Madrid has asked the Eurozone authorities for a bailout of 100 billion euros for its banking sector. Bad real estate loans lie at the heart of Spain’s problems.
After a high-stakes game of chicken with the Brussels and Berlin in recent months, Mariano Rajoy’s government in Madrid has finally caved in to pressure and asked for an international bailout of its insolvent banking system.
By agreeing a bailout just for the banking system, Rajoy can claim that Spain has avoided a humiliating national bailout a la Greece and Portugal, even if there is not much difference in reality. The Government is arguing that the strings attached to the bailout will only affect the banking system, not the rest of society.
It is too early to say what the impact will be on the Spanish economy, though it will inevitably mean more restructuring in the banking sector. But most important for readers of this blog, what does it mean for the Spanish property market?
As far as I can see at this stage, there are two possible outcomes for the housing market: The most likely outcome is a bigger and faster decline in house prices, as banks are forced to recognise the true extent of their bad loans, and can afford to do so now that they have access to fresh capital. The Spanish press is quoting an “expert” consensus of around another 20pc in declines.
The other possible outcome is the exact opposite, with banks using fresh capital to keep prices high and sit out the crisis in the hope that prices will recover in time, and lending more to buyers, which would also support prices. However, I think this is unlikely. Everyone now knows that Spanish banks have been over-valuing the properties they own to avoid recognising losses and showing the world how bust they are. Now that the bailout has been requested the game is up, so the banks can come clean. My guess is banks will now be more aggressive about reducing prices.