Spain crumbles

By Felix Salmon
August 25, 2009
Neil Unmack is constructive about Spain in general, and Spanish banks in particular: Santander knows its own loan book better than anyone, he says, and if it's happy to buy back billions of euros of its own bonds at 82% of par, it probably knows something the market doesn't.

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Neil Unmack is constructive about Spain in general, and Spanish banks in particular: Santander knows its own loan book better than anyone, he says, and if it’s happy to buy back billions of euros of its own bonds at 82% of par, it probably knows something the market doesn’t.

On the other hand the notorious Variant Perception report on Spain and its banks, quoting Edward Hugh at some length, makes for very sobering reading. Read at in the light of the report, Santander’s buy-back begins to look more like an act of desperation than one of strength — and one which bondholders would do well to tender into.

It’s undeniable that the implosion of Spain’s formerly-hot construction sector is going to blow holes in a lot of balance sheets; the only question is where and when. The gist of the Variant Perception report is simple: the problems of Spain’s construction industry and homeowners have become the problem’s of Spain’s lenders, and the problems of Spain’s lenders are going to a major problem for all of Europe, going forwards. Meanwhile, Spain will become Ireland-but-worse, as real interest rates soar thanks to deflation and extreme levels unemployment, combined with low wages, depress the entire economy for the foreseeable future.

That said, it’s important to draw a distinction between Spanish banks in Spain, which are largely domestic savings banks, and Spanish banks as they exist in the imagination of the international capital markets (Santander and BBVA). Santander is a well-managed and internationally-diversified bank, which does retail banking extremely well. BBVA owns the largest bank in Mexico, Bancomer, and has built an extremely strong franchise stretching from Texas, through Mexico and central America, and down through the Andes. While neither bank will be immune to a national disaster in its country of origin, their international holdings will help to soften the blow.

At heart, however, the situation in Spain will be familiar to many US observers: consumers augmented their low wages by making huge amounts of money in a soaring property market. And now that the property market has stopped soaring, they’re left with hundreds of billions of euros in loans, an enormous percentage of which will end up in default. The problem in Spain is exacerbated by the fact that much of the property bubble was concentrated in the beach-home market on the coast, where the willingness of homeowners to pay mortgages on underwater properties is much lower than historical data would suggest.

The problems in Spain have taken longer to emerge than those in the US or Ireland for two reasons. Firstly, Spanish lending standards were generally tighter than in Anglophone countries, giving banks more of a cushion to absorb losses or refinance souring loans. And secondly, the massive influx of liquidity which hit the world in 2008 as a response to the global economic crisis is helping to hide the scale of the problem in Spain: it’s worth noting that Santander is tendering for more than $23 billion in mortgage-backed bonds “through its normal liquidity facilities”. But neither of these two factors is sufficient to withstand an economic crisis of the one facing Spain. My feeling is that the pessimists (and the other Neil) are right — the situation in the country is going to get much worse, and spill over into the rest of Europe, long before it gets better. We haven’t hit bottom yet.


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Fair enough but why and how will the situation in Spain ‘spill over into the rest of Europe’?

Posted by BigBadBank | Report as abusive

Welcome to the real muchacha!
Don t forget, they praise themselves about this bank /financial cushion in Spain, but it is all politically connected.
Also Spain, although not being Italy to a certain point, still has a big black market.

Now to spill to other countries ? i don t think so. Not directly tough. Houses are not exported as far as i know.
let me the market rule , that is the price to pay when more or less 20% of an economy depends of construction/building and i am not counting the destruction of the land.

Santander and BBVA will be ok. The Cajs, it is what i would worry about. And to show you an example of the Spanish way of the market Economy, Bancaja has jut lent +/- 80 M euros to FC de Valencia just to pay its obligation….

And i live in Spain. 8-=)

Posted by chris | Report as abusive

To be honest, as I observed on Edward Hugh\’s blog some months ago, it would be better if Spain had its own currency and could devalue it. The alternative would seem to be cash from the rest of the EU.

A tender for one’s own securities means that one values them at the tender price, or that one wishes others to believe that one does. Either seems possible to me here, regardless of whether they’re actually worth 82.

Here’s a somewhat scary view on Spain that came this week from alternative economic research house Variant Perception.

The top line: that Spain is now the hole in Europe’s balance sheet, and that misunderstanding the severity of the crisis will prove costly to investors as it could have profound implications for the European banking system. As it explains:

Spain had the mother of all housing bubbles. To put things in perspective, Spain now has as many unsold homes as the US, even though the US is about six times bigger. Spain is roughly 10% of the EU GDP, yet it accounted for 30% of all new homes built since 2000 in the EU. Most of the new homes were financed with capital from abroad, so Spain’s housing crisis is closely tied in with a financing crisis. 25/68471/on-the-matter-of-spanish-proper ty-valuations/


Posted by chris | Report as abusive

Given that the prices Santander are offering for the bonds go as low as 61 cents on the euro in some cases for senior tranches of ostensibly prime RMBS, it’s entirely consistent to say that they know the loans better than anyone and that things will get much worse in Spain.

Posted by Ginger Yellow | Report as abusive

I agree with the importance of the Spanish leverage and real state problems. However, there are two factors that help diminish the impact of the crisis significantly in Spain and which I never find in the analysis about this country:
1) Real interest rates are not soaring for consumers. More than 90% of mortages are floating rate, mostly referenced to EURIBOR 12M (which has dropped from more than 5% to 1.3% in the last months). This way, borrowers have been able to benefit from the drop in inflation expectations and the interest reduction pushed by the ECB. The percentage of floating consumer credits is lower but still high.
2) Although much of the property bubble is centered in the beach home market, consumers have similar incentive to repay these mortages that the mortgage of their primary home. In Spain when somebody does not pay its mortgage the house is repossesed, and if after the sale of the house there is still pending debt the bank will still have a claim on the rents or other goods of the borrower.

Posted by Javier | Report as abusive

some of you question how it could spill over to the rest of Europe. the answer is:

1. (major one) banks have been financing the real estate sector. due to the crisis, unemployment, etc etc, lots of defaults. but guess where spanish banks got the money from… european investors!!! and if a spanish bank defaults… the european investor will not get the money back
2. (minor one) spanish gdp is above 10% of the european union. which means is not a critical but a major contributor to european’s economy by buying german, french, british… products. if the economy trembles… european production will suffer a bit. consider that spain is fundamentally an importer

hope this helps

Posted by montecristo | Report as abusive


the critical moment for the spanish economy will be at the point where major euro economies (france, germany) grow with high inflation. at that moment, the BCE will increase interest rates

if at that point the spanish economy is not improving already… spain will become an economic desert… and might require to leave the euro union (i mean the currency not the political agreement) to lower interest rates and / or devalue its currency

as of today, i give around 50% chance to this happenning. and i am not pessimistic in nature

Posted by montecristo | Report as abusive

Most foreign analists talk about a great inventory of unsold new homes in Spain. But the sad truth is that there is also a great inventory of second-hand old and empty houses flowing into the market. They have been a traditional way of investing in Spain. Now the owners realize that the top of the market has been reached, and want to cash them, what is nearly impossible. Just have a walk in no-new areas of spanish cities to check it.

So, what is the real magnitude of the sotck of unsold houses? Pretty difficult to asses, buy anyway much higher than the official statistics.

Posted by rufus | Report as abusive

How many of those beach-home market properties are owned by foreigners who are less likely to have their residual bank mortgage claims follow them to their home countries seeking repayment? Strong institutional arguments about why the willingness to pay in pain is better than elsewhere may be suspect if investors use trusts to buy their beach homes or are foreigners and can toss the keys to the bank. Ultimately, capacity to pay trumps willingness, and if interest rates can’t go any other direction but up in the future — there’s the answer to future payment performance ¿no?

Posted by Cerri | Report as abusive

The only pisos I see selling in Madrid are on the very low end of the market (below 200,000).

The rest have been on the market for years…I see the same old flats for sale in the windows of estate offices.

The magnitud of the collapse is stunning. But some how some way nobody is in a hurry to sell and God forbid lower their asking price…

People are still holding out for top dollar even though none one can afford 500,000 euros for a 2 bedroom flat with 100sq meters.

I get the feeling that Spanish banks will be able to hide their losses and millions of unsold pisos will still be on the market for years to come.

Pathetic isn’t it.

Posted by Gunter | Report as abusive

Spain and Ireland differ considerably. In particular by about 10 degrees centigrade, 250 days sunshine and a few feet of rain. In Spain you have an overinflated property market built up by demand from northern Europeans in the good years. The economy turns and the last thing you need is a second home. (Most of Spain’s excess property availability is due to holiday homes.) The economy turns up (always has, always will) then guess what, people have excess cash, want a lifestyle, climate etc and… demand returns. Meanwhile it continues to rain in Ireland ! We had a lot of buyers from Ireland looking to buy at Polaris World in Spain 3 years ago but I fear the specific problems of the Irish market will hold demand back for some years.