We've now entered the silly season of Spanish pride.
When the Spanish finance minister Luis de Guindos announced last night at London School of Economics that "Spain doesn't need a bailout at all," the audience burst out laughing, demonstrating once and for all that even economists can appreciate a good joke if it's delivered with chutzpah.
Even the finance minister's interpreter was stifling a giggle. Timing is everything in comedy.
Of course, Señor de Guindos didn't fly all the way from Madrid to London just to tout the Party line in person. He was asking for money; specifically, for investors to buy into Spain's "bad bank" of toxic assets, which is one of the Troika's conditions attached to the €100 billion bailout.
Naturally, de Guindos wants Spanish investment on terms favorable to Spain. I believe I speak for private investors everywhere when I say, "Um, no."
Señor de Guindos had previously assured the Spanish parliament that private investors will make up "at least 55 percent" of the "bad bank." I hope he didn't mean the ones that just fell into the aisles laughing at LSE. Apparently, the scheme requires Spanish banks to transfer their bad mortgage and real estate development loans to the toxic entity in exchange for Spanish bonds, which can then be posted as collateral with the ECB in exchange for cash.
This is the devaluation of the euro by other means - and that's fine. But why should investors be interested in discounted mortgages -because that's what this is, the Great Spanish Property Fire Sale- when the Spanish housing market has yet to see bottom, much less hit it?
Fig. 1: Comparative Eurozone House Price Indices
In fact, it is this very stumbling block which places the Spanish bailout in jeopardy. The number of commercial real estate transactions in both Spain and Italy have fallen 90% since the crisis began, as outside investors sit on the sidelines and wait for rock bottom. There's an eight year backlog in supply. "Buyer's Market" hardly begins to describe the situation.
Over the last year, the average asking price of Spanish property has decreased from €267K to €244K - an 8.5% reduction, according to the Tinsa House Price Index, which tracks real estate conditions in Spain. The price of Spanish inland property has decreased 25.9% since 2007. Year-over-year price decline is 11%.
Coastal property suffered even more, posting a 37.2% decline. According to the August 15th report:
In terms of the cumulative decline in house prices by region since peak prices, there was a 37.2% fall in July for the Mediterranean Coast; followed by 33.5% for Capitals and Major Cities, 32.1% for Metropolitan Areas, 29.2% for the Balearic and Canary Islands and 25.9% for Other Municipalities.
Fig. 2: Y-O-Y losses by region
(Source: Tinsa Quarterly Report)
Those of my readers who enjoy the benefits of a Classical education will appreciate the similarities with the Roman housing market during the last days of the Roman Republic.
Marcus Licinius Crassus - by all accounts the richest Roman of them all - organized numerous fire-fighting units in Rome. At the time, the Seven Hills of Rome were filled with closely packed, ramshackle tenements made of cheap wood. When a fire would start anywhere in the city, Crassus' fire-fighting units would quickly go running to the site. Crassus would then show up in person and begin haggling over the price of the house with the distraught owner. If the owner agreed to Crassus's "fire-sale" price, the Roman Senator would signal his fire-men, who would immediately put out the fire. If the owner was stubborn, the fire-men would sit and watch the place burn.
After another half-hour or so, Crassus would make a new, lower offer. By this time, the fire would be in real danger of spreading to the adjacent buildings, adding considerable peer pressure to the negotiations. If the owner still held out, Crassus' men would wait another half-hour, and so on.
Fast-forward to today: Spain is burning, the investors in London are currently in Crassus's position, and the Troika represents Spain's neighbors.
The chances of de Guindos succeeding are slim to none. (It would have to be at least a 75% off sale to attract investors, as the original loans were made at bubbly valuations.)
However, for the sake of argument, let's assume the intrepid Finance minister does succeed. Sooner or later the losses on the loans will have be written-off. Will it really matter if the losses are realized by the Spanish government or the Spanish banks? Aren't the two really the same thing, at this point?
The original logic behind the housing boom in Spain was that Europeans would flock to the Costa del Sol and Tropical, as well as towns like Zafra and Baeza for vacation. Originally, they did. Spanish property apparently offered a risk-free, tax-free, high-return investment. Unscrupulous real estate agents during the Boom had little difficulty pitching "hot projects" at ridiculous premiums to credulous Anglo buyers, many of whom went to Spain to buy a holiday house and came home with investments they had no intention of making. Time to pay the piper.
As with Ireland, the key is the transfer price. Look for Spanish REITs to start popping up all over the place in 2013, as the Spanish government/banks balk at the low-ball offers from London. Investors may wish to take advantage of Spanish pride and the resulting bailout turbulence by initiating short positions in the iShares MSCI Spain Index (NYSEARCA:EWP).