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Spain gets bank bailout from Eurozone

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.


SPI Member Comments

2 thoughts on “Spain gets bank bailout from Eurozone

  • Peter George says:

    Good article Mark,
    I agree with everything except your conclusion, I would n´t trust a banker anywhere in the world not to do what was best for him. They have been hiding the fact for four years that Spanish property prices have been in free fall. This is why when the stress tests were ordered by the EU,the people doing the stress tests just took any figure the Spanish bankers gave them, SO EVERYTHING LOOKED ROSY . When in reality it was obvious to a first year economics student that Spain´s figure were overstated by 40%, additionally the time bomb of bad debts was underestimated.

    Spanish bankers always remind me of Wilkins Macawber in Charles Dicken´s wonderful book David Copperfied. Poor Mr Micawber was always in dire financial straits but was always optimistic that “something will turn up”. We do owe a great debt to Dickens/Micawber for the following quote,oh if only our idiot politicians were better read in great literature ,rather than their personal bank statements..

    Micawber is known for asserting his faith that “something will turn up”. His name has become synonymous with someone who lives in hopeful expectation. This has formed the basis for the Micawber Principle, based upon his observation:

    “Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

    If only governments lived by the “Micawber Principle” what a happier place the world would be.

    I fear this “bailout” will be used to fudge the market,lots of 115% loans just to get the bad debts off the books. I also am convinced that 100 billion is only a tip of the iceberg a truer figure could be as HIGH as 300billion euros.

    Another question, will a proper audit be done or will the “auditors” accept figure from the Spanish bankers?, which will mean a false impression of financial stability is given, due to Spanish bankers still hoping that “something will turn up”

  • Paul Wentworth says:

    All sensible stuff from you both! Now after all that previous rhetoric about fraudsters in the Spanish property market i.e. builders/estate agents/vendors/ lawyers/local politicians et al, the realization seems to be dawning that this whole mess was brought about by corporate greed and the main culprits were and still are the ‘Bankers’. I don’t see them changing their spots any time soon.

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