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Edward Hugh is only able to update this blog from time to time, but he does run a lively Twitter account with plenty of Spain related comment. He also maintains a collection of constantly updated Spain charts with short updates on a Storify dedicated page Spain's Economic Recovery - Glass Half Full or Glass Half Empty?

Monday, July 14, 2008

Spanish Builder Martinsa Fadesa Suspends Trading (Updating Daily 10)

Please Note That This Post Is Presently Being Updated On A Daily Basis As The Crisis Develops. The latest news is at the bottom.

Reuters are reporting that the listed Spanish property company Martinsa Fadesa have been suspended from trading this morning following the request from the Spanish property firm last week for extra time from the banks to obtain additional credit in order to maintain its refinancing obligations. Martinsa Fadesa said on Friday it had asked creditor banks to waive a requirement that it obtain a 150 million euro ($235.7 million) loan - to make scheduled interest repayments - until August 7 after the deadline for obtaining it expired. (For fuller explanation on the background see this post of mine from yesterday).

The company is scheduled to hold a board meeting at 14:30.

Shares fell 25 percent to 7.30 euros this morning before the Spanish stock exchange regulator suspended trading. On Friday, they fell almost 34 percent after the company said it had asked creditor banks to give it until Aug. 7 to obtain a loan the loan it needed as part of a refinancing agreement reached in May. In a regulatory filing, the company added that it had asked for the waiver because the deadline for obtaining the loan had expired.

Update 1

According to the Spanish paper Expansion Martinsa-Fadesa creditors expect the Spanish developer to initiate bankruptcy proceedings later this week.

La Caja de Ahorros y Pensiones de Barcelona and Caja Madrid, Spain's two largest savings banks, are said to have lent more than 1 billion euros ($1.6 billion) each to Martinsa, while Banco Popular Espanol, Spain's third-biggest publicly traded bank, may have lent 400 million euros, again according to Expansion. Banco Popular's shares closed down 2.74 percent today.

One of the big areas of interest about the Martinsa portfolio is the quantity of land it contains. At the end of March 2008, Martinsa Fadesa had land totalling 28.67 million square metres, 41 percent of which is outside Spain. They also have a stock of more than 173,000 newly-built and unsold properties. Their net assets were worth 1.693 billion. In the first quarter, the company made net losses of 85 million euros and an EBITDA (earnings before interest, tax, depreciation and amortisation) loss of 85. Further, more than 40 percent of Martinsa Fadesa's land in Spain is not zoned, which means it could have problems getting building authorisation, particularly as the government tightens development rules.

Update 2 - Tuesday 15 July 2008

Well, it's happened. History is now in the making. Martinsa-Fadesa SA yesterday became the first publicly traded Spanish developer to seek protection from creditors following the closing of the wholesale money markets to Spanish banks in the wake of last August's sub-prime crisis in the United States. Martinsa sought bankruptcy protection after failing to secure a loan that banks had demanded from them as part of a debt refinancing process. Martinsa has a current market value of 680 million euros ($1.1 billion), less than half of the peak reached in March 2007.

Sixty-five developers and real-estate brokers based in Spain have now sought bankruptcy protection this year, according to Credito y Caucion, a Spanish credit insurer.

So now it is simply a question of waiting and see who is going to be next. This is very frustrating, sitting here and watch the government sitting back with virtually folded arms, as if we were attending a typical European Cup final play off, just waiting to see when the Spanish team get sent home. There is lot's that could be done. This is all such a pity.

In very active trading on the Spanish Bolsa this morning Banco Popular and the country's leading real estate shares opened down over 6 percent as the market weighed news of Martinsa Fadesa's bankruptcy. This is already one of the largest and most significant corporate failures in Spain's history.

Property firms Colonial and Renta also opened down more than 6 percent. Popular, a major creditor to Martinsa - Expansion suggested yesterday that they were into Martinsa for 400 million euros, but they are much more vulnerable (and possibly generally exposed) than the larger La Caixa and Caja de Madrid - suffered the heaviest fall of any Spanish blue-chip stock.

At 2:12 Banco Popular shares had fallen 56 cents, or 7.9 percent on the day, at 6.54 euros, thus extending their loss so far this year to 44 percent.

Update 3 - Wednesday 16 July 2008

Well, El Economista is reporting that Spanish Prime Minister Jose Luis Rodriguez
Zapatero actually went back on a promise to provide loans to Martinsa, effectively forcing the company to seek protection from its creditors. According to the paper Zapatero promised Martinsa Chairman Fernando Martin he would provide the company with a 150 million-euro ($239 million) loan from the Official Credit Institute at a meeting in his official Madrid residence - La Montcloa - last December.

This is fascinating. Who really knows if ZP did make any such promise, or if this is simply the Spanish rumour mill hard at work - although presumeably ZP did meet with Martin - but either way a lot of scandal is surely now about to be served (incidentally there is now quite a lot of opinion and observation in comments if you are interested).

Also Martinsa-Fadesa SA formally asked a court for protection from creditors late last night, in the largest bankruptcy filing yet among traded property companies in Spain. The company said in a securities filing dated July 15 that it delivered the request to the Mercantile Court of La Coruna, in northwestern Spain, where the real estate company is based.

According to Reuters writer Elena Moya
, the demise of Martinsa is a sign hedge funds are pushing hard to profit from the plight of ailing companies and this may lead the insolvency proces in Spain to speed up.

Hedge funds bought Martinsa Fadesa debt at discounts of as much as 50 percent of its value, and may now profit from the forthcoming administration process, since the expected sale of assets in the longer term may pay them back at a price closer to face value. The problem is that the Spanish banks and builders simply don't now have the liquidity to sit back and wait in this way.

Basically this is modern globalised capitalism, and there is no need for such funds to care whether or not a company goes bust, and this may teach many Spanish companies - used to cosy long-term relationships with regional savings banks such as La Caixa, and Caja Madrid - a very painful lesson in modern global finance. Essentially the process doesn't come in parts. You can't have the parts you like, and then reject the bits you don't like. No one was complaining when these people were buying cedulas, well now.....

Moya quotes Mark Fennessy as follows:

"There will be more of these companies. Spain is completely unprepared for what's going to hit them," said Mark Fennessy, a restructuring partner at Orrick, a London law firm. "There are a number of funds, large private equity funds, that are already in discussions with Spanish banks to take out their debt and equity positions in distressed companies. We will see an increase in this activity."

I completely agree, the whole deabte here is way behind the curve. Basically such funds tend to be patient investors who sit back and wait for months (or years) before acting - and they are now reputedly eyeing Spanish companies such as retailer Cortefiel, or natural stone producer Levantina, who are both rumoured to be suffering as Spain's economy crumbles. (Claus Vistesen had a useful summary of the debate about the so called "vulture funds" - more correctly termed distressed hedge funds on his Alpha Sources blog earlier last year).

Spanish banks had been trying to exclude foreign banks and investors in distressed companies from the restructuring agreements, in an attempt to prevent them influencing debt deals, however with the position deteriorating rapidly this is no longer realistic. Property companies such as Detinsa and Diursa did recently manage to reach debt restructuring agreements without international banks, but it will now be hard to keep international investors out, especially after the collapse of Martinsa Fadesa has increased the profile of opportunities in Spain.

Indeed, earlier this year, Martinsa Fadesa itself had to battle hedge funds in London as it needed a unanimous creditor agreement to approve its 4 billion euro refinancing. Using their deal-blocking power, some hedge funds managed to win repayment deals within one year, while some Spanish banks had to wait as much as seven years.

Perhaps the most ominous quote of the day comes from this (anonymous distressed hedge fund manager):

"Before, prices discounted the fact that the biggest companies wouldn't go bust, now maybe there will be a change, maybe now people will see the seriousness of the matter and will start working with more realistic expectations,"

On a not altogether related front, we learn today that Spanish car sales fell even further through the floor in June. Car sales fell 31 percent (year on year), compared with only a 14 percent decline for January-May. New car registrations for the whole of Europe were down 7.9% year on year, falling to 1,427,008 units from 1,549,574 in June 2007, according to data from the Brussels-based European Automobile Manufacturers Association. European sales for the first half of the year slid 2.2 percent, accelerating the 0.7 percent contraction recorded in the first five months.

So car sales are falling everywhere, but Spanish car sales are falling by a considerable order of magnitude above the rest, and the problem is accelerating rapidly, as financial jitters send builders out of business, and the combination of these two sends the real economy swiftly down, which of course only adds to the problems in the financial sector, etc, etc, etc......

Meanwhile Spanish Economy Minister Pedro Solbes in an interview on PuntoRadio today that the financial trouble of property group Martinsa Fadesa is an isolated case and not a sign of systematic failure. He also said the government would not bail out Martinsa Fadesa.

``We always said to Martinsa that we would help in whatever way we could,'' Solbes said in an interview on Punto Radio. Still ``the Official Credit Institute's credit lines aren't for working capital or real estate investment'' so ``we couldn't agree that there were projects that would allow us to offer'' financing.

Solbes also confirmed that Spain's economic growth will be "close to zero in some quarters" this year. Economic growth slowed to 0.3 percent in the first quarter, less than half the 0.8 percent rate of the previous three months and the government has predicted the expansion will cool further this year. When asked "Could growth turn negative?" Solbes replied "It's not my feeling at the Moment".

However the daily El Pais reported today that 12,500 families have begun paying for homes that were still under construction in Spain, Portugal, France, Morocco and eastern Europe, and Solbes also said that the government had an interest in guaranteeing that the company preserved the maximum amount of jobs - 234 people are apparently already about to lose their jobs - and that houses under construction were finished, so it is not quite clear at this point how all the circles are going to be squared here.

'It is true that other countries have acted to help companies, but it's normally when the problems are systemic and could filter through to other sectors...but this has nothing to do with the Spanish case, which is isolated,'

I really fail to see how he can say that this is an isolated case and keep a straight face. Maybe the magnitude of the land portfolio made Martinsa a bit special, but the issue is going to be far from an isolated one.

However he did admit that Spain's economy is going through an exceptionally complex economic crisis, this is the firts time, I think, that he has spoken so frankly.

'For me, this is ... the most complex crisis we've ever seen due to the number of factors at play,'

Would sombody kindly like to do something to try and extinguish the fire! (see comments)

Update 4 Thursday 17 July 2008

Prime Minister Jose Luis Rodriguez Zapatero has denied Martinsa loans he had promised the company before Spain's March 9 election when he wanted to prop up the company to avoid damaging consumer confidence, according to the newspaper El Economista.

Reuter's Elena Moya is now reporting that Martinsa Fadesa may not need to sell assets during its administration process if a new debt refinancing agreement is reached with creditors, citing "a source involved in the situation".

Moya says that "under Spanish administration law, a deal now needs only 50 percent consensus to be reached, facilitating an agreement amongst creditors". It's the now in this phrase which attracts my attention. Does this mean that the law has recently been changed, since this clearly wasn't the position before, or they wouldn't have gone bust so quickly. Or is this just rumourology to "buy time"?

According to Moya:

The international banks and hedge funds that imposed tough conditions on the company's failed restructuring agreement will now be left out -as the board will only need 50 percent approval on any deal- making a solution more likely, the source said.

But this takes us back to the hedge funds as the source of the problem - the so-called "vulture fund" thesis - and while they are part of the picture, they are not the main part, so something still has to be faced up to somewhere, someday. And protecected as unlisted savings banks like La Caixa and Caja Madrid are, there are limits to their potential "generosity".

Meantime Spanish real estate company Renta Corporacion said today it had booked net losses of between 25 and 27 million euros ($42.8 million) for the first half of the 2008 financial year. Sales were between 173 and 176 million euros, the firm said, without giving a comparative figure for the same period last year.

Friday 18 July 2008

Not too much on the general bankruptcies front today. The only vaguely related topic is the news that Banco Popular after coming back from last Tuesday's low of 6.54 retreated again for the first time in three days today, declining by 10 cents, or 1.5 percent, to 6.80 euros.

Spanish loan defaults climbed by 3 billion euros in May, according to data from Spain's central bank. Defaulted loans climbed to 27.76 billion euros from 24.75 billion euros in April and 12.05 billion euros a year ago. Loan defaults as a proportion of total loans reached 1.53 percent from 1.37 percent in April and 0.77 percent a year ago, according to the Bank of Spain data.

Spain's stock of mortgage loans rose an annualized 10 percent in May, the slowest growth rate in at least 15 years. Mortgage growth in May halved from 20.5 percent a year earlier, the Spanish mortgage association said today. That is the slowest growth rate since at least 1993, when the association began recording the data. Growth in Spain's stock of mortgages may slow to the 6 percent to 9 percent range this year from 14.9 percent in 2007, the association said. Mortgage defaults are now at about 1.1 percent of home loans and may rise to 2 percent by year-end.

Spanish construction sector output fell by 10.8% in May compared to May last year, according to the EU statistics office Eurostat. This was the biggest fall in the EU, and came after a 19% drop in April, when Spain also lead EU countries with construction sectors in retreat.

On a monthly basis, however, Spanish construction activity actually rose in May, with output 2.9% higher than in April. This is the first time since December that Spanish construction activity has risen from one month to the next, and was the second biggest monthly rise in the EU, behind only the UK (+3.4%). However, we need to remember that building is one thing and selling another (see mortgage data above), that Spain has to complete a record number of house and flats this year, and that the government is also increasing spending on civil engineering works which also figure in the data.

On another front altogether Promotora de Informaciones SA, aka as PRISA, and which is Spain's largest publicly traded media company, extended the maturity on 1.95 billion euros ($3.1 billion) of loans used to fund its increased stake in pay TV operator Sogecable SA on Friday.

Prisa extended the debt's maturity to March 2009, the company said in a regulatory filing today. Prisa owes about 5 billion euros after borrowing last year to buy the 48 percent of the Spanish TV company it didn't already own. The publisher of Spain's El Pais daily newspaper will raise another 500 million euros in the capital markets to reduce debt, the regulatory filing said, without providing details. Banks that supplied other loans to Prisa approved the extension, according to the filing. Looks like some people are struggling to find cash.

Update 6 Monday 21 July 2008

Well as noted at the end of last week, Prisa have been looking for cash, news today may help us understand why. Gestevision Telecinco SA and Antena 3 de Television SA, Spain's largest broadcasters, may well have to cut their dividends as a slowdown in advertising growth erodes earnings. Telecinco, who have raised their dividend for the past three years, have alreadt lost 48 percent in Madrid trading this year. The television company reports earnings on July 31. Antena 3, which has paid annual dividends since 2005 and is down 43 percent this year, posts results the same day. Both broadcasters will say profit declined, according to analysts' estimates.

Spain's 2008 ad revenue is forecast to grow at about half of last year's pace, if they are lucky. The slowdown in ad revenue has prompted Morgan Stanley to cut its profit estimates on the broadcasters for 2008 through 2010. As Spanish economic growth falters, the companies' outlook is worse than their European peers, and this is giving us another clear sugn how what started out as a problem with cedulas hipotecarias in the wholesale money markets is now ripping its way through the entire Spanish economy.

Shares of Fomento de Construcciones y Contratas SA, Spain's third-biggest construction company, are falling this morning, and were down as much as 4.4 percent in Madrid trading following a decision by Morgan Stanley to cut its price target, citing Spain's building slowdown.

FCC dropped as much as 1.62 euros to 35.29 euros and traded at 35.70 euros as of 10:32 a.m., giving the Barcelona-based company a market value of 4.66 billion euros ($7.4 billion).

Also Spanish construction company ACS is going to put its 45 percent stake in electricity group Union Fenosa on sale this week and hopes to close the deal by mid-September. Media had previously reported that ACS was going auction its stake in Spain's third largest utility - worth about 2 billion euros at current market prices - today, and wanted to close the deal by August. So everyone is having a hard time finding cash at the moment.

ACS says it is selling becuase it wants to "consolidate" its position in rival utility Iberdrola where it owns 7.2 percent directly and a further 5.2 percent via equity swaps, but some of the cash raised could well go towards cutting its net debt, which stood at 16.6 billion euros at the end of 2007. Iberdrola's gearing at that point was 66.4 percent.

Update 7: Tuesday 22 July 2008

Well today it is the turn of the telephone companies. Basically we are in the period of company reports and outlook, and it is clear that the deteriorating real economy is going to affect virtually everyone. Telefonica fell the most in six months in Madrid trading after Vodafone's quarterly sales in Spain declined. Telefonica declined as much as 6.8 percent to 16.10 euros and traded at 16.22 euros as of 9:23 a.m. in the Spanish capital. Before today, the shares were down 22 percent this year. Vodafone, the world's largest mobile-phone company, posted a 2.5 percent service revenue drop in Spain in the three months through June. Spain was ``impacted by a decline in customer spending in a challenging macro economic and competitive environment,'' Vodafone said today in a statement.

Spain's benchmark stock index, the IBEX 35, fell 0.53 percent at 9:05 a.m.

Acciona: Enel will be forced to pay a premium should it wish to buy Spanish builder Acciona out of their partnership in power company Endesa, according to El Economista. Acciona shares retreated 60 cents, or 0.4 percent, to 141.05 euros on the news.

Fomento de Construcciones y Contratas SA (FCC SM): Merrill Lynch & Co. cut its recommendation for Spain's third-largest builder to ``underperform'' from ``neutral.'' The shares declined 41 cents, or 1.1 percent, to 36.50 euros.

Meanwhile cash-strapped savings bank Caja de Ahorros del Mediterraneo (CAM) yesterday set a final price for retail investors of 5.84 euros per share for a planned July 23 placement on the stock market, the first of its kind by a government-controlled savings bank. CAM had set 5.95 euros as the maximum price of the listing on July 15, but the final figure was at the bottom of its initial price range of 5.84-7.30 euros. CAM plans to allot retail investors 65 percent of 50 million "participation certificates" - similar to non-voting shares - on offer. The Alicante-based bank aims to raise up to 365 million euros ($582.3 million) by floating 7.5 percent of its "available surplus". We will see what happens on Wednesday.

Also the Spanish press has revealed that Fernando Martin, president of Martinsa-Fadesa, the company that left 12,500 clients with no home to show for their money, and hundreds of staff laid off, took 85 million Euros in cash out of the company last year in the form of dividends. That is more than the 70.4 million Euros paid in salaries to all Martinsa-Fadesa staff.

It has also emerged that Martinsa-Fadesa’s board of directors was paid a total of 6.8 million Euros last year, an average of 614,000 Euros per director. Despite running the company into bankruptcy, Martinsa-Fadesa’s board was paid more than larger builders like FCC, which is still in business.

The Spanish press reports that owners and managers of Spanish property developers are worried that Martinsa-Fadesa’s bankruptcy could set off a domino effect that engulfs the sector. Various sources in the Spanish property business have told the press that more bankruptcies are now inevitable.

Sources in the Spanish property sector warn that many more developers are experiencing liquidity problems. “Many other companies should be seeking voluntary protection from their creditors, but they aren’t doing so for image reasons,” Angel Serrano, director of the real estate consultancy Aguirre Newman, told the Spanish daily ‘El Pais’. “When they finally do so it might be too late.”

Martinsa-Fadesa’s bankruptcy has been front page news in the international business press, helping to reinforce negative investor sentiment towards Spain. “The principal repercussion is the damage done to the image of Spanish real estate sector in the eyes of national and international clients,” Serrano told ‘El Pais’.

With the Spanish banking system heavily dependent on foreign capital for liquidity, Martinsa-Fadesa’s bankruptcy will make it even more difficult for other Spanish developers to get credit, making further bankruptcies even more likely.

Now that Martinsa-Fadesa has gone into voluntary administration, investor attention has turned to Reyal Urbis, a quoted Spanish developer whose 6 billion Euros of debt makes it even more leveraged than Martinsa-Fadesa. Reyal Urbis chalked up first-quarter losses of 52.7 million euros ($81.9 million), which had quadrupled from 13.7 million a year earlier. Total Q1 revenue fell to 187.4 million euros from 314.5 million, with property development sales down to 129.5 million euros from 243.3 million a year earlier.

Both Colonial and Reyal Urbis, warned the CNMV stock market regulatory body last week that they have still not managed to refinance their substantial debt.

The Valencian developer Obradis was also forced at the weekend to seek protection from its creditors. With 5 developments partly sold and under construction, including its Balco de la Vila building in the popular resort town of Javea, Obradis has run out of the cash it needs to finish the projects and pay its debts. Obradis borrowed more than 50 million Euros in 2006 when credit was plentiful and cheap and had sales totalling 13.7 million euros in 2007. This is evidently pretty small beer compared with what is going on generally, but it is indicative of what is going to increasingly happen among the smaller developers.

Update 8: 23 July 2008

Not a lot of really "fresh" news today.

Sacyr Vallehermoso - Spain's fifth-biggest builder - has said it has extended by one year a 560 million-euro ($884 million) loan used to buy its stake in Europistas Concesionaria Espanola SA. Their shares declined 10 cents, or 0.7 percent, to 14.24 euros. Everyone is absolutely strapped for cash now.

El Confidencial is reporting that Sacyr has also put its services division Valoriza on sale to raise cash. Shares declined 10 cents, or 0.7 percent, yesterday to 14.24 euros.

Exceltur, a lobby group for Spanish tourism companies, has halved its estimate for growth in the industry as the economy slumps, according to El Pais. Exceltur now predicts the industry will grow 0.8 percent this year, down from its previous prediction of 1.6 percent growth.

Banco Santander: Sovereign Bancorp Inc., the U.S. lender in which the Spanish bank owns a 24 percent stake, is scheduled to release its quarterly earnings today. Santander shares declined 12 cents, or 1 percent, to 11.58 euros yesterday.

Caja de Ahorros del Mediterraneo (CAM SM): Shares of the Spanish lender are due to begin trading at midday today on the Madrid exchange.

ABC is reporting that as many as five groups that may be interested in buying Actividades de Construccion y Servicios's 45 percent stake in Fenosa, and that they will receive sale documents on July 28. The shares were up 31 cents, or 2.2 percent, to 14.16 euros. ACS also need to raise cash. First you sell the household silverware and crockery.....

Housing Minister Beatriz Corredor announced a small plan to buy some land from the builders today. The Spanish government is planning to buy some 300 million euros ($478 million) worth of land for state-subsidised housing over four years. At the same time she insisted the move was not to bail out ailing construction firms, although it obviously is. She said the government needed extra land to meet its promise to increase production of state-subsidised homes to 150,000 a year from 100,000. The government will start a search for land to buy in October, asking companies to present plots for sale.

A few things are obvious here and needs saying. In the first place this is quite a small quantity compared to the size of the problem, and it is an attempt to do what badly needs to be done, but by the back door. The fact the plan isn't going to be put into effect until October also suggests they are in no hurry, and hence have no real idea of the magnitude of the problem they are actually facing.

Also, why build more homes? If the government want 150,000 to 200,000 flats, why not simply buy them at bargain basement prices to try and help clear the huge backlog of unsold housing.

I am in favour of buying back land, but with a large "haircut" to the present owners, and only under condition that this land is reclassified and not used for future building. If you don't do this you are simply never going to clear the market given the long term downward adjustment in the number of houses which are going to be needed in Spain, given that people are now not likely to be buying them for investment purposes in any way which is remotely comparable to the quantities which were built 2000-2008.

Update 9: Thursday 24 July 2008

Well today Banco Popular is back in the news again. Banco Popular Espanol is Spain's third-biggest listed bank, and today they reported that second quarter profits rose less than analysts estimated as asset sales offset higher loan defaults.

Popular fell as much as 5.4 percent in Madrid trading after reporting net income increased 8.3 percent to 352.2 million euros ($552.5 million) from 325.3 million euros a year earlier. That missed five analysts' 392 million-euro median estimate. Popular may need to raise capital in the not too distant future should loan losses continue to mount. Popular fell 35 cents, or 4.4 percent, to 7.60 euros at 9:30 a.m. in Madrid, which was the most since July 15 and which puts this year's decline to 35 percent after the shares had recovered somewhat in recent days.

In May, the bank reported provisions of 39.3 million euros to cover loans to Inmobiliaria Colonial SA. On July 15, Popular said it set aside 100 million euros to cover loans to Martinsa-Fadesa SA, Spain's first traded developer to seek bankruptcy protection. Popular made 332 million euros in provisions in the quarter. It used gains of 200 million euros from the sale of real estate to cover part of the loan-loss provisions. Popular also booked 40 million euros in gains from the sale of its French banking unit.

Popular reported core capital, a measure of the underlying solvency backing its business, of 6.67 percent in June and said core capital could reach 7 percent by the end of 2008. The bank reported loan losses as a proportion of total loans of 1.42 percent, up from 0.98 percent in March and 0.72 percent a year ago.

The ratio of provisions to defaults has now plunged to 139 percent from 185 percent in March and 256 percent a year ago as new defaults surged 1.15 billion euros from 359.2 million euros a year ago. Losses from impairment of assets climbed 325 percent to 343.6 million euros from 80.8 million euros a year ago. Lending growth slowed to 8.1 percent from 11.7 percent in March and 16.7 percent in the same period last year. Client funds Net interest income rose 8.8 percent to 630.97 million euros.

Update 10: Monday 28 July 2008

Banco Bilbao Vizcaya Argentaria (BBVA), Spain's second-biggest bank, said quarterly profit declined in the second quarter of 2008 by a more-than-estimated 19 percent as loan defaults surged and it set aside money for early retirements.

Net income dropped to 1.16 billion euros ($1.82 billion) in the second quarter ended June 30 from 1.42 billion euros a year earlier. Profit missed targets as BBVA booked a 329 million-euro charge for early retirements.

BBVA is facing simultaneous slowdowns in the bank's three largest markets, Spain, Mexico and the U.S., which together account for more than 80 percent of profit. While BBVA avoided subprime mortgage assets, the U.S. economy started to deteriorate after it bought Compass Bancshares Inc. for $9.1 billion last year. Loan defaults in Spain and Portugal rose to 1.22 percent in June from 0.64 percent a year ago.

BBVA's loan growth in Iberia (ie Spain and Portugal) fell by half to 7 percent in the first six months of 2008. The increase in Mexico declined to 15 percent in constant currency terms from 26 percent a year ago, when Mexico and the U.S. reported as a single division.

Worldwide defaults at BBVA climbed to 1.15 percent of total loans from 0.99 percent in March and 0.86 percent a year ago. Consolidated losses from impairment of assets rose to 618 million euros in the quarter from 509 million euros a year ago.

And this piece is very interesting. Spanish bank Banesto announced on Friday it had set up a joint venture with Spain's third largest property firm Reyal Urbis to help it sell unsold property. A spokesman for the bank declined to confirm or deny a report by El Confidencial on Friday which said Banesto had bought assets worth 400 million euros from Reyal Urbis in the last few weeks to boost the firm financially. The spokesman only confirmed that Banesto had created the company Promodomus "to try to make the promotion of Reyal Urbis assets more efficient".

Promodomus is 51-percent controlled by Banesto and 49-percent controlled by Reyal Urbis. Banesto formerly owned a stake of slightly more than 50 percent of Inmobiliarius Urbis, but sold it in 2006 before the firm merged with Construcciones Reyal.

Meanwhile we learn that Martinsa-Fadesahas won a reprieve from its creditors (ie it will not go into bankruptcy, for the time being) after a judge in La Coruña accepted the company’s request for voluntary administration. However a recent article in the Spanish daily ‘El Pais’ reports that Martinsa-Fadesa sold properties without building licences, and failed to provide some buyers with bank guarantees to cover their stage payments, which is against the law. This may be illegal, but it is the buyers who will do all the suffering: They may be looking at big potential financial losses, whilst Martinsa-Fadesa only has to worry about a slap on the wrist for an ‘administrative infraction’.

“Voluntary administration helps companies in distress, but does nothing to protect the interests of citizens,” the notary José Ignacio Navas Olóriz told ‘El Pais’.


Anonymous said...

Hi Edward,

I think the goverment should let the problem to re-adjust freely and not intervene. I am sure that, even painful for the economy, many people would no agree to spend public tax payer money in helping these companies. When the times were buoyant, they massed fortunes at the cost of young people signing never ending mortgages. Now it's probably the time for them to suffer, and many people will lose their jobs, but otherwise house prices will never go down to afordable prices. What is what you refer to that the goverment is just watching and should do more?

Kind Regards

Edward Hugh said...

Hello Jaime,

I appreciate your point of view, but I suspect maybe you don't realise just how serious this problem is potentially.

If we accept that the exposure of the banks to the builders could be of the order of 300 billion euros - the opinion of analyst Inigo Vega at Iberian Securities, and one I more or less share - and that the exposure of the banks to the cedulas ALONE is nearly anothre 300 billion euros (plus other classes of more conventional mortgage backed-securities which are possibly at least as large), then we are talking about an injection into something of over half of one years GDP in Spain.

This should not surprise us, because the quantities in the US including the intervention of both the Fed (to the tune of swallowing 500 billion dollars of securities) and now the virtual nationalisation of FannyMae and FreddyMac - have been very large indeed, and this is the centre of world capitalism, where market solutions are preffered.

So it is either inject a lot of money now - more than Spain itslelf can afford alone - or have several percentage points of GDP contraction over several years and very large price deflation - ie a rather big slump - IMHO.

Also you need to do something to put a floor under land prices, and quickly. A national agency to buy up land classified for building in in large quantities - Japanese style - and reconvert it back to agriculture or green spaces, to simply remove the glut.

Basically Spain needs a whole change of mentality. Domestic consumption will probably NEVER be the same again, and we need to live from exports now. But getting from here to there is going to be a hard road.

At the moment there is a lot of speculation in the English speaking world about whether the eurozone can survive as is. I don't go along with this at this point, but if Italian public debt is allowed to simply inch towards default, and a huge hole is blown in the side of the Spanish economy, then of course the whole position may well change.

The question is THIS SITUATION HAS ARISEN DUE TO THE ONE SIZE FITS ALL INTEREST RATE POLICY, so who should pay for this? Just the Spanish? Or should all European taxpayers - via the EU - be asked to stump up. Arguably if you want to save the eurozone it may have to be like this, since Spain alone could simply sink under the weight.

Sorry I can't be more positive and optimistic, but I think complacency here is our worst enemy. We are already 11 months into this, and we need to face up to reality, and quickly. The ship is on fire.

And we also need a plan to encourage the migrants to stay. This is also going to be hard, as it won't be popular. But they too form a part of Spain's future, since they basically make up for the "missing children" Spain didn't have, and without them the pension system may well become unsustainable a lot more quickly than you may imagine.

So here's a four point programme:

1/ Buy out and close down builders.
2/ Buy up the outstanding cedulas hipotecarias
3/ Set up a national land agency
4/ Establish a programme to help immigrants in difficult circumstances, and offer training etc to prepare for the future

This is a put out the fire plan. Then would come a strong recession and correction, during which time we could discuss how to generate a vibrant export sector, on which Spain's future will depend.

"When the times were buoyant, they massed fortunes at the cost of young people signing never ending mortgages. Now it's probably the time for them to suffer"

I understand your feelings here, but I think this is a time for extreme pragmatism and a lot of emotional intelligence. There is no point in agreeing to have your own throat slit just to see people you don't like have their's slit first.

Actually, now I think of it, this is all some strange version of the prisoner's dilemma.

Good luck anyway, and I hope you are not to badly affected.


Anonymous said...

Hello Edward,

Thanks for your answer.
I understand that having 80% construction companies going under is not good for the country in general, the problem is that maybe those 80% should not be there in the first place (in the absence of a bubble), market has to regulate itself, prices go down according to salaries and unemployment go to 12-14%, which is what the Spanish industry can generate, no more no less. Spain has no the Germany industry and never will. The sheer size of the construction sector is just unsustainable, some kind of crash is unavoidable. But I think that the faster that adjustment happens the better. I also understand that the goverment has to avoid a full blown disaster in some way.. Fortunatly I am on the safe side, I am in my 30's and wanted to believe that maths would catch up eventually and bubbles would explode. Is it too bad in economic terms to think that maybe it is better for Spain to have 2 years of negative growth and overall price correction? Spain is utterly overpriced from basic goods to housing, having in mind its salaries, and that translates in life quality and purchasing power at the end. Maybe with a correction, things would go back to normal for the yound people coming. The other option is to let the bubble not to fully explode. I mean, the disyuntive is this: Shall we trap (many already trapped) the 25-30 years old people with huge mortgages and all others coming behing? Or maybe the normal spaniard would live better if a strong correction happens and therefore the next generation coming can afford houses at a normal price? If growing GDP at 2-3% means that house prices don't go down substancially, i'd rather have a 0% growth, credit restriction and prices correcting sustancially for few years and then picking up from then (would productivity improve?). The poin is that normal people were just priced out of the market, and not only, also inmigrants which are much needed as you commented. If recession/dismal growth is the only option to get speculators's hands out of the housing market, maybe this should be considered.

Does what I say make sense from a macroeconomic point of view?

Thanks and Regards

Edward Hugh said...

Hi Again Jaime,

And thanks for your speedy and lengthy response.

I think your views reflect those of a lot of people at this moment. Certainly all the young people I know in Barcelona would endorse much of what you say.

"I understand that having 80% construction companies going under..."

Let me be plain. I don't think we disagree on this. I don't know what % of the builders need to go under (or be "restructured out of the business, as they say) but it is a lot. I just think we need to avoid the secondary consequences of this, in terms of the money they owe the banks, and the impact of a massive default. So it isn't a question of rescuing builders, it is a question of paying some of their debts to the banks, on condition they (the builders) close down. Personally, and individually, they may not get to keep a lot.

The government also needs to think of something creative to do with all those unwanted houses, because if you don't do something with them then the market isn't going to clear for a very long time. Keynes would probably have said something like buy them and blow them up - certainly all the unwanted and un-needed housing in places like Castille La Mancha and Almeria - but maybe in this modern day and age we could think of something more creative to do with them. Some could be used to house a Museum To Folly.

And there are more reasons we don't need some of these houses. Spain's external deficit, and the energetics of maintaining them. Nouriel Roubini said this over the weekend about the US:

"And these MacMansions and the broader sprawl of suburbian/exurban housing are now worth much less – in NPV terms – not only because of the housing bust and the fall in home prices but also because: a) the high oil and energy prices makes it outrageously expensive to heat those excessively big homes; b) households living in suburbian and exurban homes that are far from centers of work, business and production that are not served by public transportation are burdened with transportation costs that are becoming unsustainable given the high price of gasoline. So on top of the housing bust that will reduce home values by an average of 30% relative to peak high oil/energy prices make the same large homes in the far boonies of suburbia/exurbia worth even less – probably another 10% down – because of the cost of heating palatial MacMansions and because of the cost of traveling dozens of miles to get to work in gas guzzling SUVs."

Well, more or less the same could be said about Spain. Apart from the points Roubini raises about energy and population distribution, I would mention here in Spain privatization (which I am of course not at all against, btw). But you have to question the wisdom of putting selling energy-intensive products into the self-interest brief of a small number of effective monopolies. The link-in between energy giants like Endesa and Gas Natural (in Spain) and the construction industry is not a mere detail, IMHO. Not to mention all those huge housing estate complexes in the South which are effectively not liveable in without constant air conditioning. And now all this has to unwind.

On the question of the proportion of GDP given over to construction, the numbers vary, simple becuase it depends which definition of "construction" you use. But then you also need to compare like with like. Construction in the "pure" sense (ie as an industry) represents so 3.5% of GDP in Germany, and about 12% of GDP in Spain in 2007. Whichever way you look at it - even assuming Spain can maintain some immigrant driven population growth (Germany's population is shrinking), and attract some retired second home owners - that % is going to move down into the 5%-6% range in Spain as of 2009 (you have probably seen in the last post, we are building more houses than ever this year) and staying there, as this is the transition we are into.

"But I think that the faster that adjustment happens the better."

I also agree with this, I just think we need some "corta fuegos" in place, otherwise the whole of Spain may go the way of the Liceu here in Barcelona, when they did some soldering repairs on-stage with the safety curtain up!

Basically I would be extremely critical of the Zapatero government (although note, I am not at all political) for wasting ammunition with this tax refund (which assumes the problem with demand is cyclical and not structural) and spending money on civil engineering building works to try to keep open people who have to close.

"The other option is to let the bubble not to fully explode."

I think, personally, that it is now to late for this. It has bust wide open, and there is no turning back. We are on a "forced march" adventure, and we have to try and find the way to the other side. No one is in control of this at this point.

"I mean, the disyuntive is this: Shall we trap (many already trapped) the 25-30 years old people with huge mortgages and all others coming behing?"

Well, this brings us to the debt deflation side of the issue. This is the most important problem, as house prices drop, and unemployment rises, wages and prices in Spain are going to deflate, not inflate - except energy, of course, energy prices which will probably keep on rising as places like India, China, Brazil, Turkey etc continue to grow.

So something has to be done about the debts of these young people, otherwise they are going to be stuck with them all their lives, and as wages fall, the debts do not. Basically we are going to need what you could call a "national haircut", ie one part of these outstanding loans will have to be written off, and this is another reason why the government is going to need to put money into the banks. This will need legislation I guess.

I would say the 27-35 age group has all of this absolutely hanging round their necks. The 20-25s are in a much better position. They can now study two or three more years (while the situation is as difficult as its going to be) and they won't have either the same salary expectations, or the same liabilities outstanding as their older brothers and sisters, when they do finally hit the labour market. Here is where you could do some enforced human capital accumulation.

"Spain has no the Germany industry and never will."

Look Jaime, we can't look at it like this. The big unmentioned issue which arises out of all this is can a services based economy sustain the sort of living standards people in Spain want to have? Look at what the US has been doing since the housing problem started and you will alreay find the answer. The dollar is down (for all Treasury secretary Paulson's protests that his administration is in favour of a "high dollar") and the US trade deficit is falling. They are exporting again, and they are building factories. The balance has been wrong, and they know it, and recognise it, and since they are quicker to react than Europeans they are already doing something about it.

And Spain needs to do the same. And since we don't have a pesseta to let fall, then wages and prices have to fall instead. There isn't really too much alternative. I mean productivity also needs to rise, but productivity is no magic wand, and the number of percentage points you can realistically hope to get in this direction (say between 1% and 2% a year) is simply nothing like enough.

Now.. we need top build factories, but where? Maybe we could follow the German example.

Some years ago Pascual Maragall started a thing called the "Barcelona Process". This idea has now been picked up by Sarkozhy, and called EuroMed. Essentially, the other side of the Mediterranean can be used as a plaform for Spanish entities just like the East of Europe is for Germany. What we need is a favoured commercial space project like Sarkozhy is proposing.

This would also mean ending the tragedy of the Pateras, since employment in agriculture and industry could be offered in the Maghreb to Sub-Saharan migrants on a significant scale. The advantage to Spain of doing this? Well a lot of the high value and production support work could be based in Spain. This would be good for everyone - Spain, Morocco, Senegal - if done properly. And this, obviously, is only one ingedient.

Spain also has major cultural ties with Latin America, and in Asia (and don't dismiss this, since they are also starting to grow nicely now) the Philippines. So similar ideas can be deployed there. Spain is much better situated in these two regions than she is in China or India.

So all I am saying is don't be "cap cot" (head down) as we say in Catalan. There is lots to do, and we need to do it. But first we need a plan, and the first step to getting this plan is to accept that what is happening is happening, and it is this "recognition" part at the moment that I find almost completely lacking from public debate.

Charles Butler said...

Hi Edward,

Possibly beside the point, but what I find most bizarre is that the banks renegotiated the loan to MTF last March. The moment they put in the clause requiring them to come up with 400 m by year end (of which this is presumably part) and that loans taken out to that end be subordinate, the company was dead. One has to assume that the lenders stand to recuperate considerably more under the new terms than they did from the old.

Looks to me like Martin went around believing he could escape by threatening everyone in sight with his own bankruptcy. 'I'll hold my breath til I turn blue and die'. How else could he have presumed to turn to the ICO for the money?

As for the four point plan...

1). Why should they buy out and close down builders? They're croaking anyway and without costing the guv a dime. The problem is the unemployment created, which doesn't change under your scenario.

2). Backstopping the cedulas might be the idea. But outright buying them? In any regard, the ones that roll first will be the easiest to renew because they're guaranteed by properties bought at reasonable valuations and with higher probability of repayment. Real crunch time for this might be a bit further in the future than we think - like when 2005 valuations roll in 2015. But that's a long way, and a change of government, off.

3). A national land agency will end up being a redistribution of properties to the enchufados and pringados. That's etched in stone. Pray they don't touch it.

4). You might be right about immigrants, but it ain't gonna happen. Consider them gone, and look on the palliative effect it'll have on unemployment stats.



Edward Hugh said...

Hello Charles,

"How else could he have presumed to turn to the ICO for the money?"

Well quite. And why did the others "believe" him. Possibly for the reasons you mention. Everyone propagated their own "fictions".

"Why should they buy out and close down builders? They're croaking anyway and without costing the guv a dime. The problem is the unemployment created, which doesn't change under your scenario."

Well I'm not sure I agree that the unemployment is the MAIN problem. It is a problem, of course, but a well known and standard macro economic one. I think we are into much bigger problems here.

The problem is the exposure the banks have to the builders. I mean remember, even before people really start going bust big time the banks are being bled of what little cash they have to keep fuelling the economy. Of course you can just pay the 300 billion euros as a handout to the banks, but then what is there to stop the banks lending this to the builders again. A much tidier way of doing this is to have a "restructuring programme" - like for the shipyards in Asturias, or the mines in Leon - and close them down in an orderly fashion. One way or another a big chunk of this money has to be found.

Remember Spain's problem is proportionately a LOT bigger than the US one, and in the US you can have a two pronged approach, with both the Federal Reserve and the US treasury. Spain has neither, in the sense that it doesn't fully "own" the ECB, and the treasury is in Brussels, with Madrid being something like Nevada in this context. This is not going to be easy.

"But outright buying them?"

Well, they all need rolling over remember, so if you don't do something soon, the agony will simply drag out till 2015, or whenever. You see, people are saying property will fall 30% (i have no idea if this is anywhere near right, but just to say something), but then if you let the economy go into free fall at the same time, and you have a major banking crisis, then these prices are simply going to fall, and fall, and fall.

Anbd then you have to think about trying to keep Spain in the eurozone. This isn't an issue now, but if this bleeds and bleeds till 2012 or whatever, it will become an issue, and then you have to look at the external position, and the rapidly deteriorating income account. Without the support of the eurozone Spain has a very familiar third world problem here, you have a country that would simply go bankrupt. So I do think pretty strong measures are called for to try and stop this before it goes too much further.

I mean Bernamke has effectively swallowed $500 billion of US securities, and I bet none of them are going to see the light of day in my lifetime. But the ECB may be more hamstrung on what it can do here than the Fed is.

"A national land agency will end up being a redistribution of properties to the enchufados and pringados."

I think you thinking they are going to start building again some time soon. How many companies have grossly overvalued land in their balance sheets? What will be the impact of all this on corporate Spain? I would start with the land, and I would use the Japanese model. Come to think of it I would fly a whole planeload of Japanese in tomorrow, since they are the only people really with experience of the sort of problems Spain is about to have.

"Consider them gone, and look on the palliative effect it'll have on unemployment stats."

Well, you have to think of the ageing society aspect. Without the immigrants Spain population was set to shoot up over the next decade and occupy poll position as the world's oldest society. If they go this ticking time bomb will be set in motion again. You can say goodbye to any resurrection of domestic consumption (ever, and that is a long time), you only have to look closely at domestic demand in Italy, Germany and Japan and how fragile it is to see that.

Edward Hugh said...


"Backstopping the cedulas might be the idea."

Well they do effectively have a backstop at the ECB at the moment. But there are two problems here. The free rider one, and the investment grade rating they need.

On the first of these Brad Setser has a very good post on the US Agency debt problem - Too Chinese (and Russian) to fail?

Essentiall, the implicit guarentees given to FannyMae and FreddyMac haven't worked and cleared the housing and financial market because they have simply allowed people to go on leveraging:

the Agencies ability to use their implicit guarantee to turn US mortgages into a fairly liquid reserve assets — hasn’t broken down after the “subprime” crisis. The expectation that the US government would stand behind the Agencies is a big reason why. That allowed the US government to turn to the Agencies to backstop the mortgage market once the “private” market for securitized mortgages dried up, as emerging market governments continued to buy huge quantities of Agencies.

And it now seems that this game will break down on the US end before it breaks on the emerging market end. The Agencies will run out of equity before central banks lose their willingness to buy Agency paper.

Now if we look at what has been happening over at the ECB, we note that of the 480 billion euros or so made available to the banks, spanish banks have only taken advantage of about 10% - more or less equivalent to their level of participation in the ECB "key" - so we might ask the question, where the hell have the other 430 billion euros or so gone? Some, undoubtedly to troubled banks in other countries, but my guess is a big chunk has been used to allow people to continue financing cheap mortgages they shouldn't be financing. With very little risk, since if the Spanish cedula debt is written down as junk, then they hope their version of it will be too, and that they will get the same level of support.

This has a name: moral hazard.

A second reason the cedula position cannot hold is the requirement of investment grade for Spanish Treasury and ECB support. That the cedulas in the main continue to have this rating is scandalous, and clearly at some point there will need to be an investigation, but the problem is, if people like S&P and Fitch lose all credibility, well really, where do we go from there?

Of course, they have been coming under growing criticism of late, so you know what they have done, just to show they can be strict, they have both just downgraded India country rating - due to the fiscal deficit (oh, we won't talk about Italy here will we). This is again absolutely scandalous, since IMHO the risk to Indian public debt is much less than to that of Italy and Japan, and if the latter are thought to be no problem, then I don't see why one of the great future growth tigers should be considered to be one (which is not to say that India shouldn't address the fiscal issue, but making it more expensive for them to borrow money isn't the way). So basically, one day or another someone somewhere is going to cry "foul" about all of this. Of course, at this point Indians haven't bought a lot of Spanish companies or public debt, so they don't have too much "pistonada" yet, but just give them time.

Anonymous said...


Around this town, the typical new real estate transaction involved a selling price of 250,000 pesetas/sq. mt. at its peak. The standard deed shows 150,000. The rest was paid in cash. Bailing the builders out, albeit to save the banks, equivalates to money laundering on the part of the government and shouldn't happen unless it were accompanied by a total audit of 10 years of activity. Tall order.

Santander's recent advertising campaign offering Euribor +0.17% for mortgages of more than five years antiquity transferred from other institutions is as close to proof that there is that pressure on the cedula front does not begin to even show itself before 2012. Are they wrong? It's possible. But to date, Botin has proved himself to the smartest kid on the block - the global block.

The Economista rumour may or may not be true. Zapatero, in his sublime idiot innocence, is capable of promising anything. He just does not get it. He strikes me as being socialism´s equivalent of a hedge fund manager cranking 30% returns out of mortgage-related instruments. Pure product of his time. If it's true, it's obvious and fortunate that Solbes and the Sebastian clan managed to rein him in (yet again).

As an aside to the above, note that the 400 euro tax rebates have not yet arrived and are now rumoured to be being divided up into smaller partial payments. Also apparently stalled in the administrative inbox are the rental subsidies for young people. The chickens of easy money are coming home to roost on everybody's porch.

Anonymous said...


Around mine, mortgages started at around 300.000 euros (no luxury, normal piso) 1.400 euros/month nicely repaid monthly for the next 30 years. Baically you are wipped out as a potential consumer.

Zapatero's "sublime idiot innocence" is probably a good definition of what he has done or sometimes looks like. I also thing of those 400 euros as wasted ammunition.

A remark on the 200 euros/month aid to young people renting. Maybe not the best option, I agree too. But the fact is that this one is the only measure young spaniards saw during these years of soaring process that was aimed at them in order to be able to leave their parent houses.
I guess that was something "different", aiming a people priced out. Maybe we could say Zapatero "bailed out" the lucky ones go thought the administrative black box. Maybe it is also not too bad to bail out young people and not only the todo poderosos banks. Becuase 6 billion is nothing compared to those 600 billions banks own and goverment might have to bail. So there might be a moral argument here to whom the goverment is allowed to bail out and whom not.

Structural measures to stop speculation on real state would have been the right thing to do, but noone was doiung anything on the last 14 years, bubble in full swing.
Because if that is wrong, what can we say about the fiscal rebates people are getting back for having a mortgages?? That translates into around ... 4000 whopping euros back a year! That is also public money. Is that waste of ammunition too? So the problem is that at least now the 2 sectors are on equal foot. So in economic terms, if no financial help is given people renting, then no financial help should be given to people adquiring property. That's a factor why the housing market is so leaning towards buying. So Zapatero's policies, indeed aimed to help at those weekend segments of population. Timing is everything. Would the surprime mess and its effects had happended before and pricess started to contract before, such measures would have not been necessary and resources could have been allocated to other much needed areas.
I see people are starting to realize that they were living far beyong their means. Cutting spenditure is much needed in Spain which will translate into weak internal comsumption, but that might be welcome.


Anonymous said...


My point about the rebates and the subsidy was that they are arriving much later than expected - if at all. Giving 400 euros to all taxpayers, regardless of need, may not be the wisest use of money right now. Same goes for 200 euros towards rent, regardless of the monthly cost of the apartment. Decisions have to be made as to who gets what. ZP's dreamland of everybody gets everything doesn't cut it.

And we still haven't gotten around to what happens to Chaves' utopia when the money runs out.


Anonymous said...

Hello Charles
I know, don't get me wrong, the mistake from Zapatero is clear. But wouldn't be better for expample to remove those tax rebates from people buying houses in the first place? or just penalize speculator?
That would refrain housing bubbles, and leave those who want to rent in the same conditions.
The problem is that today's Europe prohibits the control of free movement of money.
Housing is a basic need for people and by far the biggest investment of a lifetime This asset was becoming a means for speculation, which is completelly unacceptable for a modern society.
Encoraging people in that way to buy an asset is very tempting to speculators.
What I was seing in Spain that 3 different classes were forming in just some 7 years timespan. One who had several houses considered as assets to buy/sell. One that had bought a house at reasonable prices, and the second who could no afford to buy or bought at excesive prices.
Regarding of what the economic indicators say on macroeconomics, my guess is that only if this big crisis happens, this 3-class-model can be stopped now. Without temporal crisis, that model would build up and stay here for long. What Spain needs is strong leadership, making sure controls are set when we are talking about basic needs, and leave investments for all others. That is somehitng iI don't see in today's environments, but people are starting to wonder about this


Anonymous said...


An administrative change that would put an end to lots of nonsense, and provide more tax revenue (or lower tax rates for everyone), would be assigning realistic property values at the level of the catastro and the property registries. The standard speculative play was to put cash down before the ground was broken and resell the rights when the building was finished, also for cash. If you put 20% down and the place appreciated 20% in the meantime, you doubled your money.

If the government doesn't want political fallout, they can raise the assessed valued and lower the IBI, IVA and IIP rate so there is no net difference in the taxes paid and remove the incentive to hoard cash while providing a paper trail to undeclared wealth. But they've all got wall safes full of bin ladens.

The pity about Zapatero is he doesn't even know the vocabulary to describe the current situation. The PP's ejection of the Bobsy Twins and the rest of the dregs of Mr. Aznar clearly shows that they know that all they have to do is present a centrist face that will appeal to weak socialist supporters and wait. La venganza gallega in action.

BTW, you forgot class 4 - those who had money for the down payment, enough income to get a mortgage, but not enough cash to satisfy the sellers demands for 'b'.


Anonymous said...


An administrative change that would put an end to lots of nonsense, and provide more tax revenue (or lower tax rates for everyone), would be assigning realistic property values at the level of the catastro and the property registries. The standard speculative play was to put cash down before the ground was broken and resell the rights when the building was finished, also for cash. If you put 20% down and the place appreciated 20% in the meantime, you doubled your money.

If the government doesn't want political fallout, they can raise the assessed valued and lower the IBI, IVA and IIP rate so there is no net difference in the taxes paid and remove the incentive to hoard cash while providing a paper trail to undeclared wealth. But they've all got wall safes full of bin ladens.

The pity about Zapatero is he doesn't even know the vocabulary to describe the current situation. The PP's ejection of the Bobsy Twins and the rest of the dregs of Mr. Aznar clearly shows that they know that all they have to do is present a centrist face that will appeal to weak socialist supporters and wait. La venganza gallega in action.

BTW, you forgot class 4 - those who had money for the down payment, enough income to get a mortgage, but not enough cash to satisfy the sellers demands for 'b'.


Anonymous said...

Hi Edward,

Elaborating on your 7.27 AM comment, I will start by saying that getting the needed injection of money is much more problematic for Spain than for the US because Spain by itself cannot print as much Euros as they want as the US Fed does.

Indeed, Spain today is in exactly the same situation as Argentina in 2001, with the ECB playing now the role the IMF had then.

The KEY question is: are the German willing to allow the ECB to print as many Euros as needed to bail out the Spanish economy (basically its private sector)?

If the answer is Yes, then logically the Italian will subsequently demand a bailout of their public sector, and as a result Euro debasement will rival that of the USD.

If the answer is No, just like Argentina in 2001 Spain will be faced with two tough choices:

Option a is depression and deflation, impying failure of most Spanish banks and massive internal and external default.

The movie basically takes the form of a run on the banks: faced with the risk that banks could fail due to probable loan defaults, depositors start to withdraw their money. The arising liquidity problem forces the banks to sell their assets at distressed prices whereby the problem becomes one of solvency. The process feeds on itself and becomes a self-fullfilled prophecy.

Option b is "pesetization" and devaluation, implying massive external default.

That was the Argentinian choice ("pesificación"). Specifically, all internal prices, wages, assets and liabilities are redenominated to pesetas and then the peseta is devalued. This path implies trespassing on property rights, laws and the Constitution, proving that in times of distress any Constitution becomes a damned piece of paper. Conceptually it's the same as the 1933 US gold confiscation.

Before concluding from the 1933 US/2001 Argentina experiences that b. is the way to go, consider the critical differences between US 1933/Argentina 2001 and Spain 2001: in 1933/2001 US/Argentina were exporters of food and of crude oil. Thus, the massive 2002 Argentinian devaluation did not affect the local supply of food and energy (as a result of export tariffs), and the subsequent massive drop in imports was mainly in discretionary items (clothing, electronics, etc.) In contrast, Spain does not produce a drop of oil, which is also much more expensive now than then.

Therefore, you are certainly right in saying that Spain "needs to live from exports now. But getting from here to there is going to be a hard road." Particularly when that road will have to be travelled on donkey's back.

Edward Hugh said...

Hello Real Think,

I think the basic dichotomy you spell out is a pretty valid one.

The point you make about a comparison with the US is very much to the point. The EU Commission is not the United States Treasury, and the ECB is not the Bank of Japan, so it is also hard to see how Spain could receive "massive monetary easing" should the deflation become so severe that this is needed.

"Indeed, Spain today is in exactly the same situation as Argentina in 2001, with the ECB playing now the role the IMF had then."

Again I think, unfortunately, you are right. Argentina's misfortune - which is not China's at the present time - was that they were pegged to the dollar when the USD hit very high levels at the end of the 1990s. China, as we all know, is now partially pegged to the dollar, but the yuan is pegged to a dollar which has been in structural decline. And this problem doesn't only affect those EU countries which are inside the eurozone, it also extends to those Eastern European countries (the Baltics, Bulgaria, Hungary, the Czech Republic, Slovakia etc) which are either locked into the euro, or sucked up in the backstream. The CR is a particulary "hard" case. One commenter on my Czech blog who has a services business in the CR just put up the following:

I think you are right and in my opinion the CZK is reflected as a mini version of the old D Mark and thats why it is so strong. With the strength of Germany dissipated through it's alliance to a weaker diluted euro which it is still propping up, the only way is down. Czk has been the strongest currency in the world for the last 6 months. The $ will strengthen and ultimately the CZK weaken fairly dramatically in quarter 4 or early 2009. If it doesn't then CR is in for a big shock as it export market will fall off a cliff. Meanwhile we are hanging on by our finger tips."

I don't agree with everything here, but I do think he puts his finger on a very important problem, and one which is receiving very little in the way of serious discussion. Basically, if the dollar - for structural reasons - doesn't "rebound" then this is going to produce all sorts of issues all over the place, with Spain's difficulties simply being - IMHO - the most serious of these problems.

"If the answer is Yes, then logically the Italian will subsequently demand a bailout of their public sector, and as a result Euro debasement will rival that of the USD."

Again, I think you are right, in the sense that the eurozone has its own version of the US twin deficits, the CA deficit issues in Spain, Greece and Portugal, and the fiscal deficit in Italy.

But the issue is, if BOTH the euro and the USD trend structurally downwards, what happens to Bretton Woods II?

Interesting times I feel.

"Option a is depression and deflation, impying failure of most Spanish banks and massive internal and external default."

Well, maybe "most" is going a bit far, but I certainly think that some will go. Arguably Banco Popular is already in the initial stages of unravelling. And what the hell is Santander up to in the UK. I cannot see how increasing exposure to the other main economy affected by the mortgage backed securities crunch is sound thinking at this point. If Botin gets this one wrong it will be an incredible negative shock to the morale of the average Spaniard.

Arguably the main difference between Spain and Argentina in 2000 is to Spain's disadvantage, and the issue relates to the differing situation of the two countries in what is know as the demographic transition. Basically Argentina was at a point when it had a pretty young population (median age under 30) with a lot of high productivity structural shifts in the economy and "catch up" growth out there in front of it (like Turkey in 2000), so it had the potential (but my god how they are one more time making a mess of it) to recover through very strong growth.

Spain isn't in this position. The period of strong catch up growth and major structural shifts is now behind it, and the population is ageing very rapidly. If we don't hold the immigrants - or a big chunk of them - then the average age of the population is going to shoot up over the next 10 years (which could well be the years of Spain's "lost decade") and the demand for mortgage related credit could also shoot down simply of its own accord. Meanwhile the pressure on the health and pension systems is set to grow and grow.

So nothing here looks good, quite frankly. I am just writing a longish post for RGE European EconMonitor with the rather ominous title "What Is The Risk Of A Serious Melt-Down In The Spanish Economy?" (I will also post directly here, but I think the points will have rather more reach there).

In that post I cite a recent study from PNB Paribas - entited "Spain:Bubble Bursting - We now expect a full-blown recession". They are - as one might expect - somewhat guarded, but much of the analysis is very sound, and while there headline forceast - which is only for negative growth of 0.75% in 2009 is rather soft under the circumstances, they do repeatedly stress that downside risk is all over the place.

Anyway, the point is, on demographics they say this:

With United Nations population projections pointing to growth of only 300k per year on a ‘high-population’ variant for 2010-15, housing starts could fall considerably further. Hence the risks to our central forecast of 30% off housing investment by end-2009 are to the downside. The correction could be more rapid than expected. If not, it is likely to persist into 2010.....Our forecast has housing investment converging to levels consistent with relatively strong population growth. A weaker population assumption or some undershoot of the ‘equilibrium’ level would lead to a worse outcome.

Now, obviously the weker population assumption has a name: immigrant flight. Basically the size of the coming cohorts in terms of the domestic population is set, and only the ability to pay will vary, but the presence of 5 million immigrants adds considerable uncertainty to any projection. Very little of Spain's recent population growth has been due to "natural growth", although, of course, the cohorts moving through the home buying age have been comparatively large by historic standards.

If the migrants go in large numbers the first thing to be hit will be urban rents in the major cities, and then property values in the migrant barrios, since of course a lot of migrants have jumped in on the boom. It is interesting to note that the area of Barcelona where property prices are falling most rapidly is the Raval (10% y-o-y according to the town hall), just off the Ramblas, and historic home to first arrival immigrants.

Just to close, I am playing around with doing a Catalan blog on the crisis (just something personal from me, I feel I can't simply stand back and just watch all this happen), and one dimension I am thinking about is documenting all this visually in some way or another (I mean most people are so challenged when it comes to arguments about economics in words, so charts and photos may be much more effective.

So earlier in the week I was out in the Barcelona barrio "El Fondo" . The population, as you will see, is now largely old people and migrants, and it is important to stress that many of the properties in this neighbourhood are now owned by migrants.

Have a nice day,


Anonymous said...

Edward, thanks for your thoughtful response.

I will only comment here on the CR case: according to Jul 17 data from The Economist, they have trade SURPLUS 3.5% GDP and CA deficit 2.5% GDP. So their external front is way better than Spain's trade deficit 9% GDP and CA deficit 9.5% GDP.

Regarding population growth, it's funny the extent to which viewpoints on that topic can depart from the conventional when you are aware of the "physical limits to growth" issue. To be clear, I estimate there is 98% probability that the "Peak Oil Now" hypothesis (now = 2008-2013) is correct. This perspective implies also "Peak Food Now", which can further become a hyper-Malthusian scenario if a growing part of global agricultural production gets diverted into biofuels production. Therefore, from this perspective a stop in global population growth is just logical and avoids a painful drop later, and in the case of countries that are both oil and food importers, such a stop is all the more logical and urgent, and if the population naturally tends to decrease it's not a tragedy but an adjustment to reality.

I know that this view (which BTW is the standard view in sites like can be too unpleasant for some people, and if that's the case with you, just tell me and I will get lost.

For now, let me just mention that in 1946 Spain was actually on the verge of massive starvation, with no hard cash (gold, dollars) in the Bank of Spain to pay for food imports, and they were bailed out by Argentina under Perón with big grain shipments under extremely easy credit terms. Today, most of Argentina's farmland is planted with soybean for China, and the country barely exports wheat at all. So don't count on Peronist Argentina this time.