August 12, 2012 at 9:39 am #56995
Spain is a sham of a nation that used easy credit to pretend it was a real modern western democracy. It is, in reality, a nightmarish barely developed place where middle income Brits think they’ve found Nirvana. It is Europe’s finest example of a failed state. That allows four out of ten under 25’s to languish on the scrap heap.
Spain is corrupt and saddled with cowboy planning and jerry building. The World’s uber rich do not want to live there as their billions are not safe. There is little history left ,especially at the coast which has been bulldozed for chalets and golf courses nobody wants. Large areas are without metalled roads, bin collections, street lights, a postal service. There are few jobs. While Santander trys to tell us it is the Latin American version of HSBC, when in fact it is a bloated RBS.
Recently two noted Spanish economists were interviewed. One was always an optimist and one was always a pessimist. The optimist droned on and on about how bad things were in Spain, the dire situation with the regional debt, the huge problems overtaking the Spanish banks and the imminent collapse of the Spanish economy. In the end he said that the situation was so bad that the Spanish people were going to have to eat manure. The pessimist was shocked by the comments of his colleague who had never heard him speak in such a manner. When it was the pessimist’s turn to speak he said that he agreed with the optimist with one exception; the manure would soon run out.
Spain is a catastrophe on such a level that few analysts even grasp it.
Indeed, to fully understand just why Spain is such a catastrophe, we need to understand Spain in the context of both the EU and the global financial system.
The headline economic data points for Spain are the following:
• Spain’s economy (roughly €1 trillion) is the fourth largest in Europe and the 12th largest in the world.
• Spain sports an official Debt to GDP of 68%
• Spain’s unemployment is currently 24%: the highest in the industrialised world.
• Unemployment for Spanish youth is 50%+: on par with that of Greece
On the surface, Spain’s debt load and deficits aren’t too bad. So we have to ask ourselves, “Why is unemployment so high and why are Spanish ten year bills approaching the dreaded 7%?” (the level at which Greece and Portugal began requesting bailouts).
The answer to these questions lies within the dirty details of Spain’s economic “boom” of the 2000s as well as its banking system.
For starters, the Spanish economic boom was a housing bubble fueled by Spain lowering its interest rates in order to enter the EU, not organic economic growth.
Moreover, Spain’s wasn’t just any old housing bubble; it was a mountain of a property bubble that made the property bubble in the US look like a small hill in comparison.
In the US during the boom years, it was common to hear of people quitting their day jobs to go into real estate. In Spain the boom was so dramatic that students actually dropped out of school to work in the real estate sector (hence the sky high unemployment rates for Spanish youth).
Spanish students weren’t the only ones going into real estate. Between 2000 and 2008, the Spanish population grew from 40 million to 45 million (a whopping 12%) as immigrants flocked to the country to get in on the boom. In fact, from 1999 to 2007, the Spanish economy accounted for more than ONE THIRD of all employment growth in the EU.
This is Spain, with a population of just 46 million, accounting for OVER ONE THIRD of the employment growth for a region of 490 million people.
This, in of itself, set Spain up for a housing bust/ banking Crisis worse than that which the US faced/continues to face. Indeed, even the headline banking data points for Spain are staggeringly bad:
• Spanish banks just drew €227 billion from the ECB in March: up almost 50% from its February borrowings
• Spanish banks account for 29% of total borrowings from the ECB
• Yields on Spanish ten years are approaching 7%: the tipping point at which Greece and other nations have requested bailouts
As bad as these numbers are, they greatly underestimate just how ugly Spain’s banking system is. The reason for this is due to the structure of the Spanish banking industry.
Spain’s banking system is split into two tiers: the large banks (Santander, BBVA) and the smaller, more territorial cajas.
The caja system dates back to the 19th century. Cajas at that time were meant to be almost akin to village or rural financial centers. As a result of this, the Spanish country is virtually saturated with them: there is approximately one caja branch for every 1,900 people in Spain. In comparison there is one bank branch for every 3,130 people in the US and one bank branch for every 6,200 people in the UK.
Now comes the bad part…
Until recently, the caja banking system was virtually unregulated. Yes, you read that correctly, until about 2010-2011 there were next no regulations for these banks (which account for 50% of all Spanish deposits). They didn’t have to reveal their loan to value ratios, the quality of collateral they took for making loans… or anything for that matter.
As one would expect, during the Spanish property boom, the cajas went nuts lending to property developers. They also found a second rapidly growing group of borrowers in the form of Spanish young adults who took advantage of new low interest rates to start buying property (prior to the housing boom, traditionally Spanish young adults lived with their parents until marriage).
In simple terms, from 2000 to 2007, the cajas were essentially an unregulated banking system that leant out money to anyone who wanted to build or buy property in Spain.
Things only got worse after the Spanish property bubble peaked in 2007. At a time when the larger Spanish banks such as Santander and BBVA read the writing on the wall and began slowing the pace of their mortgage lending, the cajas went “all in” on the housing market, offering loans to pretty much anyone with a pulse.
To give you an idea of how out of control things got in Spain, consider that in 1998, Spanish Mortgage Debt to GDP ratio was just 23% or so. By 2009 it had more than tripled to nearly 70% of GDP. By way of contrast, over the same time period, the US Mortgage Debt to GDP ratio rose from 50% to 90%. Like I wrote before, Spain’s property bubble dwarfed the US’s in relative terms.
The cajas went so crazy lending money post-2007 that by 2009 they owned 56% of all Spanish mortgages. Put another way, over HALF of the Spanish housing bubble was funded by an unregulated banking system that was lending to anyone with a pulse who could sign a contract.
The real problem with Spain’s banking system is that it is saturated with subprime and sub-subprime loans that were made during one of the biggest housing bubbles in the last 30 years.
Spain is dying a death by a thousand cuts, it is finished, kaput, finito.
August 12, 2012 at 9:54 am #111461
I would have thought europes finest example of a failed state would be one that has had a bail out.
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