Spain on the verge of a nervous breakdown

By: Jaime Pozuelo-Monfort

The slowdown in Spain’s real estate is a fact. Recent data released by the INE (National Statistics Institute) confirm the trend most foreign investors acknowledged in recent months. The figures are concerning: a drastic decrease of the sale and purchase of apartments, down 27.1% in January 2008 over the previous year in annual terms; a two-figure reduction of mortgage loans, down by 25.71% in January 2008 over a year earlier in annual terms; and a fall in the average sale price of an apartment, down by 3.08% to 142,793 Euro.

We all knew it, but only a few with no stake in the game dared to anticipate the outcome. Spaniards can no longer rely on real estate as the engine for growth. Half of the real estate companies have closed down over the last 6 months and there is yet more to come. Spanish construction boom accounted for 18% of its GDP and a major part of its GDP growth that for the last 14 years has remained above the 3% mark.

Promoters have indebted heavily over the past few years. Their funding procedures worked in time of high demand and appetite for real estate. They would ask for funding to Spain’s financial institutions, to a larger extent to the savings banks (Cajas de Ahorro), which at this point are most exposed to a downturn. They would then pay their loans back with the revenues obtained from the sale of the apartments. Apartments are now not being sold any longer and many of the promoters are finding it very difficult to refinance their debt, an inability based on the lack of liquidity in the marketplace, with banks and savings banks having drastically cut their credit to real estate.

On March 26 five companies of the Cosmani Group filed for bankruptcy. The Cosmani Group, conformed by 22 different subsidiaries, has accumulated a debt of 350 million Euro. Another construction company by the name of Prasi has also filed for bankruptcy with an outstanding debt of 40 million Euro. This is a new phenomenon. The massive bankruptcy in the Spanish banking sector in the 1980s may now have its counterparty in the construction industry. The 1980s crisis led to a consolidation of the banking industry. It is not clear what might come out of the current crisis.

Antonio P.G. is a civil engineer based in southeastern Spain, an area that has experienced the real estate boom like no other, with heavily construction along the coast and a rising stock of unsold apartments. He has worked in the construction business for over 30 years and never has he observed the sudden stop in credit to promoters. He does not understand the rationale behind the sudden decision of granting credit, in a dynamics that penalizes promoters who failed to forecast the end of the cycle and did not switch gears, as Santander and BBVA did late last year, selling a majority of their real estate portfolio. But Antonio is not aware that commercial banks and savings banks have already reached their limits and exposures. A good and sound credit risk management, which has for so long characterized Spanish financial institutions, is the raison d’etre of a business that is undergoing a severe crisis worldwide.

The filing of bankruptcy is not only impacting some of the smaller savings banks. It is also touching furniture manufacturers, electricians, plumbers, among others. The economy is likely to slow down faster than what some of the Economists on the Socialist ranks would have liked. The timing could have been worse, but Zapatero renewed a second-year mandate last March 9, on the verge of an economic collapse that might have driven him out of the Spanish White House, called ‘La Moncloa’.

In the meantime the successful refinancing of some of Spain’s largest realtors pushes their stock price up. This is the recent case of Martinsa Fadesa, a consolidation of Martinsa and Fadesa, formerly two separate companies. Martinsa Fadesa’s stock raised as a result by 5%. The terms of the rolling over of the debt will typically involve longer payback periods at a higher interest rates, provided that some of the credit ratings of Spain’s largest realtors, and as a result their credit risk or probability of default, have raised upwards.

Overall the current environment is not promissory. An anticipated slowdown may become a sudden halt with a severe correction for Spain’s economy. As the Almodovar girls, many Spaniards are on the verge of a nervous breakdown. So are thousands of immigrants who arrived in Spain in times of economic bonanza. The economic penumbra will trigger a heavy burden on Spain’s welfare state, that now serves five more million people than ten years ago. The sun and the tapas will surely soften an economic crisis that might make many remember the 1992 recession, when unemployment stood at 23% of the workforce, far from today’s 8%.

 

This article first appeared on www.5spaniards.com

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