As the dust continues to settle around Europe from last week’s EU bail-out of Spanish banks, many are left wondering which country will be next to remove it’s cap and send it up-turned to Frankfurt.
Portugal, Ireland and Italy are all falling under mounting scrutiny as banks across many European nations continue to admit that they are continuing to struggle in the face of continued uncertainness.
Greece of course, has rarely been out of the headlines recently. With the Greek government holding its hands up and admitting that it continued to borrow heavily in an attempt to support its economy through what it hoped was a short-term blip in 2008, despite the fact that financial institutes around the world had continued to crumble in the wake of the financial capitulation of Iceland (the country, not the frozen food emporium).
Spain has presented a slightly different kind of problem to the EU. The Spanish government has done its best to save some face by reiterating the fact that they are not to blame for the woes it’s financial institutions are facing, and the money they need is a loan and not a bail-out. To some degree, they have a valid point.
For years, and even up to the start of the crisis in 2008, the Spanish government had run a relatively tight ship. Throughout the 00’s, Spain had ran a balanced budget, and had a stronger debt-to-GDP ratio than many of its European partners. In fact, Spain managed to shrink its debt-to-GDP ratio year-on-year up until the crisis – similar claims cannot be made by the Germans.
So, exactly how did Spain end up in this situation?
The answer is simple: Housing
Since the turn of the century, the housing market in Spain had boomed. Buyers had confidence, demand had soared and between 2004 and 2008 house prices increased by 44%. As the market boomed, Spanish households took on bigger and bigger loans; loans the banks were happy to underwrite.
As the bubble burst in 2008, the average property price fell by a quarter. Suddenly, the millions who had taken on larger mortgages found themselves in negative equity. As the crisis continued to spread to industry many lost their jobs and found themselves unable to meet their monthly repayments.
Spanish banks had also invested heavily in construction companies and their new schemes. To meet increasing demand (and to make money of course) construction companies commenced massive new building projects – in some cases building completely new towns.
Today, many of these towns have one grim thing in common – they’re empty.
Valdeluz, a town constructed on the outskirts of Madrid, was built with 30,000 inhabitants in mind. Today, the town stands half built with just 700 residents. Sesena is another town that has been awarded the name of Ghost-Town, with 10,500 houses standing empty.
As the bubble burst, the construction companies, just like ordinary Spanish borrowers could no longer afford to pay their debts. The situation has become so bad that banks have been reported to have written off many people’s mortgages completely in an attempt to at least keep families off the streets.
The Spanish government has now begun a massive re-structuring of its banking system. Smaller or weaker banks have been forced to merge with or surrender themselves to the larger more fluid banks. However, it is expected that all of the 100bn Euros the Spanish government has borrowed will be needed to underpin these institutions and prevent further problems.
Hope remains that enough has now been done to allow the Spanish banking sector to recover. The attention of economists throughout the world is now turning towards Italy, and whether they will be the next country to call upon the help of Robin von Locksley (Angela Merkel) and her band of merry men at the European Central Bank.
What does all this mean for us Brits then?
In the short term, very little. Unfortunately, our government’s deals with the Eurozone are solid, and means the UK will continue to provide support to the ECB in order to try and aid export growth and recovery here.
Santander, Spain’s largest commercial bank operating in the UK, are reportedly in a healthy condition compared to most of its competitors in its home market although we have seen them pull back in the mortgage market since the start of the year.
Are you a Property investor?
Given the fact that the Spanish housing market remains in bad shape, suitably financed UK investors should be able to pick up property in the country at a very good price. Especially in the new towns. Just don’t expect the local shops and Paella dispensaries to open until sometime in the next decade.