Spain Real Estate News

The Inevitability of a Spanish Property Crash, article supplied by Fairhomes (Gibraltar) Limited

Despite the best efforts of the European Financial Stability Facility it was evident that even before the ink had dried on the Irish bail-out agreement that the contagion could not be contained.

Immediately nervous investors began looking to other Eurozone countries, such as Belgium, Italy, Portugal and especially Spain fearing the same issues that dragged Ireland down will resurface elsewhere. After all it was not the state’s inability to borrow (Ireland is well funded until well into 2011) but the inability of Irish banks to refinance their borrowing in the wholesale markets that triggered the bail out.

But could Spain’s banks face a similar problem?

At present the response from Spain seems to be bullish with the country’s Economics Minister, Elena Salgado telling CNN that the eurozone’s fourth biggest economy has “absolutely no need” for an Irish style rescue. This was then followed by the extremely brave statement of Snr Zapatero that speculators betting short against Spain would “lose their shirt” and that the government is already doing enough to avert a debt crisis.

Whilst this may seem like an admirable attempt to re-assure and calm the markets it ignores the hard facts that underlie the current situation. Barclays Capital reckons that combined, the Spanish sovereign and Spanish banks need to raise €73bn in the first four months of 2011, some half of it in April 2011 alone.

These figures in isolation don’t seem to point to bail-out territory but when you take into account the fact that Spanish bond yields are at their highest in 8 years it’s clear that more than words are required to attract investors. The speed of the increase in yields from 4% to 5.2% in a month is a dramatic shift for bond markets which usually move in small doses. It means Spain’s bonds are slumping in value and holders are dumping them as they’re worried they won’t get all their money back.

So what is it that is spooking these investors? The country has made big efforts to scale back spending by central government and the national debt this year will be 60% of GDP – not great but not as bad as Ireland’s near 100%. But as Victor Mallet points out in the FT there’s a lack of clarity about the figures as despite the “strict limits” the debts of the country’s 17 autonomous regions (104.8 bn euros) account for over half of the public sector deficit which makes it much more difficult for the central government to impose reforms. “Spanish sovereign risk is increasingly at the sub-national level” says Nicholas Spiro of Spiro Sovereign Strategy and several regions including Catalonia and Madrid have such financial difficulties that a recovery seems unlikely given the economic stagnation and sluggish growth forecast for Spain.

It’s also in the regions where the problems for the banking systems lie. Spain experienced a huge property bubble, accompanied by a huge rise in private sector debt, and fell into recession when that bubble burst. But whilst the larger national banks such as Santander were well capitalised (and even in a position to acquire troubled foreign firms), in the regions the cajas (regional savings banks) have accumulated vast exposure to the construction and development sector. When the big two banks (BBVA and Santander) put the brakes on in 2006-07, the cajas continued lending more keenly, tapping wholesale debt markets to fund themselves. That alone makes them higher risk. But the savings banks also supplied about half of the €318 billion borrowed by Spain’s property developers. These loans now represent about a fifth of the cajas’ assets, according to Santiago López Díaz, an analyst at Credit Suisse. They are deteriorating fast.

So now the cajas are undoubtedly facing the grimmest outlook for sometime in what is already an extremely volatile situation. The results of the stress tests earlier in 2010 were supposed to have calmed fears but investigation revealed that much of the supposed liquidity in the regional banks was due simply to the over-valuation of much of their repossessed housing stock. A recent survey by the Economist estimated that Spanish property is still over-valued by 47.6% which suggests that a painful correction is on the way.

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