Alistair Spence Clarke
28/11/2011
An article in a blog I was reading this weekend caught my eye and I decided to do some digging. After a few minutes, what I have long suspected about the bank’s holdings of defaulting loan assets became crystal clear.
The last property crash in Spain happened in the early 1990s, at a time when the internet did not exist and so the authorities were able to keep a lid on the real story. These days, with the internet providing such a rich source of commentary and information, the authorities can no longer hide their dirty washing, even if the Spanish press participates in suppressing news on what is really happening.
So far the banks have foreclosed on 200,000 properties and this is likely to rise to 600,000 in the next few years. If these properties were worth the face value of the loans then it would just be a problem of liquidity. However, the loans far exceed the market value (what market!)of real estate assets they acquire through foreclosures. This means that at some point the banks will have to account for additional losses in their balance sheets of an estimated 60 billion Euros. I wonder whether even this estimate of overvalue is enough, given that Spanish banks have over 300 billion Euros in real estate loans.
To get a real understanding of the colossal scale of white elephant developments across Spain that the banks now own, I found a CNN report on a newly built 1 billion dollar mothballed airport in Ciudad Real. Unbelievably, another new airport in Castellon near Valenci has been open for business for almost a year, does not yet have a single arline operator and carries 54 million in bank debt. Another article explained that 43% of the unsold residential real estate stock is in ghost town residential developments in the middle of nowhere. I especially liked the reference to Don Quijote economics!
So who is going to buy these assets? Well, at the prices that the banks are currently willing to accept, few are interested. The banks have tried to tempt individual buyers with 100%+ loans that cover all the taxes and costs of purchase with 30 year repayment terms, but real estate sales transactions are on a deepening downward spiral.
Spanish real estate marketing specialists say that it will take until 2017 for the market to absorb the 1 million unsold new properties that were built during Spain’s mad construction boom.
This seems to me to be a wildly optimistic projection, given that unemployment is now at a record 21.9% of the working population and likely to rise further in the next year or so, given that there will be zero growth in real terms after discounting inflation.
This quote says it all “If the banks were to write down their property holdings today the whole financial system would go bankrupt… We can’t risk that,” said Juan Jose Toribio, economics professor at the IESE business school in Madrid. This is an odd mentality and perhaps the commentator would do well to read a little English history. King Canute demonstrated to his courtiers with great aplomb that the mere will cannot hold back sea tides. For those who would like to learn more about this bit of English/Danish history see below.
Many European politicians would also do well to read a little history and desist from saying that the financial markets are just being naughty because they will not subscribe to their so far pathetic attempts to sort out the problems of the Euro.
Given the choice, and always with a large pinch of salt, I prefer to believe the sentiment of the markets in preference to the ravings of European politicians whose democratic legitimacy is doubtful, at best. We should give thanks to the internet for the information that exposes these politicians for what they are.
International investment funds with long term perspective will move in to take up the unsalable real estate assets of the banks, perhaps with banks retaining some equity, as soon as the banks show a bit of realism in valuation and the politicians and bank regulators stop thinking that their words have the power to overcome market sentiment.
The Spanish economy desperately needs the liquidity that is locked up in its overvalued and unsalable bank assets to help kick start its economy and get its population back to work and generating wealth.
Perhaps the new government will act on this sooner than later, as well as attending to the other structural deficiencies that exist.
I certainly hope so, for the sake of the unemployed generally and especially the youth of Spain whose unemployment rate exceeds 46%.
Sources:
Bloomberg article
Who was King Canute?
New government needs to act on banks
Amusing blog on Spain by a maverick investment adviser
CNN report on new billion dollar airport now closed (sorry about the 30 second advert)
