Spain is a catastrophe [of major proportions and] to fully understand [why that is the case] we need to understand Spain in the context of both the EU and the global financial system. [Once you read what I outline below you will more fully understand why] I believe that the EU, in its current form, is in its final chapters. Whether it’s through Spain imploding or Germany ultimately pulling out of the Euro, we’ve now reached the point of no return: the problems facing the EU (Spain and Italy) are too large to be bailed out! Words: 1345
So says Graham Summers (http://gainspainscapital.com/) in edited excerpts from his original article*.
Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has further edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.
Summers goes on to say, in part:
The headline economic data points for Spain are the following:
- Spain’s economy (roughly €1 trillion) is the fourth largest in Europe and the 12th largest in the world.
- Spain sports an official Debt to GDP of 68% and a Federal Deficit between 5.3-5.8% (as we’ll soon find out the official number)
- Spain’s unemployment is currently 24%: the highest in the industrialized world.
- Unemployment for Spanish youth is 50%+: on par with that of Greece
Why is Situation So Bad in Spain?
On the surface, Spain’s debt load and deficits aren’t too bad. So we have to ask ourselves, “Why is unemployment so high and why are Spanish ten year bills approaching the dreaded 7%?” (the level at which Greece and Portugal began requesting bailouts). The answer to these questions lies within the dirty details of Spain’s economic “boom” of the 2000s as well as its banking system.
1. Spanish Property Bubble
For starters, the Spanish economic boom was a housing bubble fueled by Spain lowering its interest rates in order to enter the EU, not organic economic growth. Moreover, Spain’s wasn’t just any old housing bubble; it was a mountain of a property bubble (blue line below) that made the U.S.’s (gray line below) look like a small hill in comparison.
In the U.S. during the boom years, it was common to hear of people quitting their day jobs to go into real estate. In Spain the boom was so dramatic that students actually dropped out of school to work in the real estate sector (hence the sky high unemployment rates for Spanish youth).
Spanish students weren’t the only ones going into real estate. Between 2000 and 2008, the Spanish population grew from 40 million to 45 million (a whopping 12%) as immigrants flocked to the country to get in on the boom. In fact, from 1999 to 2007, the Spanish economy accounted for more than ONE THIRD of all employment growth in the EU. This is Spain, with a population of just 46 million, accounting for OVER ONE THIRD of the employment growth for a region of 490 million people.
2. Spanish Banking System Crisis
This, in of itself, set Spain up for a housing bust/ banking Crisis worse than that which the U.S. faced/continues to face. Indeed, even the headline banking data points for Spain are staggeringly bad:
- Spanish banks just drew €227 billion from the ECB in March: up almost 50% from its February borrowings
- Spanish banks account for 29% of total borrowings from the ECB
- Yields on Spanish ten years are approaching 7%: the tipping point at which Greece and other nations have requested bailouts
As bad as these numbers are, they greatly underestimate just how ugly Spain’s banking system is. The reason for this is due to the structure of the Spanish banking industry.
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Spain’s banking system is split into two tiers: the large banks (Santander, BBVA) and the smaller, more territorial cajas.
The Cajas: The caja system dates back to the 19th century. Cajas at that time were meant to be almost akin to village or rural financial centers. As a result of this, the Spanish country is virtually saturated with them: there is approximately one caja branch for every 1,900 people in Spain. In comparison there is one bank branch for every 3,130 people in the U.S. and one bank branch for every 6,200 people in the UK.
Now comes the bad part…
Until recently, the caja banking system was virtually unregulated. Yes, you read that correctly, until about 2010-2011 there were next no regulations for these banks (which account for 50% of all Spanish deposits). They didn’t have to reveal their loan to value ratios, the quality of collateral they took for making loans… or anything for that matter.
As one would expect, during the Spanish property boom, the cajas went nuts lending to property developers. They also found a second rapidly growing group of borrowers in the form of Spanish young adults who took advantage of new low interest rates to start buying property (prior to the housing boom, traditionally Spanish young adults lived with their parents until marriage).
In simple terms, from 2000 to 2007, the cajas were essentially an unregulated banking system that leant out money to anyone who wanted to build or buy property in Spain.
Things only got worse after the Spanish property bubble peaked in 2007. At a time when the larger Spanish banks such as Santander and BBVA read the writing on the wall and began slowing the pace of their mortgage lending, the cajas went “all in” on the housing market, offering loans to pretty much anyone with a pulse.
To give you an idea of how out of control things got in Spain, consider that in 1998, Spanish Mortgage Debt to GDP ratio was just 23% or so. By 2009 it had more than tripled to nearly 70% of GDP. By way of contrast, over the same time period, the U.S. Mortgage Debt to GDP ratio rose from 50% to 90%. Like I wrote before, Spain’s property bubble dwarfed the U.S.’s in relative terms.
The cajas went so crazy lending money post-2007 that by 2009 they owned 56% of all Spanish mortgages. Put another way, over HALF of the Spanish housing bubble was funded by an unregulated banking system that was lending to anyone with a pulse who could sign a contract.
Indeed, these banks became so garbage laden that a full 20% of their assets were comprised of loan payments being made by property developers. Mind, you, I’m not referring to the loans themselves (the mortgages); I’m referring to loan payments: the money developers were sending in to the banks.
To try and put this into perspective, imagine if Bank of America suddenly announced that 20% of its “assets” were payments being sent in by borrowers to cover mortgage debts. Not Treasuries, not mortgages, not loans… but payments being sent in to the bank on loans and mortgages.
This is the REAL problem with Spain’s banking system. It’s saturated with subprime and sub-subprime loans that were made during one of the biggest housing bubbles in the last 30 years.
Indeed, to give you an idea of how bad things are with the cajas, consider that in February 2011 the Spanish Government implemented legislation demanding all Spanish banks have equity equal to 8% of their “risk-weighted assets.” Those banks that failed to meet this requirement had to either merge with larger banks or face partial nationalization.
The deadline for meeting this capital request was September 2011. Between February 2011 and September 2011, the number of cajas has in Spain has dropped from 45 to 17.
Put another way, over 60% of cajas could not meet the capital requirements of having equity equal to just 8% of their risk-weighted assets. As a result, 28 toxic caja balance sheets have been merged with other (likely equally troubled) banks or have been shifted onto the public’s balance sheet via partial nationalization.
On that note, I fully believe the EU in its current form is in its final chapters. Whether it’s through Spain imploding or Germany ultimately pulling out of the Euro, we’ve now reached the point of no return: the problems facing the EU (Spain and Italy) are too large to be bailed out. There simply aren’t any funds or entities large enough to handle these issues.
* http://gainspainscapital.com/?p=1697 (To access the articles please copy the URL and paste it into your browser.)
Editor’s Note: The above article may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
On the surface, Spain’s debt woes have many things in common with those of Greece – bad age demographics and a toxic bank system – but you’ll note that, as we tackle each of these, Spain is in fact in far worse fiscal shape than Greece. [Let’s take a look.] Words: 700
Spain is an absolute disaster on a level that [it seems] few, if any, analysts can even grasp. [Let me try to.] Words: 428
I continue to see articles in the media claiming that Europe’s problems are solved. Either the folks writing these articles can’t do simple math, or they don’t bother actually reading any of the political news coming out of Europe [so let me present 3 data points that guarantee Europe will collapse at some point in the near future]. Words: 722
In this article I lay out precisely why the coming Crisis in Europe will be THE Crisis I’ve been forecasting for the last 24 months, why it will have dire consequences on the U.S. and why the Fed can do absolutely nothing to stop it this time round. Words: 1334
On the surface things may appear to be calm, but I don’t think the European crisis is anywhere near its conclusion. Losses still have to be taken from Ireland, Spain, Portugal and possibly even Italy…There are a number of ways out of Europe’s problems. One of them is higher inflation…[which] is going to be very positive for gold… because the central banks will be under pressure to print.
When the supply of something is increased sharply relative to demand, the value of that commodity will decline. If the supply continues to increase rapidly and indefinitely, then that item will become worth less and less, with the potential to finally become nearly worthless. This is the Developing Disaster facing the US Dollar and the world. This is the factor that could become the single most important criterion in investment allocation decisions and possibly even for individual financial survival…[Let me explain this further by reviewing the 7 major problems facing the U.S. (and thus the world) and how they all will lead to problem #7 – devolution.] Words: 1520
The European economic situation is explained very simply in the illustration below. Take a look.
The International Monetary Fund wants the rules of the IMF changed so it can lend directly to banks and underwrite a rescue of the Spanish financial system without increasing Spain’s government debt. If the IMF is permitted to do so, however, the banking system’s control would pass to the IMF and such an increase in powers would be momentous. Here’s why. Words: 755