- Credit wasn’t a problem, the banks were throwing money at people. Comment: Yes, this is due to the fact that the Governments have created Central Banks which control the availability of credit, and they have also made it lawful for banks to create money out of nothing, with the fractional reserve banking, which allows banks to lend as much as 30, 40, or 50 times as much as they could without this law.
- More obviously: Both booms also were fueled by incentives. In Ireland, the government gave investors tax breaks to build in certain areas, and granted homeowners breaks on their interest payments. In Spain, there were incentives for municipalities to approve land for development because they could keep 10 percent of all the land they reclassified.
- The former Irish Minister couldn't say it better: “You could say the government was drunk on the revenue that was coming from all the construction taxes.”
- The regulators failed at their job, including every single Central Bank. Yet, pro-Central Planning people will say they need more power and more staff.
(Bloomberg) May 10, 2012 — Spain is underestimating potential losses by its banks, ignoring the cost of souring residential mortgages, as it seeks to avoid an international rescue like the one Ireland needed to shore up its financial system.
The government has asked lenders to increase provisions for bad debt by 54 billion euros ($70 billion) to 166 billion euros. That’s enough to cover losses of about 50 percent on loans to property developers and construction firms, according to the Bank of Spain. There wouldn’t be anything left for defaults on more than 1.4 trillion euros of home loans and corporate debt.
Taking those into account, banks would need to increase provisions by as much as five times what the government says, or 270 billion euros, according to estimates by the Centre for European Policy Studies, a Brussels-based research group. Plugging that hole would increase Spain’s public debt by almost 50 percent or force it to seek a bailout, following in the footsteps of Ireland, Greece and Portugal.
“How can you only talk about one type of real estate lending when more and more loans are going bad everywhere in the economy?” said Patrick Lee, a London-based analyst covering Spanish banks for Royal Bank of Canada. “Ireland managed to turn its situation around after recognizing losses much more aggressively and thus needed a bailout. I don’t see how Spain can do it without outside support.”
Spain, which yesterday took over Bankia SA, the nation’s third-largest lender, is mired in a double-dip recession that has driven unemployment above 24 percent and government borrowing costs to the highest level since the country adopted the euro. Investors are concerned that the Mediterranean nation, Europe’s fifth-largest economy with a banking system six times bigger than Ireland’s, may be too big to save.
[...] Spain’s banks face bigger risks than the government has acknowledged, even with lower default rates than Ireland experienced. If losses reach 5 percent of mortgages held by Spanish lenders, 8 percent of loans to small companies, 1.5 percent of those to larger firms and half the debt to developers, the cost will be about 250 billion euros. That’s three times the 86 billion euros Irish domestic banks bailed out by their government have lost as real estate prices tumbled.
Moody’s Investors Service, a credit-ratings firm, said it expects Spanish bank losses of as much as 306 billion euros. The Centre for European Policy Studies said the figure could be as high as 380 billion euros.
At the Bankia group, the lender formed in 2010 from a merger of seven savings banks, about half the 38 billion euros of real estate development loans held at the end of last year were classified as “doubtful” or at risk of becoming so, according to the company’s annual report. Bad loans across the Valencia-based group, which has the biggest Spanish asset base, reached 8.7 percent in December, and the firm renegotiated almost 10 billion euros of assets in 2011, about 5 percent of its loan book, to prevent them from defaulting.
The government, which came to power in December, announced yesterday that it will take control of Bankia with a 45 percent stake by converting 4.5 billion euros of preferred shares into ordinary stock. The central bank said the lender needs to present a stronger cleanup plan and “consider the contribution of public funds” to help with that.
The Bank of Spain has lost its prestige for failing to supervise banks sufficiently, said Josep Duran i Lleida, leader of Catalan party Convergencia i Unio, which often backs Prime Minister Mariano Rajoy’s government. Governor Miguel Angel Fernandez Ordonez doesn’t need to resign at this point because his term expires in July, Duran said.
Spanish banks have “a 1.7 trillion-euro loan book, one of the world’s largest, and they haven’t even started marking it,” Hesse said. “The housing bubble was twice the size of the U.S. in terms of peak prices versus 1990 prices. It’s huge. And there’s no way out for Spain.”
[...] The losses of bailed-out domestic banks in Ireland have reached 21 percent of their total loans. Spanish banks have reserved for 6 percent of their lending books.
[...] Developers are still building new houses around the country, even with 2 million vacant homes.[...] In Spain, a bank can go after other assets of the borrower, who remains on the hook for the debt no matter what the price of the house when sold. Still, the same extended liability didn’t stop the Irish from defaulting on home loans as the economy contracted, incomes fell and unemployment rose to 14 percent.
(Bloomberg) May 2, 2012 — From atop the stone walls of Avila, Spain, a medieval city an hour’s drive northwest of Madrid, beyond the parking lots and empty playgrounds and thousands of vacant new apartments, a construction crane can be seen moving on the horizon as building continues.
“Avila isn’t an exception,” said Jesus Encinar, co- founder of Madrid-based Idealista, Spain’s largest property website, and an Avila native. “It’s a small-scale example of the madness that gripped the whole real estate industry.”
In the stages of death of a real estate boom, Spain is still in denial. [...] Spain, Europe’s fifth-largest economy, is the current focus of attempts to contain the region’s sovereign debt crisis, as Prime Minister Mariano Rajoy struggles to quell speculation it will need a bailout. Developers are showing similar optimism. They continue to build even with 2 million homes vacant around the country, new airports that never saw a single flight being mothballed, and property appraisers and banks reporting values have fallen only about 22 percent, said Encinar, who estimates the real decline is probably at least twice that.
[...] On the plain below the central walled city of Avila, a world heritage site and a popular tourist destination, the province with a population of 171,680 has about 19,000 apartments and villas empty or unfinished, according to Borja Mateo, the author of “The Truth About the Spanish Real Estate Market.”
Ministry of Infrastructure figures show 23,419 homes were constructed in the decade through 2007, with another 11,000 homes built there since 2008. The sprawling developments are dotted with thousands of empty parking spaces, while streets have makeshift barriers where the money has run out, others simply end in fields.
Miguel Angel Garcia Nieto, mayor of Avila for the past decade, disagrees that his city has been overbuilt.
“When we approved the first urban plan back in 1998 there was an unprecedented demand for homes,” Nieto said in a telephone interview on April 19. “Yes, there is oversupply at the moment because of the financial crisis and everyone’s gone back home to live with their parents, but it’s not because there is lack of demand. When the economy gets back on track I am confident the supply will be absorbed.”
That may take decades, said Encinar, after Spain’s jobless rate rose to 24.4 percent in the first quarter, the highest in almost two decades and the economy is mired in a recession that the International Monetary Fund predicts will cause it to shrink by 1.8 percent in 2012.
The Spanish real estate bust is the biggest test to date for European authorities with Spain’s economy almost twice that of Greece, Portugal and Ireland combined. Yields on Spain’s 10- year bonds climbed nine basis points to 5.86 percent from April, approaching the level of those countries when they had to be bailed out.
[...] In 2009, Ireland created the National Asset Management Agency, or NAMA, a so-called bad bank. It used bonds to buy commercial real estate loans from the banks with a face value of 74 billion euros for 32 billion euros. That left banks needing capital, leading the state to pour in cash and nationalize five of the six biggest lenders.
[...] “The big knock to the domestic economy was the fact that building and construction totally collapsed and that was over 20 percent of the economy and it was bang, gone completely,’” Finance Minister Michael Noonan said in a speech to a Parliamentary committee on April 25.[...] In the 1970s and 1980s, Spain and Ireland were among the poorest countries in Europe. Following the creation of the euro, both tapped into international money to fuel the growth in their real estate markets.
Prices doubled in Spain in the decade through 2007. Irish house prices more than quadrupled from 1995 to 2005 to an average of 303,247 euros, the fastest growth among 18 countries surveyed by the Paris-based Organization for Economic Cooperation and Development.
“It was avarice,” said James Nugent, managing director of Dublin-based real-estate broker Lisney. “You just had to get as much of it as you could possibly get your hands on. Credit wasn’t a problem, the banks were throwing money at people.”
Former Irish Minister Tom Parlon recalls putting a 2.1 acre site of the state’s veterinary college in Dublin’s embassy belt of Ballsbridge up for sale in 2005. “We thought in our wildest dreams that maybe it might make 100 million euros, which was a crazy price,” he said. “When the bids were opened there was a bid of 171 million euros and the developer was backed up by one of our main banks. That was just a flavor of the madness.”
The site is currently being used by a local luxury car dealer, MSL Ballsbridge Motors, to store vehicles, mainly Daimler AG’s Mercedes-Benz models.
On the northern outskirts of Madrid, near Barajas airport and the Real Madrid soccer team’s training ground, is Valdebebas, a development project under construction covering more than 10.6 million square meters of space. About 5,400 of the planned 12,500 homes have been built and another 2,100 are under construction, according to a spokesman for the project who declined to be identified by name, citing company policy. The development, which belongs to private land owners who pooled their property, is backed by banks including Banco Bilbao Vizcaya Argentaria SA and Aareal Bank AG. (ARL) There are bus tours on Saturday for potential buyers, and an open house of the model homes every Sunday.
“In Spain, there seemed to be an effort to smooth out the pace of activity rather than face the shock, as Ireland did,” said Alcidi. “That means the adjustment is going to take much longer in Spain.”
At the height of their respective real estate booms, construction accounted for more than 20 percent of the economies of both Spain and Ireland. In Spain, the figure is now about 14 percent, according to Alcidi. In Ireland, the figure is just 5 percent.
Both booms also were fueled by [Government] incentives. In Ireland, the government gave investors tax breaks to build in certain areas, and granted homeowners breaks on their interest payments. In Spain, there were incentives for municipalities to approve land for development because they could keep 10 percent of all the land they reclassified. The towns would get revenue from the developments and they could use the land they acquired as collateral for loans, said Encinar.
About 230,000, or about two-thirds, of Irish construction jobs have gone since 2007. Home building will hit an all time low this year, with just 1 house per 1,000 people being built, compared with 15 in the 2000s, according to the Society of Chartered Surveyors Ireland.
“It was a mania,” said Parlon, the former Irish government minister who now heads the Construction Industry Federation. “You could say the government was drunk on the revenue that was coming from all the construction taxes.”
[...] In all, about 15 percent of Irish homes were vacant in 2011, the country’s statistics office. About 20 percent of office space in Dublin is vacant.
[...] “It took 20 centuries for the center of Avila to be developed, and in the last 10 years they’ve developed twice that amount,” said Natalio Encinar, a brother of Jesus Encinar who still lives in Avila. Until demand collapsed, “the main industry here was building houses. And plumbers made more than engineers.”
And a few links from Mish, in chronological order:
- Hopeless Situation in Spain: New Wave of Defaults as Home Prices Crash; Bad Loans Highest Since Oct '94
- Eight of Ten Largest Stocks in Spanish Ibex Index Below Liquidation Value; Madrid Rejects Regional Budgets Representing 32.5% of GDP; Treasury Warns of "Immediate" Intervention
- Spain Long-Term Debt Lowered to BBB+ from A, With Negative Outlook; 100% Certain Conditions in Spain Worsen
- Depression in Spain: Unemployment Rate Up .5 Percentage Points to 23.6%; Expect Much Higher Rates Later This Year; When is the Breaking Point?
- Bank of Spain Confirms Foreigners Dump Spanish Bonds; Spanish Banks Foolishly Load Up
- Spain to Spend €7bn-€10bn (It Doesn't Have), Bailing Out Bankia, the Nation's 3rd Largest Bank
- Top Tweet in Spain "Do as Iceland Did"
- Audit Shows Spain's Bankia Short 3.5 Billion Euros; PP says "We Must Help Bankia, It Has Deposits for 10% of GDP"
- Spain Nationalizes BFA and 45% of Bankia; No Bid for CatalunyaCaixa, Bank Worth Less Than Zero; Der Spiegel: Germany Fears "Bottomless Pit"