How bad will things get in Spain?

I recently received an email with an article that you may find interesting. From comes this, “Spain: The Hole In Europe’s Balance Sheet “. It makes for a depressing read, but much of it makes very good sense:

“We believe that Spain is a disaster waiting to happen [and] is set for a long, painful deflation that will manifest itself via a very high unemployment level for an industrialized economy, a real estate collapse and general banking insolvencies… Spain had the mother of all housing bubbles. To put things in perspective, Spain now has as many unsold homes as the US, even though the US is about six times bigger. Spain is roughly 10% of the EU GDP, yet it accounted for 30% of all new homes built since 2000 in the EU. Most of the new homes were financed with capital from abroad, so Spain’s housing crisis is closely tied in with a financing crisis… Spanish banks, in our view, are now facing a very bleak outlook. Spain’s unemployment rate reached over 17%; there are now four million unemployed Spaniards and over one million families with not a single person employed in the family. “

Read the full article here, and let me know what you think…

70 thoughts on “How bad will things get in Spain?

  1. Bill (Legazpi)

    @Moscow. Interest rates have everything to do with currency values. If a currency’s interest rate goes down then it becomes cheaper to borrow in that currency, so the supply of that currency to the market is increased, and the value of that currency goes down. On the other hand if interest rates go up, then it becomes more attractive to hold that currency so the supply of that currency is decreased, and the value of it increases. The two are directly related.

    Furthermore the state of a nation’s economy is directly linked to the money supply. If the economy is strong then the money supply increases, which is inflationary, so the central bank will increase interest rates in order to reduce the money supply and control inflation. When the economy is weak, then the money supply goes down, so the central bank reduces interest rates. This is pretty basic and fundamental stuff.

    Of course it does not always work like that. Sometimes governments increase the money supply too much, in an attempt to avoid making structural changes (which is what I think you are talking about) and that results in a weak economy and high inflation at the same time. However if that happens then the government will find it harder to sell its debt on the bond market, will have to pay more interest on its bonds, and will face the choice of making structural changes anyway, or going bust. The bond markets hold a lot of power over how governments behave. In the case of Spain however, having the euro as its currency did not prevent its credit rating from being dropped from AAA to AA+ earlier this year. This makes it harder for Spain to sell it’s debt (i.e. gain eccess to credit).

    However you soon might not have to take my word for all this. If euro interest rates start to rise before the Spanish economy picks up, then all those unemployed Spaniards are going to watch their mortgage payments shoot up, while their incomes remain low. Furthermore if Spanish banks refuse to lower house prices then they will become even more unaffordable and the whole economy will grind to a halt.

  2. moscow

    Bill, thanks for the lecture, but I am an economist and plainly I don’t need it. Also precisely because I am economist I have grown to dislike the language of economics, and the banalities that it tends to masquerade. Of course, interest rates are related to the value of a currency, but I use crude brushes at times. What I am trying to say is that a currency devaluation is no good for Spain in the long term. And when you point out that Central Banks slash interest rates to combat the crisis, I say that this is unrelated to currency devaluation, for the simple reason that all Gov’s slashed interest rates, thus the effect on currencies is nil. If only one Gov’ reduces rates vis-a-vis all others then that would tend to devalue it’s currency vis-a-vis these others (and not necessarily so), but since they all have done that, there hasn’t been much change in how currencies correlate to each other. The Pound has fallen with respect to the Euro and the $, but that has something to do with the size of the British economy – and other issues related to that -, and in the long-term I expect the Pound to continue falling against the Euro (even if temporarily it could rebound upwards) – as more and more countries join the Euro. But all this has little to do with Spain. Spain needs supply-side reforms, which are painful, unpopular and sometimes slow to produce results. But there is absolutely no option. Essentially, I don’t believe in monetary economics, they are not the cause of the crisis (human greed is) but they have multiplied the effect. If everybody had had less confidence in A. Greenspan and his miserable tinkering of interest rates, perhaps the mess might have been smaller. Keep a reasonable interest rate, not too high not to low, make Central Banks keep an eye on inflation, but all this monetary tinkering and fluffing around is just a charade.
    In reality we don’t need all these currencies. They are just another instrument for national states to keep control over their own domain. Europe is doing the right thing. The only real loosers are the currency dealers.

    If Euro rates start coming up before the Spanish economy picks up…..unlikely, think a bit. If they go up that is because the German and French economy are on a growth path again. Wouldn’t you think that this will have an effect on the Spanish economy? After all these 2 countries are Spain’s main export markets. You like to write as if you understood economics, but apart from having picked a few standard ideas I am afraid you don’t have the imagination to think beyond a few banalities. Good effort, though.

  3. bill (Legazpi)

    @Moscow. You wrote “I am not sure I follow. Perhaps, you are yourself a bit confused. What has the slashing of interest rates got to do with currency rates?”. I simply provided an explanation at a level that was appropriate for such a question. You like to call yourself an economist, but the fact that you ask such a question and seem unable to construct an economic argument without throwing in personal jibes suggests that you are not one to be taken too seriously.

    Personally I think that there is a very good argument for the euro in that it is not linked to a particular government/state, and therefore it is not prone to being tinkered with by one particular set of politicians (or their cronies). I don’t like the way exchange/interest rates get tinkered with either (yes I do use the terms interchangeably – any reason why not to?), but that’s because I think interest rates matter. Since you appear not to think they matter that much then I can’t see why you’d be that bothered by such tinkering.

    As I’ve already mentioned, the problem I see is that the economies that belong to the eurozone are not sufficiently synchronised to warrant them having the same interest rate. Of course those economies are linked to an extent, but that the fact that, for example, Germany went into recession in 2002 when the Spanish economy went shooting off into the distance shows that they don’t all move in the same direction, and at the same time.

    PS I know that exchange rates are a zero sum game, but that doesn’t stop them from fluctuating. And I agree that Spain could do with supply side reforms, but other countries have managed such reforms without currency pegs.

  4. Dan

    On Wednesday as part of his opening speech in the debate in parliament, Zapatero said that if he wanted to “resolver el estancamiento del sector inmobiliario es necesario para adelantar la recuperación y para reordenar nuestro modelo productivo”. Yes, he’s going to try and blow up the housing bubble again.

    This is after various budget cuts, one of which was R & D.

    This crisis isn’t going to get solved any time soon, certainly not by the government. They’re more interested in flogging a dead horse and borrowing enormous amounts of money to do it.

    By the way, about the comment about 1994 above (banks hiding losses and waiting to sell off repossessed properties at a profit when the market finally picks up), it’s not going to happen again because it’s not going to be as easy for Spain to get credit in the future. Who’d want to invest in a country already up to its eyeballs in debt and with 25-30% unemployment (as shown by Eurostat, not the INEM’s figures which are dubious at best)?

  5. MrMark

    Dan – There are actually quite a few international companies (mainly US) that are investing in Madrid in the IT field. Far easier to get a good European based DBA there (and pay just 30.000 Euros a year instead of say 50.000 pounds in the UK); in fact I know of IT guys from the UK who’ve gone there for the experience. Now this in itself may not be enough to make a major dent in the unemployment figures – but Spain had high unemployment in the 80s too (so did the UK if I recollect). That in itself does not hinder investment. There are just as many talented people in the Spanish population as in other countries. As for debt – this is indeed a problem as we in the UK will find out. Funnily enough, one of the most indebted nations in the public field is Germany, but I’m sure they’ll manage to pay back their debt somehow!

  6. Dan

    Maybe foreign companies will pay 30,000, but home-grown ones certainly aren’t. After my project finished in July there’s been precious little to speak of although there are some adverts appearing now but it’s the same story (‘solo tenemos presupuestado hasta 21 mil’). And multinationals will also start to think about salary cutbacks when demand falls in the Spanish market.

    Yes there are just as many talented people in Spain as in other countries, and just like in other countries they can emigrate, and anyone with an ounce of common sense and 3+ years of experience under their belt certainly will with these salaries.

    As for debt, borrowing as if money is going out of fashion to try and resuscitate a dying housing market and spend on Plan E (re-laying cycle paths, repainting roads and building roundabouts) is just a way wasting money. If they were spending the money on infrastructure that would be useful in the future then that would be different. As it is we’ve got precious little to show for it and tax rises on the way to try and pay for it, which will lower internal demand even more.

    (By the way, in case it wasn’t clear in my previous post about 25-30% I was talking about the near future, somewhere between 1-2 years.)

  7. Moscow

    @Bill, Thanks for your reply. Nice to see you are still answering despite the jibes. I am seriously not much concerned at all if I am not taken seriously here. I am not writing an essay or giving a speech at a conference. Only writing on a blog (no offence to the bloggist).

    I disagree when you say that European economies are out of sync. The fact is, despite some lags and lapses (like the one pointed out by you) European economies are very much in sync. The Economist had an article a year ago about this (sorry for quoting) in which it almost wrote something like an apology, because after years of using the argument ‘one-size-does-not- fit-all” it realised it proved to be not much of an argument (given the actual evidence). The one economy that tended to be out of sync was (what a surprise) Britain.

    I am glad to read you agree Spain needs structural reforms. Perhaps, you could pass that knowledge on, and with a bit of luck it might one day reach ZP. He is actually the only one who hasn’t realised yet. Even prominent in his own government already have. Some had to leave. Others are keeping mum.

    I expect trouble ahead for Spain. Perhaps, Spaniards are getting what they deserve, but it is a sad feeling, nevertheless.

  8. acosta

    Well Spanish politics seems like all politics, well except spanish. How’s that for a true’ism.

    Yet I don’t see the PP proposing any real substinative changes economics wise rather than just not being the PSOE or an oppsosing force.

    Interesting comments with respect to the ZP government.

    Course in the US many think we are in for a serious second round of a foreclosures of Mortgages…….and some are quite worried we could have a serious round of inflation coming…..

    vamos a ver

    quiero quedar un optimista

  9. Bill (Legazpi)

    @Moscow. As someone who works in Madrid, owns a flat in Madrid, and gets paid in euros, I hope the euro works out. I just have my doubts. If it turns out that the one size does stretch enough to fit all the economies then I’ll happily eat my hat.

    I would also like to see the Spanish housing market crash, the Spanish banks get burnt, and many other “inefficiencies get flushed out of the system” so the Spanish economy might start rewarding people/companies for their innovation rather than enchufe. If membership of the euro achieves that then again I’ll happily eat my hat.

    In a way I would like to see Germany come out of recession before Spain, for euro interest rates to go up, and for the Spanish government to get forced into taking drastic action. My fear is that whoever is in power simply won’t take sufficient action, and the pain will be too much to bear. If the euro hadn’t been such a rush job, with countries rushing (and some now even being forced) into it before they’re ready then I wouldn’t be so skeptical.

    Regarding ZP – I think pretty much the same can be said for Gordon Brown. Both seem obsessed with how they spend other people’s wealth rather than how other people’s wealth is created. However I doubt either of them will be in power for very long.

  10. moscow

    @Bill, in the long-term I am optimistic. I do realise that changing the ‘enchufe’ culture could take decades, if ever. But the reforms will come, perhaps, not all at once, but bit by bit. I am not a fan of the PP – I dislike the whiff of reactionary conservatism the party exudes – but right now, even someone as happless as Rajoy is a better option than ZP. I am hoping for early elections.

    I do believe that would Spain step out of the Euro, not only would reform not happen, the country could slide backwards and become something like Argentina. And that was my last word on this issue.

  11. Johnny

    another reason why people might not buy is that renting is now a great option.
    We arrived here in southern spain in feb this year and rented a fine house with three bedrooms, lovely views from the teracce right in the middle of a pueblo blanco in sight of the sea.

    all this for €6000 a year! Anda! Bills such as Endesa, telefonica make up about €100 per month.

    I keep thinking, “Why do I need to BUY anything?”

    I originally rented for a year with a view to buying somewhere. Now I have rolled it over for another year at the same price and the landlord is dancing down the calle.
    He’s happy, I’m happy.

    All I gotta do now is get a job……..

  12. Tom

    @Dan – not all Spanish companies are slashing wages, you know. In many cases, €30K is far less than someone doing similar work would expect in the UK or France… but it’s not that rare a thing here. The problem industries (those linked to speculative construction, for example) are suffering major repercussions in this recession. Other industries are seeing a slight downturn. Respectable Spanish companies in that second category are still hiring and still paying their staff a decent wage.

  13. Bill (Legazpi)


    I work in IT in Madrid, and earn about two thirds of what I would earn in London as a full time employee. Of course it depends on the exchange rate, but generally When I take into account the lower living costs in Madrid, etc there isn’t that much difference in the overall standard of living. So I agree that Madrid can be attractive to IT workers from the UK who wish to try something different.

    However where the Uk has a clear advantage for both employers and employees is in the freelance market. In the UK it is quite common for IT workers to go freelance, which not only allows them to earn considerably more money, but also provides them with a bit more flexibility. Companies also like freelancers because they tend to offer the appropriate skills for the job at hand, without demanding the same level of job security as permanent employees do.

    It’s a situation the next Spanish government should really look into improving. At the moment it is possible to become freelance (autonomo) in Spain, however the process is very bureaucratic and the employment culture in Spain doesn’t seem to promote it. There’s no freelance market. For various reasons, the Spanish job culture tends to value job security over flexibility. I’ve worked with some really talented and professional Spanish developers who, given the chance, would make fine freelancers, offering really good services to Spanish companies and being rewarded appropriately. However the current system makes it more beneficial for them if they just stay with the same company, regardless of whether their skills are still needed.

  14. Tom

    @Bill – looking at what you’ve described from another angle, you could say: IT pros in Spain find it easier to get a permanent contract and stay in one job than in the UK, where many people are forced to freelance, meaning little job security when the economy dips….

  15. Pippa

    @Bill: I hope your hat is from an edible material.
    Spain will not leave the euro. In addition to the economic reasons, there is the recent Spanish history: Spain has been trying to be very European for the last 30 years and is not going to leave the euro system in a hurry.

  16. Rai

    @Tom: you forgot to add: “…when the economy dips, but which still leaves them free to outperform their peers, and which promotes innovation in the field in general.”
    Flexibility in the market tends to improve its ability to advance towards accepting new technologies more quickly – a vital part of IT.

  17. bill (Legazpi)

    Just noticed some comments here…

    @Tom – ideally I think you need a good mix of flexible freelancers and stable permies within the job market. However Spain currently has a mixture of stable permies who add a lot of value to a company and stale permies stuck in boring jobs, but who daren’t leave their company and move on.

    @Pippa – I didn’t say Spain would leave the euro, I simply said that Spain will not not come out of recession at the same time as Germany and France, and that the Spanish economy will be further damaged by having inappropriate interest rates.

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