Is the crisis in
Spain really coming to an end?
In the last few weeks we have seen positive statements about
the ongoing recovery in Spain and some data to back this up. The big question
is has the crisis really started to turn the corner or are we just seeing improvements
in the areas that were obviously broken only to find further problems down the
road rear their ugly heads.
What does the past
tell us ?
In order to answer this question I think it is important to look
back at recessions and financially hard times in the UK. Spain is currently
going through some very similar problems experienced after the boom years of
the 80s in the UK.
In the 80s property prices soared, debt levels were high and
everybody felt good because they had security of their little personal castle
making them feel wealthy and unafraid to spend.
Every man and his dog with or without the relevant experience
became a property landlord or a developer as money was lent speculatively
rather than off the back of personal affordability.
How did UK Banks respond
to the boom?
Banks lent off the back of the new insurance policies called
MIGS and happily gave mortgages of 95% to 100% against a rising market. All UK
banks became retail space bandits taking every zone A space available in the
high streets. Landlords rubbed their hands at the rental levels Banks were prepared
to pay and the knock on effect of this was the rents for retail space soared
and every other unit was filled with a Bank branch.
The traditionally profitable banks unlike other retailers
paid little heed to their fixed cost base as they chased what seemed like a
never ending boom.
So what happened next
Then reality hit. Interest rates went through the roof.
Inflation soared. Unemployment started to climb and negative equity became the
buzz word of the 90s.
Whilst the issues started to affect all walks of life, the
Banks a bit like large cruise liners, found it difficult to adapt to the new conditions
quickly. Strong bank unions made it difficult to implement new working
practices and reduce staff costs, mergers and rebranding took an age and
extraction from an oversupply within the branch network was well behind the
economic curve.
At just the time when other areas started to show improvement
the Banking sector went into decline. Redundancies came thick and fast across the board and not just in the cashier population, redundancies of middle and senior managers was rife. Head offices of merged
Banks amalgamated processes so were not left outside the pain, and the Banks began
an exodus from the high street. Mortgages went into net outflows as property sales
and the mortgage market became stagnant.
The most visual aspect of all of this was the death as we
knew it of the high street. Prime locations became empty but unrealistic
Landlords, used to high levels of rent, took too long to wake up and smell the coffee and realize realistic and lower rents for cost conscious retailers and new business
that were emerging from recession was the name of the game.
Mortgage defaults continued to rise as employees from previously
secure and safe employment were made redundant in an industry that was contracting.
Did it get better ?
It took some years for this situation to improve and the
reality is the UK high street never recovered to the levels previously seen.
The issues within the Banking sector resounded on for a number of years well
past the time when the rest of the economy had recovered. The Banking sector eventually
came through more profitable, more cost effective and with significantly less
consumer choice ready to throw themselves full pelt into the next crisis. Treasury
departments rather than retail arms made the profits until Lehman’s collapsed
and it became apparent that making your money outside of retail banking also
has its risks.
The UK government had to work hard to attract new industries
and outside investment using tax breaks and transparent working practices
within the public sector.
So what is happening
in Spain?
Read everything that happened in the UK, make some
allowances for the fact the world has itself changed, being more linked than
back in the 80s, and the story is very similar.
Yes exports are up. Yes there is some growth and yes the Spanish
Banks capital and liquidity issues seem to be improving. However 2013 and 2014
will I fear see much of this feel good factor disappear in a puff of new problems.
How did Spanish Banks
respond to the boom times?
During the boom times Spanish Mortgages were lent at high
loan to values, all Spanish Banks increased their mortgage books significantly,
lent speculatively and took little control of their cost base. All Spanish
Banks in a race to do more Spanish Mortgages rushed to open new branches in
every available retail unit they could find.
What is happening in
Spain now?
Now the picture has changed and whilst for the last few
years the Banks have been battling with survival relating to other issues, they are now some 5 years after the
event focusing on their long term profitability. The Banks are finally reducing their cost base and taking the appropriate actions. Barclays are closing over
1000 branches, Bankia are closing over a 1000 branches. The Sabadell group will
certainly after the takeover of CAM and Lloyds be making significant reductions.
Caixa Cataluyna are closing a third of their branches. The high street in Spain will see
a minimum of 5,000 empty units in the next two years just from closures of Bank
branches.
Net outflow on Spanish Mortgages has been happening for many
months now, not just driven by a lack of demand, but also driven by high pricing,
unattractive terms and difficulties in getting loans approved. Until Banks
adjust their cost base this it seems is the only way they can make profit.
Unemployment will rise just like in the UK. The worst affected
will be the over 45,s who spent years working often in the same Bank branch and almost
certainly for the same employer. These people know no other industry and have
been very sheltered up until now. They will find it difficult if not impossible
to gain new employment so along with the under 25, s in Spain will become a
lost generation.
Is Spain really on
the road to recovery
Not really. Landlords cushioned from the last few difficult years
by having a prime locations with top dollar rent will find their units empty
with no takers particularly at the current rental levels.
Until the Banking sector has sorted itself out, slimmed down
significantly and started lending again the crisis is believe me far from over.
It will take a few more years for the high street rents to drop to affordable
levels so new businesses can take the plunge and for the foreseeable future unemployment in the professional
and white collar industries will continue to climb.
So will it all end
and what needs to be done?
There is no reason to believe matters will not finally be resolved
but there is much pain to come. Spain unlike the UK does not have the same
welfare support, people will starve and will be homeless and this will not just
be immigrants and blue collar workers, which is predominately who has been
affected so far. The gap between the rich and the poor is widening and this is
when civil unrest can start.
There is little sign the Spanish Government is taking any of
these matters into consideration. Bureaucracy still reigns, laws are not transparent,
particularly in terms of taxation and social security. Public departments act more
like bandits robbing at every opportunity without even having to demonstrate
they are correct.
The quickest way out of the current situation is to attract outside
investment and convince new businesses Spain is the place to be. Anyone who
looks into the possibilities in Spain and understands properly will run a
mile. Most of us living in Spain, including those born here, at some point will
have happen to them something that finally breaks the camel’s back and will
leave! You can only fight for so long before the white flag has to be waved.
Lessons need to be learnt quickly from what has happened elsewhere
in the world because the cycle is going to happen in its totality before full
recovery. The difference is, Spain is doing nothing to make it easier, more attractive
and fairer to allow replacement of old industries by new and to help good quality
businesses to survive.
