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The Never Ending Dilemma of Spanish Banks

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The Never Ending Dilemma of Spanish Banks

I think it was Sheeraz Raza that found the headline for this:

Spanish Banks Merge As Lost Decade Looms

A much better headline than I ever could have made.

The point is however that it points in a slightly other direction than was my original intention; but you pick cherries where cherries are, so let me enlarge on that post.

–          In Spain about half the younger people never leave home! They still live with their parents when they are 30 years – women to a slightly lesser extend; but the picture is the same there.

–          There is around 1½ dwellings pr.  household in Spain. There is thus not terribly more housing than could usefully be employed.

–          The unemployment in Spain – especially among the young is very large, so there is not a very great ability to set up a household.

The problem that the Spanish banks face is that they might take over more and more real estate (at atrocious prices to keep the illusion of a living bank alive), but what are they going to do about it?

Sell the property? To whom? At those prices? That is not a proposition to be taken seriously.

So they will have to form real estate rental companies. Splendid idea; but to whom are they going to let the houses and apartments? The out of work nest dweller? I don’t think so – not at a rent even approaching servicing the debt of the bank owned property manager. In fact it remains doubtful if the rent revenue can even pay the upkeep of the real estate – all the minor repairs, removal of junk mail, painting over of graffiti.

But that is the level rent will drop to – the simple upkeep. The sales value of that property is totally lost – or rather entombed in a dead bank – which is the same thing,

We saw something similar in Germany after the end of WW2, where nobody could afford to build – and there was a massive housing shortage. The German position was somewhat better however, as there was lots of hard working (and eventually well earning) tenants. But even today the typical German does not own his/her dwelling – partly because the banks have been less frivolous and you have to put down about 20% of the price in cash – before we can even discuss financing.

The thought of not owning your home is abhorrence to the self conscious “Because You Are Worth It!!!” generation (to quote a cosmetics advertisement).  Now pity is not the first emotion that springs to mind concerning the Germans in this point in history. What is wrong with renting your abode? It is a matter of taste, but I can’t say I find any prestige in living 4 persons in two rooms in the center of a city hopelessly in debt. The point being, that the Spanish housing market will never “get back on its feet” – the German never really did – and they somehow survived. True Germany received a lot of help from the USA to rebuild their factories – something they acknowledge to this day; that help did not go into luxuries.

You can tear down some housing, as they did in Sweden about 20 years ago (when their banks had fallen flat on the face). There might be an argument for some condemnation; but not 1/3 of Spain’s houses? That is about the percentage of housing lost in West Germany WW2. The realistic figure I have heard of in Denmark is about 20.000 dwellings that are simply to dilapidated to be fit for human habitation – or less than 1% of the housing. And there both condition and location is wrong.

No the problem of overdeveloping will never go away – or fall apart.

Houses do have a tendency to stay where they are.  The other thing about old houses – the ones build in substandard quality, they have been torn down years ago. Spain had the civil war before WW2, but has since then avoided major devastation (nothing like a good massive bomber raid or prodigious artillery shelling to help developers).

Major disasters cast a very long shadow indeed. After the destruction of Copenhagen (about the same time those nasty Brits smashed Washington) a couple of hundred years ago the real estate bond was made the way real estate was financed. It took concerted, decisive and persistent actions of singular stupidity and tenacity from the banks to destroy the Danish real estate bond; but they succeeded!

In Spain’s case we can with some confidence say that their banks will never rise again. As in Japan the property will be locked in state ownership – in a steady stream of losses. These losses will be covered by taxing the pensioners – that is only way. The pension funds have long time ago fled the country with their investments – to the extend any of them have a mere mediocrity managing them.

So we are not talking a lost decade – a loss is much more permanent.

A Spanish economy will have to be reconstructed around lower wages and lower prices – that should be doable considering that housing cost will decay into something like the maintenance cost. The encouraging aspect is that sarcophagus of the banking system is not that likely to entomb the radioactive waste like it does in Japan. Bankia is already the largest Spanish bank. This means the future is more an active state ownership of the banks – instead of the Japanese “solution” where the banks are supplied with cheap credit to finance their lost assets.

It is likely that Spain would drag herself down into the gutter of a Japanese solution. But being in the Euro and with a constant need to refinance a deficit the Spanish government will be under administration of their creditors. Let’s see what happens to Greece, if they leave the Euro – they will have to have a positive trade balance.

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