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

Malaga Airport's response to the crisis? Jack up prices

I find Malaga Airport a somewhat irritating and depressing place.  Very big, new and modern it may be but it's hard to escape the feeling of being a captive market for the shops and restaurants that, almost without exception, charge eye-wateringly high prices.

Obviously I am not naive enough to expect airport prices anywhere to be low or comparable with those in the real world.  But Malaga Airport takes the art of fleecing innocent travellers to a new level.

When you land at the airport and come out of the arrivals hall there is a duty free shop which has a refrigerated beer display unit selling San Miguel.  As I often arrive late and enjoy a beer after a long journey, I   could be considered part of the target market for the beer selling tactic but I have always been put off by the price - €9 for 6 small cans, about 350% more than the same beer would cost at the supermarket.

It's the same all over the airport with sandwiches, drinks and snacks at the top end of the range and too rich for my blood.  The prices in the London Airports are at or just above normal high street prices but the Malaga Airport prices are so high it smacks of an attempt to fleece foreigners.

Even cigarettes in the Duty Free shop, an area which is supposed to offer travellers a chance for a bargain, are about 15% more than the normal "estanco" prices.  There is actually an estanco just opposite the terminal entrance which sells cartons of cigarettes at normal, not airport rip off, prices.

As for the shops selling souvenirs, fashion items and electrical goods, they are a joke.  They are so expensive that you rarely see them doing any business.  Even the fast food outlets like Pizza Express and Burger King are expensive - I quite often see holiday-makers pulling faces when they see the prices on the boards.

In these times of grave economic and financial crisis for Spain (see Spain's Fred Goodwin has sunk his country's credibility) you might have thought that there would be plenty of deals available, cut-throat competition and desperate bids by retailers to get the punters buying.  But in the airport and beyond I don't see much different - the restaurants in tourist areas are actually quite expensive and the retailers seem pretty much the same complacent bunch as ever.

As for the beer in the arrivals hall - I noticed on my latest trip that they had at last done something about the prices . . . put them up.  Now €9,60 for six small beers.  Cheers!

From our website:  Will you get caught not declaring Spanish tax?

Cornered Spain gets desperate

Desperate times call for desperate measures and, as far as country's economies go, things can't get much more desperate than Spain right now.  So it's no surprise to see some government measures being announced that would ordinarily never see the light of day.

Spain's plight is well known - a seemingly endless "crisis" (pronounced cree-see in Spanish) which has resulted in mass unemployment and a shrinking economy.

The immediate problem however is avoiding default. Spain has to sell bonds to finance its deficit and the fear is that if the interest rate on those bonds rises to 7% the government will have to seek a bailout from the EU and the IMF.

Last week's bond auctions saw demand for Spanish debt at 6% so there is not much margin for error.

This is why the government is trying all sorts of things to raise money which are causing massive controversy in Spain.  No one wants to end up being the next Greece but there is widespread anger at some of the measures:

- an amnesty for tax dodgers who can get repatriate funds hidden offshore no questions asked and just pay 10% in tax.  The government thinks it can raise €2.5 billion but everyone else thinks it's unfair.  The opposition want to block it in the courts as "unconstitutional" because it undermines the right to equality among citizens.

- making pensioners pay 10% of the cost of their previously drug prescriptions has caused a huge outcry even though the amount they pay has been capped at €8 - €18 a month depending on their level of income and non-pensioners pay far more (up to 60%).

- As I predicted in February (Spanish electricity bills set to soar) the government has hit energy costs with electric bills up 7%.  They now stand 60% higher than they did in 2007 when the crisis first began.

Will all this keep the bond markets happy?  Probably not as all the pain inflicted by the government just makes it harder for the economy to grow which in turn will push the deficit targets further out of the reach.

That is so obvious it hardly needs stating but what else is the government supposed to do?  Imagine if it just shrugged at the deficit and carried on regardless (which is more or less what the French seem to be doing).

Spain is chasing its tail and it's hard to see it ending in anything other than a bailout.

From our website:  Taxation of rental properties in Spain

It's a case of Good News, Bad News for Spain

Mixed headlines about the Spanish economy this week as the tourist sector delivers the goods, but unemployment continues to rise to an agonising 4.2 millions.

New figures reveal that Spain's travel sector experienced a very good Summer season. Visitor numbers hit a record high of 7.64 millions in August (up 9.4% on the previous year).

A separate survey showed Spain remains the number 1 choice in Britain (Spain's top market) for family holidays. Some have speculated that the Arab Spring and rising flight costs have caused some Europeans to choose Spain over more exotic and far-flung destinations.

Great news for the economy as tourism is Spain's biggest industry and employer. It is also the main source of export income which injects foreign demand into the stagnant domestic economy.

That's the good news. The bad news came from unemployment stats showing a net increase of 95,000 on the unemployment rolls to record another new high of 21%. The two bits of news are probably connected as tourist jobs are inevitably seasonal and some will have already been laid off last month.

Another component of the jobs woe however is more worrying. Reports say that there were heavy job losses in the public sector as local government in particular sheds employees. Teachers are being laid off for example and are going on strike in some areas.

Many local authorities which profited from high property-related taxes in the boom (and spent accordingly) are now deep in debt and some are not settling their bills and being taken to court by contractors such as rubbish collectors and cleaners.pp

It's all a reminder that austerity isn't painless and that, although Spain has made decent progress in getting the deficit under control, that very process may deepen the economic crisis.

From the website: Changes to Spanish Tax Form 210

Spanish protesters are indignant about the wrong things

Anti-Crisis protesters, indignados ("indignants"), have been marching across Spain to express their frustration and outrage at the country's economic situation - and the measures being taken to tackle it.

You can understand why people are out on the streets, particularly the young, with even a university education proving almost useless in the face of 20% unemployment. On top of that there are public spending cuts biting and laws being passed to erode pension and employment rights. People feel they are being punished with austerity and economic misery for the sins of others, mainly bankers and politicians.

Do the indignados have a point? What are their arguments and do they stack up?

Protesting “against” the crisis is pretty pointless because you can’t protest against an economic state, but that’s what a lot of the indignation seems to boil down to – a need to let off steam and vent frustration. Some protesters though have articulated anger against specific policies, people or institutions they hold responsible for causing the crisis or worsening its effects. From what I have read these are the main grievances:

- Unemployment

- Reduced pensions

- Reduced employment protection

- Austerity in the form of tax increases and spending cuts

- Corruption

In terms of who they are angry with, apart from the politicians and banks, it is chiefly Europe because of a "Euro Pact" made in the spring forcing deficit countries to reform and enforce fiscal discipline (as one Spanish paper sees it The European Pact punishes workers and social spending)

My problem with these protests is that they protest against the problem and the most likely solutions at the same time. By all means be angry about unemployment but don't then complain about changes to worker protection laws because these are desperately needed to increase employment. Similarly it is dubious to protest about public spending cuts when it should be quite obvious from the Greece situation that things could be much worse for Spain without some short term pain now. Also attacking Europe as if it is some kind of Thatcherite institution administering harsh economic medicine is ridiculous - they should not be attacking the Euro Pact, which is just what Spain needs, but challenging the Euro which is at the root of a lot of the misery.

Reading one website's description of the protests (Indignation against the crisis and for a general strike) I was struck by the truth of one reader's comment in reply-

"The indignation is against a lot of things And for that they are? What specific solutions do you propose? What will you do to feel represented? The solutions are not free rain from the sky"

I quite agree. At this stage the protests merely look like a disorganised and contradictory series of gripes. I too feel the politicians of Spain have let the country down (although the country was happy to play along during the boom), but actually now they need to be more radical and stick with a reform agenda rather than cave into these woolly headed indignados.

Has the bears' case against Spain gone down the pan?

It was supposed to be PIGS in the plural not PIG. The smart money was betting on all the Euro area's peripheral economies buckling including Spain and not just Portugal, Ireland and Greece.

As Portugal finally opted to accept a bailout package, the headlines inevitably posed the question "Is Spain next?" The markets answered pretty emphatically "No". Ten year Spanish government bond yields stayed steady at just over 5% as they have they have done all year (for comparison the UK equivalent is around 4%). Traders and investors seem to have been reassured that Spain's economy is in better shape and crucially the government debt in relation to the Spanish economy much smaller than Portugal's (63% vs 83%).

Also the Spanish government seemed to have been shocked into action last year and made some labour market and pension reforms, put up taxes and cut spending and made a start on clearing up the mess in its banking system.

Everything OK then? Of course not, Spain is barely growing (GDP up just 0.6% last year), the banks have a lot of Portuguese debt, the housing market is still a disaster area and unemployment is shockingly high. On top of that the ECB has chosen to put up interest rates by 0.25% which feeds through to the EURIBOR rate which sets most Spanish mortgage rates. By some estimates this, and subsequent rises that the market expects to see, could add 800€ to the cost of the average mortgage. And of course there are the strikes we have seen recently and some big job cut announcements (Telefonica to cut 20% of its spanish workforce). Add in rising petrol prices and higher taxes and Spain is not a bear that is out of the woods just yet.

From the ADVOCO website: Spanish Income tax rates 2011

The difference between Spain and Ireland is timing

So Ireland finally caved in and went to the EU and the IMF for a loan. The point for Spain though, is will they eventually be brought down by the same pressures that did for the Irish?

The consensus appears to be no it won't. The markets and most commentators seem to accept that Spain is a different proposition and can pay its way. At an important bond auction last week, in the midst of the Irish uncertainty, Spain did manage to sell its latest batch of debt for an acceptable yield (10 year funding cost them 4.6%). There are good reasons to think that Spain is in a much stronger position:

Ireland's economy has shrunk more than any other in the EU economy during the crisis, shows no sign of recovering and the fiscal position of the government (excluding bank bail outs) is getting worse. Spain's economy has at least stabilised in 2010 and is at least not shrinking (Q3 GDP Spanish growth was 0%). The government's deficit as a % of GDP is narrowing to single figures and the government has set up major public spending cuts and tax rises to bring it down further.

Ireland was sunk by its banking sector more so than its public sector debt. In 2007 the Irish public sector deficit was the lowest in the EU at 25% of GDP and even with the crisis had only risen to just over 60% this year. However in 2010 the Irish deficit has ballooned to a remarkable 32% mainly as a result of the cost of bank bailouts, principally the AIB and the Bank of Ireland.

The markets just did not accept that the Irish could afford the guarantees given to these banks - the government had guaranteed 100% of their deposits and made some commitments to the bondholders of backing these bank. Ireland could not afford a bank bailout and get its deficit under control at the same time.

So, Spain in the clear? Not quite. There are some worrying similarities between Spain and Ireland's predicament:

- both economies are stagnating even before austerity cuts and tax rises have started to bite. Neither have the option of devaluing their currency to boost exports as they are stuck in the Euro.

- both not only had massive house price booms and bust they are both (unlike say the UK) still suffering the aftermath in terms of mountains of unsold properties dragging down prices

- Spain has its bank problems too. See Spain's economic crisis turns nasty

- Spain and Ireland have both lost control of their monetary policy so cannot engage in Quantitative Easing policies like the UK and US have done

- Spain is struggling to make its budget deficit-narrowing plans work (partly because tax revenues are stagnating and partly because the autonomous regions are not cutting spending to plan)

- if it were to suffer a double dip Spain would have nowhere to turn. In 2008/9 the government was able to spend its way to prevent the worst of the recession and even then it was pretty awful.

So if both economies are in the same predicament - deficits, austerity, stagnation, stuck in a Euro straitjacket - what sets Spain apart? The markets seems to accept that the scale of the Irish banks' problem set it apart. But I have my suspicions that Spain is more vulnerable than it appears on this front. The banks avoided much of the pain of the housing market crash by dodgy accounting and putting off foreclosures. They have in any case become the most reliant in Europe on borrowing cheaply from the European Central Bank. Another spiral down in house properties and an increase in repossessions - hardly outlying propositions - and the game could be up. Ireland today, Spain tomorrow? Watch the housing market.

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More coffin nails for the Spanish economy?

Spain has always been a long way behind when it comes to making efforts to ban smoking from public places. When I first started to live here I was amazed to find bank tellers and government officials smoking while they attended you. I was outraged when I went to register the birth of my first child and found the Registro office so smoky that my 2 week old baby had to be kept out in the corridor while we attended to the paperwork. A year or two later when I helped set up a play centre in the local town, I had to accept that smoking would be allowed in the café or “no one would come”. But it seems this is about to change and Spain is about to get some of the toughest anti-smoking laws in Europe.

After a botched and watered down attempt at a ban on smoking in bars and other public places a couple of years ago, this new “antitabaco” law looks like the real deal. The new law would, from 2^nd January 2011, ban smoking in all bars, restaurants and other enclosed public spaces with very few exceptions. Also some outdoor places like the grounds of health centres and playgrounds are included in the ban. Terraces attached to bars which are not enclosed by three or more walls will be exempt. There are exceptions for some private clubs and certain proportions of space in hotels and prisons.

Another victory for health campaigners then and, despite not being militantly anti-smoking myself, I think on balance these kinds of laws quickly become accepted as the norm and the vast majority of people – smokers included – find them an improvement after a short time. The issue though is less about smokers’ rights and more about the effects on business, specifically the large and vitally important catering and hospitality industry which has been lobbying against the ban. Some people also think tax revenues from cigarette sales will hit the government’s finances and tobacconists are expected to suffer.

"The new law enrages barowners "

http://noticias.lainformacion.com/noticias/la-nueva-ley-antitabaco-enfada-a-hosteleros-y-estanqueros_L35ilG1cO6AdcBznocQyv3/

There could be something in these economic warnings. The Spanish economy and the government’s finances are in a precarious enough state and the UK’s experience that banning smoking, however desirable public health grounds, has had a negative effect on takings at some types of premises. I haven’t heard restaurants or hotels complaining about the smoking ban but pubs and clubs have certainly seen revenues decline over recent years. Not all their woes can be blamed on the new legislation: social trends which go back decades have left traditional pubs and places like working men’s clubs and bingo halls losing market share. The recession has taken its toll. We have been drinking less and less beer as a country for years. And there is more competition, including websites and the lottery in the case of bingo and supermarkets in the case of pubs. Some pubs, like the Wetherspoons chain, have taken on the decline and changed their offerings to, for example, capture the breakfast and coffee crowds.

What does all that mean for Spain? I think the effects could be quite significant. The small café and bar is a staple of Spanish life as, sadly, is unabashed smoking in front of other people. I can see the firm ban hitting business and shutting some of the weaker establishments. This is not a justification for putting off doing something that could save lives and set a better example for children but it’s one more reason to think 2011 won’t see any kind of rapid turnaround in the Spanish economy.

related http://www.independent.co.uk/news/uk/politics/smoking-ban-should-not-cover-pubs-and-clubs-2105331.html

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The Pain in Spain - who is to blame?

I read an interesting debate recently between leading economists about whether the Spanish economic crisis was of Spain's own making or whether Spain was the victim of failings in the Euro or of the global crisis more generally. My view is obvious from the title of the article I wrote on the subject which was published recently here: The Pain in Spain is Mostly Self-Inflicted | Alrroya

Governments love to blame international forces beyond their control for economic ills at home. Gordon Brown was a dab hand at this. But when a boom which involved a tripling of debt and house prices ends in a bust should we really be surprised? And could the governments of Spain and the UK not have stepped in to end the excesses long before their economies got addicted to debt? I think so and let us hope they don't let booms get carried away again although looking at both countries the next boom seems an awfully long way off.

History of Spain's crisis

Labour reform: fiddling while Spain burns

With 4 million unemployed, the economy practically paralysed and the public finances in crisis, something has to be done. Even if inside Spain there does not seem to be a clamour for radical action on the economy (people still in employment too comfy with the status quo and fearful of change?), the EU and the IMF are demanding reform. First came the austerity package (see post Spain's economic crisis turns nasty) and now the government is pushing through labour market reforms.

They are causing a lot of fuss. The unions are threatening a general strike over the reforms but the government has vowed to press ahead anyway (Zapatero to approve reforms with or without agreement) . They have been negotiating changes to a system which clearly does not work for almost two years now. Even with 44% of young people out of work and numerous others working in the black economy, the unions are unhappy because redundancy pay rights are being reduced.

But even if the reforms get pushed through will they make much difference? Looking at the fine print and they are not exactly earth-shattering - redundancy pay down from 45 days pay for every year worked to 33 days. Even that small reduction is only for new contracts not existing workers.

It will still be very expensive to hire and fire workers which is why so many employers needing staff get them unofficially - "sin contrato" - although they need to be wary as one of the new measures is to increase the number of labour inspections specifically to pick up such illegal practices.

The other measures in the package are mainly shuffling subsidies around and actually increasing the burden on employers e.g. by making it harder to offer temporary contracts and extending the requirement to pay redundancy packages. Full details here - Employing Staff in Spain

If Spain was serious about tackling the horrendous employment situation they need a dramatic cut in social security payments by employers and the self-employed, right across the board. Perhaps they could pay for it with an end to the 3 billion € a year they spend on subsidies for encouraging employment which clearly do not work.

Spain's economic crisis turns nasty

If you thought 2010 was going to be back to normal with the economy and the year of recovery, looks like you are out of luck. A dreadful week for the Spanish economy ended yesterday with the administrators moving into CajaSur a major savings bank in the south of the country. Depositors should be reassured that there is deposit protection insurance of €100.000 per person so that a joint account would have up to €2000.000 of their deposits safe.

Another Caja, CAM, is in merger talks with other banks after it too has got into difficulties.

All this comes after the government announced a series of austerity measures. These come on top of the VAT and investment tax rises that were announced in January. The new measures include a cut in public sector pay (5% on average), ending the 2.500€ gift to new mothers (nicknamed the baby cheque) and a freeze in most state pensions.

The government has also promised to bring in some increased taxes for "the rich" but won't say what they are or who they consider rich. The press is speculating that the wealth tax may be brought back for people with assets over €1m.

This comes just as the economy was reportedly growing again albeit by a miserly 0.1%. You wonder how long such a weak recovery can last in the face of such bad news. The austerity measures are designed to cut the deficit by around 8% of GDP so that's a massive chunk of demand to come out of the economy. The banks' woes will make mortgages even harder to come by we can safely assume which does not augur well for the housing market. On top of this the unions are threatening a General Strike (article) in protest against both the austerity measures and proposed labour market reforms.

The Advoco website has a full guide in English to the economic crisis charting its development and underlying causes from the beginning up to the present day: Spain's economic crisis.