Spain: A nation being overwhelmed by bad debts
Isn’t it funny how words change? Five years ago the Spanish used the word ‘mileurista’ as a term of opprobrium against a system that paid some workers as little as a thousand euros a month. Now to become a ‘mileurista’ is an aspiration for many Spaniards. Suddenly a thousand a month seems a princely sum in a country where a quarter of the population is unemployed (half of 18-24 year olds) with often no income at all.
When we met Manolo Toral and his wife Maria del Mar yesterday we could see both how badly this economic crisis has hit families who were once comfortably off, and how hundreds of thousands of stories like theirs add up to an economy teetering on the edge of a very steep cliff.
This couple are staring at bankruptcy. They bought an appartment in a swanky new development in the Madrid suburb of Seseña five years ago for €156,000. With their two salaries and only one child they could comfortably afford the repayments of €600 a month. By 2010 other units in their block were selling for €220,000. Now the one next door to them is sitting unsold with an asking price of just €72,000. She has lost her job. His work as a security guard now pays just €800. They are so far underwater that it might be easier to just accept their fate and turn everything over to the bank.
And this is where the ‘macro’ economic problem kicks in, because repossessing the Toral’s house is no solution for their bank. Spanish banks have repossessed half a million homes in the last three years, but can then do nothing with them. There are a million newly built homes in Spain that sit unsold. The banks already own the development in which the Torals live because the original developers went bust. One more appartment on their books is just another bad debt.
It is estimated that Spanish banks have more than €135bn in bad debts from the property sector alone, and house prices are still falling. These banks have just €50bn in reserves to cover these bad loans. Little wonder that people in the money markets are beginning to think that someone is about to lose a lot of money in Spain, and they would prefer if it wasn’t them.
If anything could be done to stimulate the Spanish economy, to get some people back into work and some bills paid, there might be some grounds for optimism, but the Spanish government is being forced by its commitments to Europe to cut back faster than at any time since democracy was restored to Spain. And the banks have no money to lend even to good businesses that might employ people and pay taxes.
Yesterday the Spanish Government passed a new law giving itself powers to force the country’s regional governments to make cuts, but this will only add to the problem. In the boom years there was not a town, city or region in Spain that didn’t use cheap credit to treat itself to a new infrastructure project or a sports pavilion or a municipal swimming pool. All are now struggling to pay that money back, and are already hiking local taxes and charges. Before long you run out of things to cut.
It does seem pretty clear that the Eurozone is going to have to intervene fairly soon if Spain’s problems aren’t to spread to others in the way we have seen with first Greece then Italy. A fully fledged bailout is probably not an option. As Prime Minister Mariano Rajoy said yesterday, “it is not possible to bailout Spain”. In otherwords there’s just not enough money out there to get the job done. Bailing out the country’s banks might, though, be affordable, and something along those lines might have to happen quite soon.