The Pain in Spain
By Eric EllisJune 8, 2012
Oh, yes, another country’s economic wreckage you really ought to understand. And it’s a big one — one of Europe’s top five. Here’s the story of the fiesta, and an explanation of its ongoing end.
Oh no, not another European economy going down the gurgler. What's wrong with these people?
Let's start with The Binge, before we get to The Hangover.
For the past 20 years, it's been lots of fun to be Spanish. You got to party on someone else's coin — Brussels' and your bank's.
The dictator Franco's death in 1975 uncorked a latent flowering of Spanish society that had been bottled up through his austere four-decade rule.
With Franco gone — but crucially for the Spanish political angst, not overthrown — this was Spain's national catch-up to the world, a party-like-there's-no-tomorrow feeling that even had a name, La Movida (think Pedro Almodovar and you get the cultural and economic exuberance of the Movida vibe).
With democracy came economic liberation, dramatic social change and a succession of self-confident booms — a high point was in 1992, Spain's contemporary Year of Marvels with the Seville Expo, the Barcelona Olympics and the 500th anniversary of Columbus's voyage of discovery to the Americas.
Many of these fiestas were supported by Brussels, as part of its wider drive to equalise the European economy. Today, Spain has first-class — and very expensive — infrastructure; superb autopistas, one of the world's most extensive high-speed rail systems, and some of Europe's snazziest airports — all financed mostly by other Europeans.
For 12 years until 2007, Spain's economy grew uninterruptedly, at a rate that was often near-double the EU average. Spain became Europe's fifth largest economy.
For a glorious decade and then some, one of Europe's poorest countries was transformed into notionally one of its richest. The Catalonia region around Barcelona enjoyed a standard of living 30 per cent higher than the European average, this before the ex-communist eastern states entered.
Economically liberated Spaniards hankered after the Five Cs — cash (they would fashionably use the English term), coche (car), casa (house), club (denoting social mobility) and cosas (literally 'things', implying consumerism). And if you were a young Spanish bloke on the up, you'd add another C for chicas, or girlfriends, suggesting a concurrent loosening of mores in this conservative, heavily Catholic society. Spain became groovy like Italy and France, a very old culture that suddenly felt very new.
The casa was the big prize for Spaniards. In rural Andalucia, barely literate campesinos, the rural peasantry who lived in caves or feudalistic hovels, were moving into spanking new urbanizaciones financed by 100 per cent mortgages.
And lured by the Ryanairs and easyJets, sun-starved northern Europeans did likewise, preferably with a golf course nearby. As the "United States of Europe" took shape politically within a confident EU, Spain positioned itself as its California.
OK, that's The Binge. What about The Hangover?
From the mid-1980s until the 2008 crash, Spanish property enjoyed three significant booms, with nary a whimper between to dampen them.
In some locales, house values jumped as much as five-fold. That meant a huge construction — and, with it, a labour — boom. In 2006, at the height of all this economic activity, Spain was consuming half the cement produced within the EU.
And property prices kept rising, even as new stock was added to the housing pool. As houses and apartment buildings went up all over the country, so did mortgage lending. Money was very easy to get hold of, and the central Banco de España was inclined to let the party rage on. In 2006, the central bank measured the average Spanish family's indebtedness at 115 per cent of disposable income.
Then, 2008 suddenly happened — instant recession. The trans-Atlantic financial crisis, which remember was prompted by the explosion of the American sub-prime mortgage market, shone a spotlight on the Spanish property bubble.
And it's been in free-fall ever since. The debt is all with Spaniards — the Madrid government has tended to run its finances well, which is just as well because Spanish unemployment is running at around 25 per cent nationally, and as high as 50 per cent among some regions and social groups, which has placed big welfare burdens on the state.
The lack of jobs meant a lack of loan repayment, so banks were exposed with billions of bad debts in a fast-falling property market. Unemployment also meant less tax revenue. It's all put massive strains on Madrid's ability to finance the nation. The government is now borrowing — very expensively, because the economy and ratings are so weak — on international markets at record high interest rates in order to finance the state's obligations. And it's not like Spain has a booming resources sector to help it through la crisis. About the best Spain can hope for in the immediate term is that this fourth-most visited nation in the world has a nice hot summer to get tourist numbers on the up.
Last December, Spaniards tossed out the left and installed Mariano Rajoy's right-wing People's Party, a kind of heir to the Franco legacy. He promised to manage Spain's economy in line with EU austerity diktats, but — like the suffering Greeks and Italians, and the anxious French — Spaniards aren't buying it. Since May last year, thousands of indignados, or the indignant, have massed in near-permanent demonstration in plazas across Spain, part-Tahrir, part-Occupy and all protest.
Have the banks taken all the pain from the property bubble bursting?
Good question, and one much debated by European economists as they try to save the euro from disintegration.
But let's try to answer it anecdotally.
This correspondent has been vacationing in the bucolic Andalucian "white village" of Gaucin each of the last three years. On a stunning cliff at Gaucin's outskirts sits a newly built block of flats, and has done so for several years. The flats have never been occupied. A local bar owner told me the construction was bank-financed. Prices in the area have come off by 50 to 60 per cent since 2008 but still these places aren't moving, and each time we've come there's a new, much-reduced price advertised. Now you can rent one "with an option to buy" for €399 per month.
Landlords anywhere like to get around five per cent annual returns, with appreciation the cream. But in Spain, forget appreciation for at least five years. At €399 a month, were one of these Gaucin apartments let, annual rent would total near €5,000, suggesting a value of around €100,000 for the flat. When I first saw them, they were being touted at €350,000. Today they are, generously, a third of that price, and still not moving.
It might also mean that they were badly built — locals hint grimly at landslips — and, if so, that hints at corruption. Local mayors, even in towns as tiny as Gaucin, pay themselves well. They are very powerful locally, and have a habit of handing building permits to their relatives and amigos. I've lost count of the mayors Gaucin has suffered in recent times, hounded from office by grumpy voters — I think it's three in three years. And for Gaucin, read any small town in Spain; in nearby Ronda, the former mayor — a man wonderfully known as Toti — was recently arrested in a national sting on suspicion of fraud, bribery, money-laundering and falsifying documentation.
Across Spain, banks are being forced out of denial and taking massive hits for their bad property debts. Last month, Spain's fourth bank, Bankia — itself a 2010 state-enforced merger of seven weak regional banks — received a €23 billion state bailout, mostly because of its bad property portfolio. (Somewhat alarmingly, Bankia was at the time chaired by a former chief of the International Monetary Fund, the global body that's supposed to rescue stricken economies.)
Back at the unlettable and unsellable Gaucin apartments, that notionally means the landlord's banker is sitting on a potential bad debt risk of at least 60 per cent. No Spanish bank has taken a 60 per cent haircut on its distressed property portfolio; those that have written off loans tend to have made 20 to 30 per cent provisions. Banks, of course, assess customer solvency on a client-by-client basis, but on the surface, the Gaucin example suggests this particular lender might need to double its provision if the Gaucin properties are any guide to how it handles the rest of its portfolio.
And there are more than a million vacant homes glutting the collapsed Spanish property market. It's ugly out there, Señor, and getting uglier.
Read Eric Ellis’s Greek explainer, 'Greekonomics' here.