Recently the growing Euro concerns are being shifted towards Spain, and rightfully so. When you take into consideration that Spain’s economy is twice the size of Greece, Portugal, and Ireland combined, it’s becomes clear why it is a serious concern for the EU. Spain’s financial crisis is arguably more of a question of morality than a true financial crisis, at least not yet.
Spain’s bank concerns center around BFA-Bankia, which was formed in 2010 as a merger from 7 struggling savings banks. When Bankia’s market value plummeted by 43%, it was nationalized by Spain on May 9th 2012. Today, the bank’s assets are equal to 1/3 of the county’s assets. To protect this interest, just recently Spain was given $120 billion Euros as an economic stimulus in order to try and recapitalize their banking system. Unfortunately, this is the least of Spain’s problems and the aid of additional funds is likely to throw Spain further in the red down the road; and seemingly sooner than later. Many professionals believe that artificial growth is today’s true culprit in Spain’s financial crisis.
Since the fall of the housing peak in 2007, Spain has approached its foreclosure crisis quite differently. In order to protect the values of the 329,000 properties that were in foreclosure, Spain offered 100% financing with many loans going as interest only loans. This financing model is only available to bank owned properties, and to no one else. This has caused the home values in Spain to drop by only 22% according to Mr. Encinar, CEO of Idealista.com (a Spanish property website), whereas values in Ireland have dropped by over 60% since their peak in 2007. Mr. Encinar speculates that the decline in housing values without artificial support (the 100% financing) would be at least twice what it is today.
The construction industry in Spain is a different but equally shocking story. For years Spain has relied on home and office building as a source of growth, as it is feared that without this growth the country may have too much of an uphill battle. Builders in Spain are continuing to build despite a massive inventory of vacant homes. Spain is allowing this because construction accounted for more than 20% of their GDP at the height of the boom, and it is argued that Spain does not want to lose this momentum. According to Ruben Manso, an economist at consulting firm Mansolivar & IAX, “There has been a lot of cheating going on where banks have lent developers new money, classed as new lending, so they can pay off their original loans”. Old loans that should have triggered credit lines pulled were instead deemed as paid in good standing. These unscrupulous measures were put into place in order to keep prices artificially high, giving the illusion of a growing nation.
This artificial demand for pricing will not be able to continue with the high unemployment rate of 24%. As this process continues, their fiscal cliff gains more elevation day in and day out, which in turn will likely spur a devastating financial drop. “Spain has engaged in a policy of delay and pray. The problem hasn’t been quantified by anyone because there is a huge pressure not to tell the truth” says Mikel Echavarren, CEO of Irea, a corporate finance company in Madrid specializing in the real estate industry.