial sector whereas in Spain it was in construction (a ludicrous 16% of GDP at one point) which is part of the reason why unemployment is now so bad. I recently wrote an article about the outlook for Spanish property which touches on some these issues:
www.advoco.es/home/19-...

Aug 26 10:26 AM

[ukdaytrader:]

Don't forget that Spain had already learnt its lessons from a Banking crisis some years ago and secondly most Spanish banks don't own large portions of junk securitised debt that the US banks passed on to any bank that would take it.

Aug 26 10:30 AM

[jorida:]

As a Belgian, having lived in the States and Belgium, and now retired at the Spanish coast and prospecting the market for a friend let me add some comments.
By repossessing defaulting properties the Spanish banks are now the largest owners of real estate that they want to get rid of and sell for the value of outstanding debt. Unless initially over appraised there are some opportunities. Commercial property, eg offices are sold with a garanteed return of 5 to 7%.
High end properties (over 1 million Euro and well situated and finished) up to now have not lost that much in value. Owners, unless forced to sell, keep properties hoping for better times.
Middle and low end properties are on sale.
The number of real estate agents has strongly decreased. Those remainig get a bigger share of a much smaller pie and new construction sites are rare.
Spanish banks, although suffering, are in better shape than banks in other European countries because better capitalized and less contaminated with US rubbish. No major bank has defaulted nor received state support, untill now.
The strong Euro is a major handicap for citizens outside the Euro zone although Russians pick up pricey properties.
The strength of the Euro puzzles me given the near bankruptcy of the social security system throughout the continent and the incapacity of any governement to take remedial action, the crumbling economy and non competitive industry strangled by unrealistic demands from worker unions , an aging and decreasing population inundated by refugees from the third world.

Aug 26 12:58 PM

[Ray Winter:]

All Euro-zone economies, including the UK are well and truly stuffed. All are running mammoth fiscal deficits together with bloated government bureaucracies on large salaries and pensions, high unemployment and social security payments that are crippling the regeneration programmes.

Clearly the Banks know this and are taking every opportunity to fleece their customers.

Bank loans are available but the security demanded means the entrepreneur is basically working for the bank, and they will pull up the ladder at the slightest opportunity to grab assets wherever they can, just as they did in all previous slumps.

So what's to be done? Very little if the Banks are involved, so it looks as if exchange bartering is the way forward for the businessman in order to stay out of the clutches of the Banks and to continue trading. As for the currencies, serious inflation and devaluations must be on the cards as the Governments will not be able to raise enough tax revenues to pay for their profligacy.

The future does not look very good for the average Joe but gold has never looked a brighter investment.

Aug 26 02:37 PM

[peterthepai...:]

just spent 3 weeks in the portugese algarve...lagos

my estimate is beach bars emptier say - 20% +?

some new-build on hold...

some mothballed properties...

far too many new apartments...

very difficult to sell second hand...

great reluctance to sell at reduced prices...

the euro has made the algarve expensive...

along with ridiculous 10% buying costs!

Aug 27 11:29 AM