Great Graphic: Spain Woes Continue

The Greek bond buy-back, the machinations of Italian politics and the European agreement on bank supervision all seem to have pushed Spain out of the limelight. Yet the economic situation is does not appear to be stabilizing and it will likely return to center stage early next year. 

This Great Graphic is was posted on Quartz and comes from a survey by the rating agency Fitch.   The chart is a bit counter-intuitive.  The blue bar shows decline in Spain's housing prices based on the year of sale.  The yellow dot registering the number of sales the rating agency studied.  

The bottom line is that housing prices continue to falling Spain and there still seems to be a way to go.  Housing prices in Spain are off about 25% from their peak.  In terms of housing market bubbles, this is quite modest.  By comparison, US house prices fell about 35% from peak to trough.  Irish house prices are expected to have fallen 50-60% before it is over. 

Spain's housing market boom was huge.  More houses were built in Spain than in France, Germany and the UK put together, though it has a quarter of the population.  There are currently a million new homes for sale in Spain and another 200k of repossessed properties.  Even in the best years, this is around 4-5 years of sales. 

This can only exacerbate the bad loans at Spanish banks, which are already officially recognized at almost 11% of all loans.   Spain is in the process of setting up a bad bank, "Sareb".  It is a public/private venture with several of Spain's largest banks taking an equity stake and receiving some subordinated debt as well.  Foreign investors are also sought, but this may be harder to secure immediately.  Among other factors, the price that toxic assets will be transferred to Sareb is not transparent and the current holders (banks) will have a large say initially over prices.  

Four banks have been nationalized recently and a fifth one is being taken over today.  BMN (Banco Mare Nostrum) has been long suspected to be a likely candidate and today Madrid took a majority stake.  BMN purportedly had 70 bln euros in assets.  Local reports suggest another bank, Caja Duero,  may soon need additional help on top of the loans it has already received. 

Spain's challenges extend well beyond the housing market, of course.  It is just that housing and the financial sector is a particularly weak but powerful link.  The weakness of the economy, the austere regime, and regional challenges round out the major issues.  

Prime Minister Rajoy is probably a bit further away from asking for EU support than he was a month ago.  Spain's 10-year benchmark yield is off 46 bp over the past month and the premium over Germany has narrowed by nearly that amount as well.   Moreover, news that Spain will increase its bill sales next year by 20 bln euros (bond issuance to increase to 90.4 bln euros from 85.9 bln) will have the effect of reducing the average maturity and Spain's outstanding debt and helps minimize debt servicing costs.  It is seen as another sign of Rajoy's reluctance to seek aid.