The economic situation in Spain

[Stephen]

Luis Garicano from the London School of economics has written a piece in the Guardian on Spain's economy. Here are the first few paragraphs and a link to the whole article:

Spain is facing a credibility crisis. Property prices are crashing, wiping out a large part of many families' wealth and leaving banks with billions of euros in loans, which look increasingly risky in a country where up to 1.5 million houses appear unsaleable.

Unemployment is more than 4 million and rising sharply. It's clear that what once appeared to be solid public finances were nothing of the sort but were in fact an illusion based on bloated and unsustainable revenues from a property boom.

But Spain's credibility problem isn't just economic – it's political. For if it is to win back the trust of the markets it needs to show that it can diagnose the extent of its financial problems, take the necessary measures to correct them and find the national willpower to carry them out. http://www.guardian.co.uk/commentisf...ic-price-crash

He writes a regular blog (in Spanish) on economic matters at http://nadaesgratis.es/

[greytop]

I'll bet they are glad we guiris are pouring our pensions into the economy now.
There seem to be a lot more orchards and fields standing untended as well so, subjectively speaking, the agricultural sector seems to be also going sour.
Not all is gloom though. They have secured a high tech space research facility for Valencia Uni. The ceramics manufacturers seem upbeat as well and are selling more abroad. Spanish food is getting more popular in China. These type of news items tend to get 1 column cm whereas the bad news gets the front page.
On the property front - an American from Mojacar was being interviewed this morning on the radio. He says he's selling houses at about half what they cost 3 years ago, so people looking for bargains may start to acquire their dream home in the sun & give that market a bit of a boost. Just tough for those of us who have one!

[ribeirasacra]

Shhh do not talk about the crisis as Spain's National Intelligence Centre (CNI) is currently investigating everything written in the UK press.
http://www.guardian.co.uk/world/2010...pain-recession
Next the blame will move to forums written in English.

[Stephen]

Originally Posted by greytop

On the property front - an American from Mojacar was being interviewed this morning on the radio. He says he's selling houses at about half what they cost 3 years ago, so people looking for bargains may start to acquire their dream home in the sun & give that market a bit of a boost. Just tough for those of us who have one!

If you're not coming back to Blighty to live then isn't it a case of no te importa?

There's a view isn't there that Spanish house prices haven't hit bottom yet due to the banks holding onto property they own and not releasing it into the market. They're waiting for prices to rise but if they despair of that happening and look to cut their losses then supply and demand could mean prices falling a lot further.

[greytop]

Originally Posted by Stephen

If you're not coming back to Blighty to live then isn't it a case of no te importa?

Even if you are going back and IF you can sell, you may get back your sterling. The lower price is somewhat offset by the exchange rate.

There's a view isn't there that Spanish house prices haven't hit bottom yet due to the banks holding onto property they own and not releasing it into the market. They're waiting for prices to rise but if they despair of that happening and look to cut their losses then supply and demand could mean prices falling a lot further.

Pass the crystal ball

[Stephen]

Originally Posted by greytop

Even if you are going back and IF you can sell, you may get back your sterling. The lower price is somewhat offset by the exchange rate.****


Pass the crystal ball

Don't many homes on the costas just change hands from one Brit to another? People looking to buy with their pounds changed into euros presumably in many cases are having to settle for a less desirable property than they would have gone for a couple of years ago due to the falling pound.

That must put downward pressure on prices of houses.
Although I can see how that's balanced for the would-be buyer by the price drop in the Spanish housing market.

[Legazpi]

Originally Posted by Stephen

...

There's a view isn't there that Spanish house prices haven't hit bottom yet due to the banks holding onto property they own and not releasing it into the market. They're waiting for prices to rise but if they despair of that happening and look to cut their losses then supply and demand could mean prices falling a lot further.

It's not so much a "view" as the truth, well at least here in Madrid where within 500m of my house there are several new build blocks that have been sitting mainly empty for well over a year, and with ownership having passed from the developers to the banks. They have been released to the market, but the prices are so high they simply won't sell. I think it's a case of the banks not wanting to mark their debts to market rather than hoping for the market to rise. They try to do "special offers" and such in an attempt to sell them cheaply, while trying to give the impression that the "real" value of the property on their books is much higher.

[Legazpi]

Originally Posted by Stephen

Luis Garicano from the London School of economics has written a piece in the Guardian on Spain's economy. Here are the first few paragraphs and a link to the whole article:

Spain is facing a credibility crisis. Property prices are crashing, wiping out a large part of many families' wealth and leaving banks with billions of euros in loans, which look increasingly risky in a country where up to 1.5 million houses appear unsaleable.

Unemployment is more than 4 million and rising sharply. It's clear that what once appeared to be solid public finances were nothing of the sort but were in fact an illusion based on bloated and unsustainable revenues from a property boom.

But Spain's credibility problem isn't just economic – it's political. For if it is to win back the trust of the markets it needs to show that it can diagnose the extent of its financial problems, take the necessary measures to correct them and find the national willpower to carry them out. http://www.guardian.co.uk/commentisf...ic-price-crash

He writes a regular blog (in Spanish) on economic matters at http://nadaesgratis.es/

In one paragraph he writes:

"So it sounds superficially plausible to argue that Spain is over the worst of the crisis – but this ignores some deeper truths. One is the cost of getting the financial sector back on track after it has absorbed the cost of defaulted loans. The next is, of course, unemployment – which could quite feasibly, on recent experience, reach 5 million in Spain and stay at that level for a decade."

[MrMark]

Originally Posted by Legazpi

In one paragraph he writes:

"So it sounds superficially plausible to argue that Spain is over the worst of the crisis – but this ignores some deeper truths. One is the cost of getting the financial sector back on track after it has absorbed the cost of defaulted loans. The next is, of course, unemployment – which could quite feasibly, on recent experience, reach 5 million in Spain and stay at that level for a decade."

He also writes some more positive stuff:

The government argues that foreign banks and media don't understand Spain and are envious of what they argue are relatively healthy finances. They point out, for instance, that forecast debt to the end of 2010 is only 66% of GDP and that Spanish banks have needed almost no public funds to rescue them.

and

Moody's has recently reaffirmed its AAA rating, and public debt ratios remain among the lowest in Europe.

Spain is reliant to some extent on other economies recovering. For example Germany is its biggest export market, and of course tourism is a big currency earner. So things will continue to be hard whilst other countries are also struggling in the recession.

[expatsinspain]

From what I`ve been reading in the past couple of days consumer spending in Spain has improved for the first time in two years of recession. Real estate is a major sector holding the economic recovery back though.

It also seems that the banks in Spain are still reluctant to lend to small businesses (similar to the attitude towards small business that the banks in the UK display, only much worse).

[Culebronchris]

Am I the only one that finds all this economics stuff a bit strange?

It's dead obvious that things are bad. The tyre shop up the road has gone, the newspaper kiosk closed down, house prices have tumbled and every second person seems to be out of work. For me, and I suspect for most other people that's how we decided things were bad. Maybe everyone else understands how growth figures and all the other economic indicators are calculated and what they mean but I don't.

On the radio, on the telly the politicians blame each other and demand that "something be done" whilst the markets seemed to be rising and banks were reporting increased profits. Lots of Countries in Europe produced figures that said they were out of recession. I presumed that things were getting better in some way even though the tyre shop hadn't re-opened.

Then one morning Salgado was off to London to try to persuade the British press not to be so nasty about Spain. Apparently currency speculators were at work and journalists encouraged Governments to follow the example of Hong Kong in dealing with them. There were stories everywhere about Greece going bankrupt and apparently Ireland, Portugal and Spain weren't far behind. All those stories quoted some index that showed how debt was traded and about individual countries credit ratings. Stuff I'd never heard of before.

How does this work? Is all this real or is it some form of make belief World like Michael Douglas and Greed Is Good?

[expatsinspain]

I`m not sure countries ever really go `bankrupt` as such. Certainly not in the same sense individuals and businesses do anyway. After all, a country HAS to keep going, there`s no choice.

Having said that I remember the austerity measures brought in by the Irish government a month or so ago, and some of the measures were very severe. Not only pay rises put on hold in the public sector, but even some benefits were cut, which is something few governments like doing.

Here in the UK a report recently showed some employees being offered the choice of working four days a week instead of five, and receiving 85% of normal pay, or, facing redundancy. No brainer for most workers.

In some areas of the UK it`s reckoned that 1 out of 5 shops now stand empty.

If that`s the case here in the UK then countries like Greece and Spain which rely heavily on sectors like construction, and the tourism industry, must really be struggling.

[Legazpi]

Originally Posted by Culebronchris

Am I the only one that finds all this economics stuff a bit strange?

It's dead obvious that things are bad. The tyre shop up the road has gone, the newspaper kiosk closed down, house prices have tumbled and every second person seems to be out of work. For me, and I suspect for most other people that's how we decided things were bad. Maybe everyone else understands how growth figures and all the other economic indicators are calculated and what they mean but I don't.

On the radio, on the telly the politicians blame each other and demand that "something be done" whilst the markets seemed to be rising and banks were reporting increased profits. Lots of Countries in Europe produced figures that said they were out of recession. I presumed that things were getting better in some way even though the tyre shop hadn't re-opened.

Then one morning Salgado was off to London to try to persuade the British press not to be so nasty about Spain. Apparently currency speculators were at work and journalists encouraged Governments to follow the example of Hong Kong in dealing with them. There were stories everywhere about Greece going bankrupt and apparently Ireland, Portugal and Spain weren't far behind. All those stories quoted some index that showed how debt was traded and about individual countries credit ratings. Stuff I'd never heard of before.

How does this work? Is all this real or is it some form of make belief World like Michael Douglas and Greed Is Good?

This is real.

Eurozone countries that have large budget deficits are unable to pull the usual trick of devaluing their currency (and therefore their debt). They therefore have two options: either reduce their spending or get bailed out. Ireland have reduced their spending, Spain is talking about doing so, but it is doubtful that Greece (which has both a high deficit and high government debt) is willing and able to sufficiently reduce its spending to get things under control.

I think a country is usually considered to be bust when it needs to be bailed out (it happened to the UK in 1976). Normally this means getting a loan from the IMF, with some large strings attached (such as devaluation and spending cuts). The EU doesn't want to call in the IMF because those attached strings are effectively political interference, and the EU would rather be interfering in Greek affairs than have the IMF do so. So it looks like if anyone is gopingto bail out Greece then it'll be the ECB. However ECB money is largely German money and they, quite rightly, don't see why they should have to pay for countries where, for example, people retire earlier and get more state benefits.

Either way, this doesn't get round the problem that Greece cannot devalue its currency and therefore its debt.

Spain isn't in such a bad state as Greece, but it is rapidly catching up, and the current Spanish government seems more intent on denying there is any problem than trying to do something about it. So there's a real risk that whatever happens to Greece this year may well happen to Spain in a couple of years time.

I think that how real this all feels depends to a large extent on whether you've got a job or not. I graduated in the 1991 recession and it took me a couple of years to find anything approaching a decent job. It hurt. I know other people who held on to their jobs at the time and now say they can't even remember there being a recession at the time.

[Andy.G.]

Did countries such as Greece and Ireland already have severe financial problems ? Didnt they change to the euro, hoping that it would solve all the problems they were having ?

[expatsinspain]

I think the idea of joining the euro zone was so that it would help bring stability to their own country`s currency.

Instead of a variety of interest rates, for example, there would just be the one base rate for all those in the euro zone.

In theory a good idea, but in practise what suits one country may not suit another. And as a lot of governments traditionally use interest rates to tackle such things as inflation one of their tools has been taken away from them.

[Legazpi]

Originally Posted by Andy.G.

Did countries such as Greece and Ireland already have severe financial problems ? Didnt they change to the euro, hoping that it would solve all the problems they were having ?

AFAIK Ireland and Spain did not have financial problems when they joined the euro. I don't think anybody knows what Greece's finances were like because they continually lied about them.

I think the original idea behind the euro was to force member countries into being "prudent". Without the "get out of jail free" card of currency devaluation then countries would think twice before running up huge deficits, and be forced into keeping public spending under control. The counter to this is that currency devaluation is the tried and tested way of dealing with financial shocks. Right now the eurozone is undergoing the mother of all financial shocks, so it looks like we're about to find out whether it can survive (at least in the way that it was intended)

[Andy.G.]

Originally Posted by Legazpi

AFAIK Ireland and Spain did not have financial problems when they joined the euro. I don't think anybody knows what Greece's finances were like because they continually lied about them.

I think the original idea behind the euro was to force member countries into being "prudent". Without the "get out of jail free" card of currency devaluation then countries would think twice before running up huge deficits, and be forced into keeping public spending under control. The counter to this is that currency devaluation is the tried and tested way of dealing with financial shocks. Right now the eurozone is undergoing the mother of all financial shocks, so it looks like we're about to find out whether it can survive (at least in the way that it was intended)

As I recall Irelands economy was going down hill fast at the time it joined the euro which gave it a bit of a respite.

[Legazpi]

Originally Posted by Andy.G.

As I recall Irelands economy was going down hill fast at the time it joined the euro which gave it a bit of a respite.

I have no recollection of Ireland having economic problems 10 years ago, but I can't say I pay much attention to the Irish economy. The following OECD graph indicates Ireland had good growth from 1995 to 2001, but I know stats can be misleading:

http://www.oecd.org/vgn/images/porta...2contr-gdp.gif

I believe the Spanish economy was doing ok until it joined the euro, at which point it began to overheat due to negative real interest rates, which led to a huge property bubble and now the consequences.