Astonishingly, after mountains of words have been written, and hours and hours of radio and TV talk shows and "turtullias" have been held, this simple detail about the background to the Spanish crisis still remains obscure to the the majority of the Spanish people (and indeed, equally incredibly, the majority of Spaniards still don't have the faintest idea what cédulas hipotecarias actually are).
So at the heart of the current problem in there Spain lies, not the fact that 12 month euribor interest rates went up somewhat, which they did, and which was (of course) an aggravating factor, no, the real reason that Spain now has around one million empty properties waiting to be sold (apart from the fact that there seems to be no switch here to "shut off" the construction industry when it produces products for which there is no market) is that the Spanish banks have been unable to raise sufficient money to provide the mortgages that are needed to enable people to buy them (or better said they are unable to raise the money at prices which make the mortgage business a profitable one for them).
And what better example of this than what happened in August 2008.
Sudden Stop In Bank Lending In August
According to the latest (provisional) data from the Bank of Spain, Spanish banks lent 33 million euros LESS to Spanish households in August than they did in July. After years when the banks were lending between 8,000 and 10,000 million euros a month, this situation, I think, counts as what people in the technical jargon of the trade call a "sudden stop". The whole Spanish financial system seems to have seized up in August. Even lending to non-financial corporates - which had been increasing during the boom at the same rate as to households - virtually dried up, with only 523 million in additional lending.
Of course, such lending has been slowing steadily since August 2007 (see charts below).
This is not the first time bank lending to households has ground to a halt during the current crisis, back in December 2007 new lending was only 561 million (see chart below), but this time the situation looks much more serious, and even definitive, since in the intervening period the economy has simply deteriorated and deteriorated.
Spain's Current Account Deficit Reducing Slightly
The principal reason why Spanish banks are so short of money to lend is the size of Spain's external current account deficit. Running at around 10% per annum, the deficit means that Spain needs to find roughly 7,000 - 8,000 million euros (7 to 8 billion) a month to settle the account. Unless external lenders step in and provide funding (by buying cedulas, or Spanish government debt, for example), the Spanish banking system keeps gasping for air, it suffers from a chronic lack oxygen in the bloodstream (and each month things simply get worse) in the form of new money to lend to oil the transactions flow. This is what having a "financial crisis" means when you come down to the nitty gritty of things. Actually the size of the deficit has come down since the early months of this year, when the monthly deficit was more like 11,000 million euros, but this "improvement" has been due more to a reduction in the value of imports (due to collapsing internal demand and lower oil prices) than to an increase in exports (both goods and services exports were effectively stationary in August year on year, and as the global economy enters recession this is hardly likely to improve).
Another factor which it is very important to bear in mind is that the deficit on the income item in the monthly current account (basically the difference between what Spanish residents receive from money lent abroad and what Spanish residents pay to external lenders) has been rising notably of late, as both the volume of debt and the cost of serving it, ie interest rates, have risen.
The financial account has also deteriorated recently, with the "other investment" heading (basically the balance between loans people outside Spain make to Spain as compared with loans people in Spain make to the rest of the world) turning strongly negative in July and August after very robust performances in February and March. So, effectively, the whole system is now folding in on itself, and the consequences are not hard to see. GDP slows and then contracts, more than likely in a pretty violent fashion in the not too distant future.
Negative Interest Rates For Far Too LongSo how did we get into this mess you might well ask? How was it that the Spanish current account deficit was able to baloon for so long, and how did the Spanish economy get so hooked on household and corporate debt steroids? Well, I don't think you need to look too far. You should just take a peek at the length of time for which a monetary policy of negative interest rates was applied to Spain by the ECB (see chart below).
Basically interest rates were negative in Spain from early 2002 till mid 2006, causing "massive overheating" in the Spanish economy, which sucked in millions of immigrant workers (5 million in 8 years - since the economy was running way beyond capacity) in order to fuel a huge property bubble which has lead to a level of national indebtedness which is now simply not sustainable.
We might also notice in passing that monetary policy from the ECB again became accommodative in the second half of 2007 as infation accelerated and interest rates once more turned negative, although, as I keep repeating in posts here, we now have a situation whose magnitude means that the economy is unlikely to be very responsive to the use of conventional fiscal or monetary tools.
Fasten Up Your Seat Belts For A Bumpy Ride
Well, I said this would be a relatively brief post (although I hope there is a lot of meat here to chew on). I think this is the core of the Spanish crisis in a nutshell. To better understand how it all works out in practice across the real economy you will need to dig around in my earlier posts, and to understand the implications of what all this will mean as we now move forward, well, naturally that will form the substance of the posts which are now to come.
I am a foreigner living here in Barcelona working for a well known bank as a BPO consultant.
I have been reading your blog with great delight and I am just curious.
We talked about the economic situation in the country yesterday at lunch, and a general perspective is that the people here in the bank, knows about the problems existing and arising, but they are not directly affected, hence they do not “ feel “ the severity adn the impact of the problem and therefore they do not act on it.
How can anybody convince the Spaniards, that it is time to wake up, stop borrowing money and start saving up, before it is too late?
I live in Barcelona too, and as an IT consultant i have noticed the price drop from the bigger competitors making it almost impossible to make a profit. Its going to be a long hard ride, where breaking even will be the goal.
I really enjoyed the way you have explained these complex economic factors in laymans terms. I would be very interested to know what you think that the government can and should do to alleviate the crisis, and your opinion on the best way for the individual to rde the storm....
Thanks Edward for your analysis. I find your blog quite interesting.
I have lived in the US for about 20years. I came back in 2004 and I have had the opportunity to witness the crisis in Spain from the very beginning. I have to tell you that when I came from the US, I noticed how subreal was the spanish economy. People were somewhat out of touch with reality. The crisis was already taking place back then in the US and I could somehow foresee all these things happening now in Spain. Spaniards were just drunk with cheap money, rampant speculation, corruption and a false sense of prosperity was all over the place. I believe that the government has done a nice job sedating people early enough so they dont feel any pain and, worst, have no clue of what is going on now. They are powerless and I am not surprised because there are not shortcuts or quick fixes now. They just didnt do their homework in the good times. We didnt use EU money wisely and that tells me that Spain has a long road to become a fully competitive developed country. For the spaniard, prosperity meant a nice house.
In my opinion, the worst is yet to come. In order to heal the economy, real estate prices must go down much further. I think the government is trying unfairly to convince immigrants to return home. I also think that we have to deal not only with the global crisis but also with an old structural problem in the spanish economy. All the EU money was spent in the construction industry. That was not wise. We didnt invest in technology and innovation for the long run so we could be competitive enough to sell our products overseas and create employment in the process. Our products are produced to sell inside Spain because they are way to expensive to sell overseas. Every multinational knows that it is necessary to produce high quality low cost. Now, we dont have that infrastructure to create jobs. Now, we will not have the money we had, the flexibility and the time to do things consciously and put finally Spain in the list of developed countries. We didnt do our homework. Now, people is looking to the other side and pretending everything is business as usual.
I suspect unemployment will reach 25% but there is a lot to see in the future. We have more problems to overcome besides the global crisis. Spanish government thinks we are following the same evolution than other european countries or the US but thats wrong. We are very much behind. For me, the crisis in Spain is just starting. Dont believe the spanish news. We are in serious trouble.
Spaniards have been conditioned to believe that we are different from the rest of the world. Spanish government should be more professional and bring international people to the table. They are not technocrats but just pseudoeconomists. They are not dealing with this crisis professionally. People is also conditioned to avoid problems and close their eyes to the international world. That mindset is coming finally to the end. We have around 15 years more to become a fully competitive country. People should speak english too and be able to read from foreigh information sources. It is a shame. Everything in Spain is self-contained and people refuses to change. That refusal is costing us money and jobs.
Stop looking to the other side and open your mind to the world.
Spain is misleading the international community. We continue avoiding essential problems in our way to do things. Outside the European Union or inside the European Union, we continue stubbornly doing things the same old way. They just dont get it. Brick soup for everybody.
Anonymous, aquí lo realmente importante es saber si cuando viníste a España se te exigió igual que en USA un seguro médico privado, si actualmente cotizas para asegurar un desempleo o bien una futura paga de jubilación. En fin, que me parece increible que digas que para los españoles la prosperidad es disponer de una casa bonita.
Aquí se defiende un modelo de vida social, en el que la educación y la sanidad son gratuitas y de calidad.
Hemos cometido el error de que hasta un 12% de nuestro PIB dependiese del ladrillo y se ha especulado mucho en los precios. Pero anda que viniendo de USA podrás darnos lecciones. País en el que se ha permitido la estafa piramidal de madoff, en el que también ha existido una burbuja immobiliaria, por no hablar de las hipotécas suprime!!!.
Esto me huele a que por ponerle a alguien un "yo viví en USA" ya te hace inteligente... y "conozco bien el problema Español", como si aquí los españoles de a pié fuésemos tontos. Pues ale vuelve a USA, no seas tonto.
Pero no digas que ya se sabia lo que iba a suceder, y menos que lo sabías tú. Por favor, si ninguno de los grandes economistas lo supo predecir. Solamente Paul Krugman en su libro "La Era De Las Expectativas Limitadas" comentó sobre el tema.
I think there is a mistake here. I am British - and now Catalan - not American. Under the terms of the Maastricht agreement the UK and Spain have reciprocal arrangements about things like health. If you need to know more about the system in the US, you need to go elsewhere I think.
"Pero no digas que ya se sabia lo que iba a suceder, y menos que lo sabías tú."
I'm sorry. This is exactly what I am saying. Go back over my posts on A Fistful of Euros, it is all there. You could learn a lot by reading back through those posts.
In fact may economists in Sweden and the UK saw the prolem we have in Spain and Ireland coming, and for this reason they recommended to their countries not joining the Euro. They were worried - as I was - that the absence of an appropriate monetary policies would lead to the creation of bubbles, which it has done.
But that is all history now - like the appropriation of Catalonia by Spain in 1714. What we have before us is a massive common problem, even though some still deny that this problem exists.
What we need are solutions, and one of these solutions is NOT Spain leaving the Euro - since this would only generate another second (and more serious) wave in the global financial crisis.
So those of us in Spain have to accept our responsibilites. We have spent a lot of (other peoples) money. Now we have to pay it back. German pensioners are depending on us for their pensions.
This will mean a lot of hard work and sacrifice. We will also need to swallow our pride, go to Brussels and ask for help. Quite simply we cannot do this alone.
Edward, I think Laura wasn't speaking to you, but to "Anonymous", who posted just before her.
Very interesting your analysis of the Spanish economy.
Greetings from Madrid
Yep, I now see you are right. How silly of me. Thanks for pointing that out. This is what happens when you read the comments in e-mail, rather than one after another. Still, this being said, I don't like this way of discussing problems, since it seems to create divisions rather than looking for mutual solutions.
Anyway, greetings from Barcelona.
I want to put a comment here, I have some windows open and I realized finally I put it here: https://www.blogger.com/comment.g?blogID=25064447&postID=9020235945498969637 ( "It's All Greek To Me").
If you have time please read it and say what you think about.
Edward, your commentaries about economics are very interesting but you have no idea about history. It's a pity you always try to mix politics, identity and false history with economics. "But that is all history now - like the appropriation of Catalonia by Spain in 1714" I'm sorry, I'm catalan and spanish (we all are, sorry for you) and Catalonia was not appropiated by Spain in 1714. Catalonia had an civil war between the old regime (local nobles) and those who wanted changes. Nothing to do with a nation building process against any kind of invasion.
Furthermore, that was 300yrs ago, why not go back to the middle ages, the moors and christians or the romans times. It's ridiculous (or stupid) that we always go back to that. Colective rights do not exist, rights belong to individuals.
It's because ot these type of stupid excuses and commentaries that Barcelone and Catalonia is becoming irrelevant in Spain in terms of economic strenght.
Hi Edward...Congratulations on your notoriety with reference to the Spanish economy. Perhaps the Spanish government should of enlisted your vision several years ago.
That said, I am an American living near Comillas in Cantabria. One could see early in 2006 the real estate bubble and eventual "pop" would occur. People who could not afford mortgages bought multiple houses, contractors to stay in business kept tapping the local banks to maintain momentum, regardless if there was a real market..or in some areas..even if the ground was legally allowed to build. And lastly, people who never had credit...now had it..and they simply did not know how to manage debt.
All this led to what we know. Unlike other European EU countries, Spain has such a high un-employment rate which borders and a "depression".
As an American living in Spain spending "dollars"..I could never understand why the euro was so strong over the dollar. Certainly..perhaps now we know.
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