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Are Spanish Banks the cause of the housing crash ?

Fri 8th Jan 2010

Economic troubles in Portugal, Ireland, Greece, and Spain (referred to as ‘PIGS') have widely publicized as of late. The economy of Greece in particular has perhaps attracted the most attention of the four so far, however recent reports suggest that Spain is in line to become the new whipping boy.

When property prices was the main issue of concern, Spain appeared to have a stable economy, with property prices decreasing by an average of just 9%. HSBC Bank commented on the issue saying "The price fall is much smaller than the 20% peak-to-trough drop seen for the UK housing market or the 32% fall of US housing prices, and is difficult to explain given the dominance of the housing market in the Spanish economy."

However, it can possibly be explained thus - the Spanish banks are simply choosing not to sell the properties that they own. This happened in Spain back in the 90's, when banks held onto their property portfolios until such a time that economic recovery caught up and allowed them to sell on the properties at acceptable prices. So why not simply stick to the same tactics?

The major difference between now and the 90's is that the Bank of Spain has changed regulations in the light of the current economic troubles to increase the amount of money that banks must keep in order to protect themselves against possessed property losses. As such, the banks need to raise this money – forcing them to sell the properties that they own. 6 months ago BBVA estimated that property prices would fall by 10% in 2009 and 12% in 2010, with a total 30% peak-to-trough drop. A review of the report last month has not prompted the bank to revise those figures.

The reported 30% drop in property prices as experienced in the USA could cripple Spain, whose credit outlook has been downgraded to negative, and whose budget shortfall for 2009 is five times higher than that of last year.

Although it has a 20% unemployment figure, Spain also has the fifth-largest economy in the EU, and because of its buoyant property sector, it has been a vital intra-Eurozone source of demand for export-reliant markets like Germany.

If the economy in Spain should continue to deteriorate, the fall-out will be felt throughout asset and interbank markets. Keeping your European investments safe in a world economy as troubled as we are currently seeing calls for constant updates on market moves throughout the EU.

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