{"id":29405,"date":"2012-05-01T22:07:13","date_gmt":"2012-05-02T02:07:13","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/2012\/05\/expect-eurozone-panic-as-spanish-house-prices-tumble-with-its-economy\/"},"modified":"2012-05-01T22:07:13","modified_gmt":"2012-05-02T02:07:13","slug":"expect-eurozone-panic-as-spanish-house-prices-tumble-with-its-economy","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2012\/05\/01\/expect-eurozone-panic-as-spanish-house-prices-tumble-with-its-economy\/","title":{"rendered":"Expect Eurozone Panic as Spanish House Prices Tumble With it\u2019s Economy\u2026"},"content":{"rendered":"

By MoneyMorning.com.au<\/a><\/strong><\/p>\n

\u2018Mortgages get paid in good times and bad. Anyone raising this problem as one of the issues for the Spanish financial system<\/strong> is saying something stupid.\u2019<\/p>\n

So said Alfredo Saenz, chief executive of Spanish bank Banco Santander.<\/p>\n

That\u2019s the kind of quote you can\u2019t help thinking will go down in history alongside credit crunch classics such as this 2007 line from Ben Bernanke: \u2018we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited.\u2019<\/p>\n

We suspect so\u2026<\/p>\n

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Spain’s Housing Bubble is Like Ireland’s Magnified<\/h3>\n

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The credit rating of\u00a0Spain\u2019s economy<\/strong> was cut by two notches to BBB+, which is the same as Italy\u2019s. Standard & Poor\u2019s wasn\u2019t telling us anything we didn\u2019t know. You only have to look at Spain\u2019s cost of borrowing \u2013 hovering around the 6% mark – to see that it\u2019s a troubled economy.<\/p>\n

What\u2019s bothering S&P in particular is the risk that Spain\u2019s banks will need more support from the government. S&P\u2019s Mortiz Kraemer told Reuters: \u2018It\u2019s not going to be an easy job for most Spanish banks to find funding in the market. So the state may be called for.\u2019<\/p>\n

When you look at the Spanish economy’s \u00a0public debt-to-GDP figure, you wonder why it\u2019s in trouble. As a proportion of GDP, the national debt is only 68% (as of the end of 2011).<\/p>\n

Yes, it\u2019s hardly anything to be proud of. But compared to its troubled peers, Greece (165%), Italy (120%), Portugal and Ireland (108% each), it\u2019s positively frugal. And Britain and France are both on 86%.<\/p>\n

But if you\u2019re confused, it\u2019s only because you\u2019re looking in the wrong place. Spain\u2019s economic problem<\/a> lies in its private sector lending. In terms of its problems, you can think of Spain as being a big version of Ireland. Easy credit drove a massive bubble in the Spanish property market<\/strong>. That bubble has burst.<\/p>\n

So the fear is that the banks will be left in such a bad state, that the government will end up needing to bail them out. As a result, that dodgy private sector debt will end up on the government\u2019s balance sheet. And as happened with Ireland, foreign lenders will no longer be willing to fund Spain\u2019s spending.<\/p>\n

As Vincent Cignarella put it in the Wall Street Journal<\/em> last month: \u2018It\u2019s not hard to imagine a transfer from private to public sector debt rapidly blowing the sovereign debt<\/a> ratio toward 100% of GDP in the next few years. Does Spain then become the next Greece<\/a>?\u2019<\/p>\n

Spain\u2019s Suspiciously Healthy Housing Market<\/h3>\n

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The Spanish government hasn\u2019t been sitting on its hands. It has already rescued several of the smaller lenders \u2013 in fact, there have been \u2018three rounds of forced clean-ups and consolidations\u2019 so far, notes Reuters<\/em>.<\/p>\n

As a result of all this, the banks have put aside enough to protect themselves against any losses on loans to property developers, notes The Economist<\/em>.<\/p>\n

Trouble is, \u2018there are almost no provisions\u2019 for all the other loans on the banks\u2019 balance sheets. This includes residential mortgages, of which there are more than \u20ac600bn outstanding. The Bank of Spain says that less than 3% of these loans are in trouble.<\/p>\n

To put it gently, that seems odd. The optimistic argument on Spanish property is that Spanish banks were more cautious lenders than banks in the US, for example.<\/p>\n

But as the New York Times<\/em> put it last week, when you\u2019ve got unemployment above 24%, \u2018the distinction between a prime and subprime borrower can be hazy.\u2019<\/p>\n

And given that, as a whole, dud loans are at their highest level since 1994, it seems particularly unlikely that the mortgage sector has escaped unscathed.<\/p>\n

What\u2019s more likely is that Spanish banks have done just what British banks have done. The strategy is \u2018extend and pretend.\u2019 Shift people to interest-only home loans, to cut their payments. Try to avoid repossessing homes. If you do repossess, keep them off the market where possible, in the hope that better times will come.<\/p>\n

But as the Spanish economy continues to deteriorate, and inventory builds up, it\u2019ll get harder and harder to continue with this line. As analysts at JP Morgan tell Bloomberg<\/em>, mortgages may be the \u2018next leg downward in a prolonged banking crisis where solvency remains a risk.\u2019<\/p>\n

What\u2019s the solution? Well, temporary money printing by the European Central Bank (ECB)<\/a> certainly didn\u2019t do it. But in essence, it\u2019s because the LTRO<\/a> was temporary.<\/p>\n

The ECB gave money to Spanish banks to buy Spanish government debt<\/a>. The money ran out. So now banks of questionable solvency hold even more debt owed by a government of questionable solvency. Why would anyone sane give either party more money?<\/p>\n

The Fate of the Euro Will Be Decided by Voters<\/h3>\n

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The likely end result of all this is that the Spanish economy needs some sort of bail-out. But Spain’s economy would be very expensive to bail out. Whatever funds exist are probably not sufficient.<\/p>\n

So once again we\u2019ll end up going to the wire. As Jeremy Batstone-Carr of Charles Stanley notes, we may have to see Spanish 10-year bond yields above 7% before we get the next panicky move to settle the eurozone down<\/a>.<\/p>\n

What\u2019ll that mean for the euro? One thing that\u2019s become clear about this crisis is that the euro comes down to politics. As long as there is the political will<\/a> \u2013 in other words, as long as people want it \u2013 the euro will be around.<\/p>\n

For all that the populations of many European countries are suffering, they don\u2019t so far seem to blame the euro currency itself for their woes. The idea of going back to their old currencies is a frightening step into the unknown.<\/p>\n

If they blame anything, they\u2019re angry with Germany for not sanctioning money printing and fiscal transfers.<\/p>\n

In the long run, the euro can\u2019t survive<\/a>. There are too many countries, with too many different needs. But it may take a larger, more self-confident nation, declaring that it\u2019s had enough of the currency and can go its own way.<\/p>\n

Perhaps Germany will get fed up subsidising the others and leave. Or post-election, perhaps France will be next to be targeted by the markets and stomp off in a huff. My gut feeling is that the ECB will eventually be persuaded to print money, and that a formal break up will remain further off in the future. But the final decision will be down to voters, rather than markets.<\/p>\n

John Stepek <\/strong><\/p>\n

Editor, MoneyWeek (UK)<\/strong><\/p>\n

Publisher\u2019s Note: <\/em>This article originally appeared in MoneyWeek (UK)<\/a><\/p>\n

From the Archives…<\/em><\/strong><\/p>\n

Why Graphite is the High Tech Commodity of the Future<\/a>
\n2012-04-27 – Dr. Alex Cowie <\/p>\n

Why Gold is Hands-Down the Best “Money” You Can Buy<\/a>
\n2012-04-26 – Kris Sayce <\/p>\n

12% Compulsory Super – Get Ready for the Government’s Next Tax Grab<\/a>
\n2012-04-25 – Kris Sayce <\/p>\n

Westfield – The Aussie Retail Stock That Could Make You Money<\/a>
\n2012-04-24 – Shae Smith <\/p>\n

Why Natural Gas Is Still My Favourite Resource Opportunity<\/a>
\n2012-04-23 – Kris Sayce <\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n


\nExpect Eurozone Panic as Spanish House Prices Tumble With it\u2019s Economy\u2026 <\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

By MoneyMorning.com.au \u2018Mortgages get paid in good times and bad. Anyone raising this problem as one of the issues for the Spanish financial system is saying something stupid.\u2019 So said Alfredo Saenz, chief executive of Spanish bank Banco Santander. That\u2019s the kind of quote you can\u2019t help thinking will go down in history alongside credit … <\/p>\n

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