The hit from Spain’s property bust has left savings banks, which account for close to half of Spain’s banking business, unable to provide credit to the economy.
The hit from Spain’s property bust has left savings banks, which account for close to half of Spain’s banking business, unable to provide credit to the economy. That, combined with soaring unemployment tied to builders being left with nothing to build, has left Spain’s economy as key European underperformer.
According to data released Tuesday, the purchase managers’ index for Spain’s services sector dipped back to negative territory in March, to 48.7, from 50.8 in February, indicating a decline in activity. That compares with a rise in the overall services PMI for the euro zone, to 57.2 from 56.8 in February.
All of this comes as the property sector remains underwater. In the first quarter, Spanish property prices dropped by 5.1% from the same period last year, a faster pace than the 3.4% fall posted in the last quarter of 2010, data compiled by IESE business school shows.
In part, that is due to the expiration of some tax breaks for property purchases on Dec 31. But even if new tax breaks were approved—which is unlikely as the government scrambles to maximize revenue and lower budget deficit to 6% of gross domestic product this year from over 9% last year—the housing glut works against a recovery in prices.
Spain, with a fast-aging population of 47 million, has between one and two million of empty homes, and just over 400,000 homes were sold in the whole of last year, according to Spain’s statistics institute, INE.
As the European Central Bank is widely expected to hike interest rates later this week, the worry is that property prices will drop for a while more. And that is exactly what the banks, which already require around €15 billion to recapitalize themselves this year according to the Bank of Spain, don’t need.
Last month, when Moody’s Investors Service cut Spain’s debt rating to Aa2 with a negative outlook, from Aa1, it cited the hole left by property losses in banks’ balance sheets as a key reason.
Moody’s believes that, under the Bank of Spain’s own rationale, the banks may need €40 billion-€50 billion; in a more stressed scenario, funding requirements could soar to approximately €110 billion-€120 billion.
Moody’s analysts said that this is because they anticipate a 30% drop in peak-to-trough property prices in Spain, in line with similar trends seen in bust-afflicted countries like the U.S. and the U.K. They declined to provide an estimate of where we are now exactly, but official figures show a decline of around 15% from the peak level.
Thus, Spain’s government finds itself in a paradoxical situation—hoping that its own numbers are wrong, and some private sector estimates of a 20%-plus drop in prices from the peak, which would imply a price rebound is due any quarter now, are closer to the mark.
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