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Monday, April 07, 2008 10:39 AM

Housing Bubble Bursts Wide Open In Spain

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The Telegraph is reporting Foreign banks flee Spanish property debt.

International banks are scrambling to sell their holdings of Spanish mortgage debt at a steep discount, fearing that the country may be sliding into the worst economic downturn in its modern history.
My Comment: What took them so long? How tough was it to see this one coming?
A blizzard of grim data has soured the mood, capped yesterday by a plunge in PMI purchasing managers' index to an all-time low of 40.9. Car sales fell 28pc in March, and even Madrid's legendary tapas bars seem to have lost their late-night sparkle.
My Comment: Spain is in recession for all practical purposes, even if Spain's GDP does not yet show it.
Inmobiliaria Colonial - once the country's biggest property group --is in emergency talks with banks after Dubai's Investment Corporation pulled out of a rescue deal.

Developer Martinsa Fadesa is struggling to restructure €5bn of debt to stave off insolvency.
My Comment: Forget it. It's over.
Traders says the market price for Spanish mortgage securities has begun to slide abruptly, replicating the pattern seen in the US last year. Large French and German funds and insurers appear to be liqudiating assets in a pre-emptive move, afraid being caught yet again in a violent downturn.
Ismael Clemente, head of Deutsche Bank's property arm RREEF in Spain, told a panel of experts in Madrid that foreign banks were now dumping Spansih mortgaged debt at a 40pc discount.

Mikel Echavarren, director of the property consultancy Irea, said Spain's housing market was far weaker than the official statitics suggest, warning that prices could fall 20pc to 25pc.

"We have a very worrying situation. The developers simply cannot refinance their debts. We need to cut interest rates by 2pc, which is obviously not going to happen," he said, adding that the crash could be sharper than the property crisis in the early 1990s.
My Comment: Developers can't refinance debt? Looks like banks are going to be landlords in Spain, just like the US.
Santiago Baena, head of Spain's estate agents lobby API, said the downturn had already forced 40,000 agents to close their doors, laying off 120,000 staff.

The Bank of Spain said default rates would rise but insisted that the Spanish banking system remains in good health, without much exposure to the US subprime debacle. The loan-to-value ratio on mortgages was kept to 70pc - although a report in Germany's Die Welt newspaper today alleges that false pricing was often used to circumvent the rule.
My Comment: OK so they do not have US subprime debt. Instead they have Spain subprime debt. Is that such a comfort?
The root cause of the crisis is in a sense Europe's monetary union. The euro effect halved Spain's interest rates almost overnight. Rates then fell below Spain's inflation rate for several years, fuelling an explosive credit boom. The country's current account deficit has reached 10pc of GDP, the highest of any major economy.
My Comment: It will be interesting to see what happens to the European Union. I am no longer certain the EU survives as we know it today.

Spain Services Plunge

The Guardian is reporting Spain services plunge as property collapse spreads.
A plunge in consumer confidence and services sector activity shows the collapse in the property market is fast infecting the wider Spanish economy.

The purchasing managers' index reading of 40.9 -- far below the 50 mark separating growth from contraction -- was the lowest ever for any PMI survey of European economies, said data compilers NTC Economics on Thursday. "In Spain it seems to be an all-round malaise," said NTC chief economist Chris Williamson. "It was a dreadful survey."

Not only that, consumer confidence fell in March to 73.1 from 76.8 in February, the Official Credit Institute said on Thursday, close to January's all-time low of 70.9, and well below the 100 mark which separates pessimism from optimism.
"Spain is a real disaster," said Marco Valli at Unicredit MIB.

"The housing downturn is spilling over very quickly to all other sectors, helped by the surge in inflation that dampens purchasing power at a time in which consumer confidence drops due to the weakening labour market and economic outlook".

"Spain will recover only after the ECB starts lowering rates, I hardly see any other way out," said Valli.

Spain's ruling Socialists were still predicting economic growth of 3 percent this year when they won re-election on March 9 but slashed their outlook a couple of days after their victory.
The idea that Spain housing will recover if the ECB lowers rates is nonsense. The Fed has slashed rates and US housing did not recover. Why should Spain be any different?

UK and Spain Risk Major Correction

Creditman is reporting U.K. And Spanish Housing Markets At Risk Of A Major Correction.
Housing markets in the U.K. and Spain are due a major, and likely painful, adjustment, says a report titled "European Economic Forecast: Major Corrections On The Cards As Housing Markets Turn Down," published yesterday by Standard & Poor's.

"Europe's housing markets are overwhelmingly turning down. And in those countries where the housing bubbles have been expanding for longer, we believe the corrections could be severe and painful," said Jean-Michel Six, Standard & Poor's chief economist for Europe. "Particularly at risk are the U.K. housing market, where the financial crisis is exacerbating issues of affordability and general economic gloom, and the Spanish housing market, which is coming to terms with a largess of new homes."

The combination of a sharp deterioration in affordability, scarce funding, and the economic slowdown are about to cause a major slowdown in the U.K. real estate market.
Country by country, a recession looms. The UK cannot be far behind.

Mike "Mish" Shedlock
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