Are Spanish property price falls good news?

The Eurozone crisis may have stabilised, but it's still all doom and gloom for the Spanish property market if the latest reports are to be believed.

Last year's average price fall of around 10% will be followed by five more years of declines and further falls of 30% according to the reports.

The course of the Eurozone crisis took in 2012, with Spain firmly in the spotlight for much of the year, is behind the latest volley of depressing statistics for Spanish homeowners.  It is not just that austerity measures were ramped up, joblessness jumped and capital flight accelerated during the year.

Specific developments in the Spanish banking sector have driven the property market at least as much as these general negative factors.  Although Spain's outrageously oversized property bubble burst in 2008 the banks had not been forced to take the full hit until last year.

For several years the banks were allowed to either forebear from repossessing properties or, when they did take possession, were able to hold the foreclosed assets on their balance sheets at inflated values (e.g. cost or amount of mortgage).  This way they didn't crystalise their losses and have to raise more capital or, in the worst cases, go out of business.

From the point of view of the property market this meant that headline prices only declined gently for the first few years of the market.  Things became frozen - no one moved, no one slashed their prices and the market was not allowed to find its bottom.  Similarly the government did everything it could to sustain the unsustainable in the wider economy though it shouldn't have (Stimulus doesn't work - just look at Spain).

The bank stress tests and subsequent recapitalisation changed all that forcing the major lenders to recognise their potential losses and sell off assets.

So at least now the grand clear out can begin.  Bargain hunters and overseas investment funds will appear and some activity will return albeit at much lower price levels.  After a couple of years of pain we may at least be able to say we are nearer the end than the beginning.

The UK is still stuck in denial.

From our website:  Spain tax form 210

Stimulus doesn't work. Just look at Spain

As the stimulus versus austerity debate rolls tiresomely on, it is a good time to reflect on what government action did for Spain's economy after the crisis hit four years ago.

Spanish unemployment hit 25% recently.  The government is bankrupt, the banking system bust and the economy is shrinking.  Only an ECB promise "to do all it takes" is preventing a slide toward default and chaos.

As with most Western countries the proximate cause of the crisis is the debt-fueled bubble that preceded it, with the property market at its core and low Euro interest rates enormously exacerbating the problem.

Unlike Brown's Britain, Spain did not compound the problem by running  a large government deficit during the boom years.  The Spanish government was running a surplus in 2007 and the public debt to GDP ratio was a respectable 36% so, according to Keynesian logic, the government was well-placed to rescue the economy from the effects of private sector deleveraging.

And the government has tried lots of stimulus in response to the crisis.  Between 2008 and 2010, before the austerity drive started, the government spent like a drunken sailor: national debt ballooned by more than €200 billion in two years (20% of GDP).

Super low interest rates sent mortgage costs tumbling and thus artificially boosted private incomes.  The government passed laws to allow people to defer their mortgage loans and escape foreclosures.  There were huge public works programmes and schemes to boost car sales (see Spanish car sale worst for 15 years).

If stimulus worked as expected these measures should have allowed the private sector to recover and allow the government to start withdrawing support and begin rebuilding its own finances.

But we are as far away as ever from a private sector recovery.  All those stimulus measures worked for a while but just postponed the day of reckoning.   Spain got no lasting momentum from those so-called boosts - they are just left with the debt.

Car sales are a perfect example of the futility of government action and the damage it can do in the name of stimulus.

Before the crisis hit Spanish car sales regularly topped 1m vehicles a year.  When the bubble burst predictably car sales crashed too, falling 18% in 2009.  The government responded with Plan RenoveE - a subsidy dressed up as a green initiative - and this programme did support increased sales while it ran.

But what good did it do?  Sales last month were 35,000, the lowest on record.  Year on year sales are down an incredible 37%.  The government is trying to revive the subsidy scheme even though it can ill-afford to and must know though that the only permanent effect will be to increase the national debt.

This is just one example.  The public work schemes helped some workers to stay in a job for a year or so but, now the money has run out and the government is cutting at all levels and raising taxes, the unemployment picture is worse than ever with no end in sight.

Arguably worst of all was the various policies to prop up the housing market.  Banks hid their losses for four years until the Bankia scandal showed just how close the whole system was to collapse (see Are Spanish bank accounts safe?).

Only then did the banks face up to their bad debts, begin liquidating and seeking new capital.  A few households might have escaped foreclosure for a time but the full force of "deleveraging" is now being felt and will be more severe than it would have been with an immediate clear out after the property boom ended.

Imagine if the Spanish government had adopted a different path in 2008: concentrated on economic reform instead of increasing public spending, cut out public sector waste, forced the banks to deal realistically with their bad debts and forsworn any quick fixes to help individual sectors.

Yes the immediate effects would have been drastic - a deeper recession, more foreclosures and probably worse public sector finances for a while.  But that was four years ago.  By now things would have bottomed out and there would be growth on the horizon instead of endless stagnation and self-defeating austerity.

Keynesians will read this and say it is the Euro that's done for Spain and it is unfair to blame government attempts to stimulate its way out of recession.  They are mostly wrong.

It is true that Eurozone membership has been a disaster for Spain but the damage was done by low interest rates during the boom not since (see Eurodoubters are being proved doubly right).  Since 2008 rates have mostly been set low to bail out Spanish debtors.  Spain does have an overvalued currency which is part of the problem but Spanish exports have actually been doing well, even now growing at double digit pace.  It is the efforts to end the recession with stimulus that have done the most damage.

When you see an American or British commentator trying to sell the benefits of government action to "fight" a weak economy, remember what has been done to Spain in the name of stimulus and reject them.




From our website: Changes to Spanish Tax Form 210

Spanish savers: government to the rescue?

Last week I wrote about the Spanish savers who are set to lose everything because they were sold preference shares in their banks which have subsequently gone bust - New fears over Spanish bank accounts.

I said that it was worrying that the government was not prepared to step in and help despite the fact that the policies were blatantly missold to the vast majority of retail investors who thought they were just deposits with lock in periods.

It seems like I may have jumped the gun and surprisingly underestimated the Spanish government on this one.  According to an article in the FT they are going to ensure that most small savers are repaid in some form.

The concession is complicated by the Memorandum of Understanding the Spanish government signed with the EU prior to receiving access to up to €100bn of bail out money for their financial institutions.  This envisages bank preference shareholders taking their losses in full and there are restrictions on what can be repaid e.g. no more than 10% more than the current market value of the shares.

Some of these shares trade at below 50% of face value so saver could still be taking a big hit.  However the outlook has definitely brightened for them and it slightly increases general confidence that the government will protect the retail depositor more generally whatever happens.  If it can afford to.

From the website:  Spanish tax form 210

Spain's Fred Goodwin has sunk the country's credibility

If there was any doubt that Spain is headed the way of Portugal and Ireland (if not quite Greece just yet), the Bankia affair has just removed it.

The country is in dire straits and the public face of the disaster is Rodrigo Rato (roughly translated as Roland Rat) who was forced to resign as boss of Bankia when it was forced to seek a €19bn government bailout.

With strong echos of Fred Goodwin he walks away with a cool €12 million or so in compensation and accrued pension benefits.  He was only at the bank a year and, while he can't be blamed for the property losses which sank the mega-bank (they were accumulated long ago by the various dodgy institutions that were roped together to form Bankia), he is certainly culpable.

This bank had already been recapitalised once when it took the opportunity to raise €3bn from the markets (i.e. pension funds and private investors who have now been almost wiped out).  The bank continually lied to the outside world about the true extent of its losses even declaring a profit of €300m just months before an external investigation revealed the true scale of the disaster.

A parliamentary inquiry and a judicial investigation into criminal charges have been called but the rat will scurry away from the sinking ship unharmed no doubt.

The Spanish public are angry and somewhat scared I think.  They have every right to be on several counts:

- Spain obviously doesn't have the money for the bailout and its European "friends" are not about to stump up

- The scale of the losses at this one bank tells the markets that the dire predictions about the Spanish banking sector as a whole (€200 billions of undisclosed write-offs) might not be far off the mark

- Spain has lots of similar hidden liabilities like the unpaid bills of its regional governments (€37 billion they say but no one knows) and a €24 billion slush fund I wrote about recently (are Spanish electricity bills about to soar?)

- But the worst thing is that the government's credibility is also sunk along with Rato's.  The previous administration encouraged the initial merger and the current one signed off on a much smaller recapitalization only days before the final shocking denouement.

The markets have given up on Spain and the spread over German bonds (the extra interest that Spain has to pay for its borrowings) is now at a record 5,4%.  It would be much higher if the markets were not wary of the ECB suddenly changing course and directly intervening in bonds markets; that is the only thing making Spain other than a one way bet.

This risk premium - la prima de riesgo - is now watched by the public like football scores or lottery draws.  They know that the game is almost up - financial chaos and humiliation is inevitable unless the ECB or Germany come up with some kind of deal.  And fast.

From our website   A guide to Spanish pension benefits

Are Spanish bank accounts safe?

MARCH '13 UPDATE:  I wrote this assessment in August 2012 and there have been some developments since.  On the plus side, the Eurozone crisis seemed to ease after the European Central Bank said it would do everything it took to backstop the weaker countries like Spain.  This has made Spanish banks look safer.

On the negative side now we have Cyprus where a Euro-area country has begun confiscating a % of people's deposits without warning and preventing them accessing their accounts.  Could that happen in Spain?  See Could Spain "do a Cyprus" and raid Spanish bank accounts? for the very latest.


The Telegraph recently ran an article entitled "Pain in Spain could spell trouble for expats" asking whether money deposited in Spanish banks was safe.

It's a good question if you live in Spain and have a current account with a local bank and also some or all of your savings in a deposit account.  Perhaps you bank with one of the big banks like Santander or BBVA or one of the cajas which are like building societies (but with less money!).

The article was prompted by a wave of downgrades of Spanish banks by S&P which followed a downgrade of the whole country to BBB+ status the previous week.

Even national giants Santander and BBVA were on the list of threatened banks although they still get a rating higher than the national one.

The article focused on the government deposit guarantee scheme which ensures you get €100,000 back from the government if your bank goes bust.  It suggested that you might want to review if you have assets more than this.  However that only partly answers the question in my view.  How good is the goverment guarantee?

Given that the Spanish government is also deep in a debt mire along with the country's financial institutions, it is unclear whether they have the financial strength to bail out the banks and honour these guarantees.

Spanish national debt is not actually that high as a % of GDP but there are all sorts of hidden liabilities and big doubts over whether government cuts and tax rises will bring it under control or simply make the economy even weaker.  The Spanish have been struggling to sell their bonds at reasonable rates of interest rates and indeed it is only the local banks that have been buyers recently.

Spanish banks have been stepping in to buy their government's bonds using dirt cheap  ECB loans they got in exchange for dodgy property assets.  Just who is propping who up?

There are no guarantees in Spain that inspire confidence - the banks have insufficient capital when compared to the optimistic values they contine to attach to their assets and the government cannot afford to pay its own bills nevermind bail out the banks.  Best therefore to stay clear.

There are plenty of alternative homes for Euro deposits but remember if you live in Spain but park your money offshore then you still have to pay tax on the interest.  It is definitely not a good idea to try and hide interest income because the Spanish tax office has information on all accounts including places like the Channel Islands and Gibraltar.  Given the pressure on them to bring in extra revenues, offshore accounts of Spanish residents are just the sort of place they will look.

This brings me onto another reason why I would be wary of holding much more than "walking around money" in a Spanish bank account: the authorities are getting desperate and are not afraid to confiscate money from people they suspect of avoiding tax using bank account "embargoes".  Even if you successfully appeal against the tax office when they wrongly make a grab for your money would you want the expense and hassle of fighting to get it back?

Finally there is what you might call the "Argentina factor" - the outside chance that things get really nasty with Spain's economy worsening further, leaving (or being ejected) from the Euro and deafulting on the national debt.  It dosen't take the world's greatest pessimist or cynic to envisage the government in these circumstances reneging on the bank deposit guarantee or repaying euro balances in new pesetas worth a fraction of the account's Euro value.

From our website:  Spanish maternity benefit