Spain's Looming Bust

[HenryTo]

Spain is a country we have been warning about for the last few months. Unlike the United States, Spain cannot sustain its current account deficit, given that the appreciation in asset prices have mainly come from a real estate boom. Unlike shares of Google and new businesses being created in the U.S., there are only so many beachside resorts one can build and there is only a finite amount one will pay for them.
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Spain's Looming Bust Will Hurt the Rest of Europe: Matthew Lynn
June 21 (Bloomberg) -- Getting worried about global imbalances?

Then turn your eyes away from the U.S. It is Spain you should be worrying about.

For a decade, the Spanish have been riding a rising tide of cheap money, fuelling a construction, property and now a mergers and acquisitions boom. It can't be long before this tide turns. When it does, it is likely to be messy -- not just for Spain but for the whole of Europe as well.

``Spain will boom ahead until it collapses under its own weight,'' warned Charles Dumas, head of international research at the London-based consulting firm Lombard Street Research at a seminar last week. ``When it will happen I don't know, but it will be pretty unpleasant when it does.''

On the surface, the Spanish economy is robust, certainly compared with its neighbors. According to International Monetary Fund estimates, its economy will expand 3.3 percent in 2006, compared with 3.4 percent last year. Over the last decade, the Spanish economy has almost doubled in size, and it has beaten the euro area's average growth rate for 11 straight years. From a relative backwater, Spain has fast closed the gap on the rest of western Europe.

Dig a little deeper and the picture is not quite so rosy. The fuel for Spain's rapid growth has mainly been the massive monetary stimulus from joining the euro. The European Central Bank sets interest rates mainly for the depressed German and French economies, not for booming Spain. Interest rates have been held down, allowing the Spanish to load up on debt.

Spanish inflation is now 4 percent, while interest rates are 2.75 percent. Given that the interest rate is below the inflation rate, borrowing money in Spain is effectively free.

Real-Estate Boom

The Spanish haven't been slow on the uptake, and have been sinking money into real estate. Property prices rose more than 12 percent in 2005, and more than 16 percent in 2004, according to Bank of Spain figures. The first thing any visitor to the country is likely to notice is the forest of cranes, and deafening chorus of jackhammers.

Short-term, that's great. In the medium-term, it is more troubling.

``Spanish economic performance is unsustainable,'' Angus McCrone, an economist with the London-based Centre for Economics and Business Research, wrote in a note to investors.

The strain can be seen in a trade deficit that is spiraling out of control. From a deficit of 3.6 percent of gross domestic product in 2003, according to calculations by the Paris-based Organization for Economic Co-Operation and Development, the deficit this year will hit 8.9 percent of GDP. Next year it will rise to 9.8 percent. Because Spain can't produce as much as it consumes it closes the gap by importing more and more.

Taking Action

Without the euro, the markets would start taking action to correct the imbalance. Investors would sell off the currency, making imports more expensive and exports cheaper -- something along the lines of what has been happening with the U.S., which has a smaller relative deficit than Spain.

In Spain, that isn't happening. Inside the euro zone, currencies can't revalue. Externally, the euro has been rising, not falling. The only way for Spain to get its economy back in balance is through a long period of slow growth, rising unemployment, and depressed demand. The most likely trigger? A crash in the property market.

If that happens, it isn't just the Spanish who will feel the pain.

Europe's Engine

In decades past, Spain might have been peripheral to the European economy. France, Germany and Italy were the countries that mattered. Not any more. According to Lombard Street calculations, between 2003 and 2005 39 percent of the growth in the euro-area economy came from Spain. Without it, the euro region would scarcely have expanded at all.

When Spain does turn down, much of the growth in the euro area is going to disappear at a stroke.

Worse, cheap Spanish money has been fanning out across the rest of Europe. Grupo Ferrovial SA has just agreed to pay slightly more than 10 billion pounds ($18.3 billion) for BAA Plc, the U.K. operator of airports such as Heathrow. Grupo Ferrovial is now the biggest building company in the world.

Abertis Infraestructuras SA plans to buy Italy's largest road operator Autostrade SpA for 12.7 billion euros ($16 billion). Indeed, of the five largest deals in Europe this year, a Spanish company was involved in three of them. At this rate, much of Europe's infrastructure is going to end up in Spanish hands.

When the inevitable downturn arrives, the Spanish companies are not going to be in such great shape. With their domestic economy slipping into recession, money will be tight. A few won't survive. When that happens, the companies they bought will be squeezed just as hard. Some may not survive.

It is now probably too late to hope for a soft landing in Spain. The trouble is, very soon Spain's problems are going to be the rest of Europe's problems as well -- and clearing up the mess may take years.

(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.)

[HenryTo]

Article claims that the recent mergers of the "cajas" are half-baked:

http://businessmirror.com.ph/index.php?option=com_content&view=article&id=25775:spains-rush-to-repair-banks-risks-leaving-job-half-done&catid=46:bloomberg-specials&Itemid=70

[rffrydr]

I dunno about Greece, but I can tell you Spain's debt includes some serious infrastructural buildout. It's the property bust that gets all the attention (which falls on the british here more than equally) but Spain had visions of becoming the "Singapore of europe"--which, though it will never happen, has come a long way:



This from the '09 propaganda:

[HenryTo]

Finally - Spain loses its AAA rating from Fitch:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aGw2PSGay0AQ&pos=1

[rffrydr]

Lotta headlines on this tiny bit of nothing:

http://ftalphaville.ft.com/blog/2010/05/24/241171/cds-report-more-pain-in-spain/
_________________
Today is the Tomorrow you worried about Yesterday!

[rffrydr]

No heroics here: bought in 1/3 position in Banco Santander preferreds at just under 9%. This is as much a trade on latin-america and its submerging markets--with an ECB guarantee as it is on europe. If it doesn't work I'll blame El-Erian.
_________________
Today is the Tomorrow you worried about Yesterday!

[HenryTo]

S&P follows up with a cut on Spanish sovereign debt. The key statement is the final sentence.

[rffrydr]

We'll no doubt be hearing more of "youth rebellion":

[HenryTo]

S&P revises its outlook on Spain to negative - as the rating agencies start to realize the systemic risk that has been created in Spain and other shaky countries such as Greece. Not surprising given that the ECB is finally pulling its indirect lifeline of providing near-zero-cost loans to the country's banks:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aUUGcgw4aRqY&pos=5

[HenryTo]

Spanish bust finally confirmed by the country's finance minister - even as many had been looking for it for months:

http://www.bloomberg.com/apps/news?pid=20601068&sid=aQYlaf0MK4zc&refer=home

[HenryTo]

This is the reason why non-US securitizations of asset-backed securities have stayed relatively high since the credit crisis began:

http://www.bloomberg.com/apps/news?pid=20601109&sid=azae4HCCn2z4&refer=home

Once the ECB clamps down, then Spanish liquidity will go to zero. And headline inflation in the Euro Zone will start to finally come down. Core inflation will most likely go negative.

[HenryTo]

Morgan Stanley issues alert on Spanish banks. The ECB will need to ease or bail out Spanish banks sooner or later - neither scenario would be bullish for the Euro especially given its current valuations:

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/08/05/ccspain105.xml

[diesel]

The currency markets should put 2 + 2 together well before the ECB gets in on the act. We are close to a top in the Euro here, maybe some more meandering into late March but it should be all over by then IMO. As the US asset markets outperform Europe and, increasingly, Asia and Australia going forward I think you will find capital will find its way back to the US. As I mentioned by late next month to April I believe this will become clear.

[HenryTo]

This cannot go on indefinitely - especially the folks that were buying second homes in Spain (i.e. London bankers) are now facing the music as well. At some point, Spanish banks will have to take their losses.

Of course, the corollary to this is that the ECB will cut rates in a few months - which should lead to a lower Euro as the U.S. economy starts its recovery while the Euro Zone's goes into a deep slump. As always, timing is the key.

[rffrydr]

And no SIVs equals "no pain in Spain":

http://ftalphaville.ft.com/blog/2008/02/01/10637/where-is-the-pain-in-spain/
_________________
Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Hi lmrhoades,

None right now, given the oversold conditions of many markets around the world. Also, since this is a public forum, I generally try to avoid talking about my individual positions here - we can either talk over email or PM.

Best,
Henry