Every
so often, the contradiction between appearance and reality breaks
out. A recent sharp reminder was the nationalisation of Netherlands'
fourth largest bank, SNS Reaal, which also had to be bailed out with
a further €3.7 billion. It had suffered losses on its property
portfolio, particularly in Spain.
It was
not alone. Spanish banks fell heavily again last week, as they were
forced themselves to fess up about some of their own property losses.
BBVA profit fell 44%, and wrote off € 10 billion; Santander wrote
off € 18.8 billion, and its profits fell 59%; Caixa Bank's shares
plunged 78%, and it wrote off € 10.3 billion; and Banco Popular
wrote off € 9.6 billion, whilst its previous year's profit of €
480 million turned into a loss of € 2.5 billion.
Yet,
most analysts believe that with more than 26% unemployment and 60%
youth unemployment, and with the economy shrinking even further, the
banks will face further pressure in coming months. The banks have
been kept afloat by money from the ECB, and they have hidden their
property losses as best they can, but they cannot “extend and
pretend” forever.
They
are under pressure to clean up their balance sheets or be named and
shamed, if they don't declare property on their books at more
reasonable prices. But, the problem even then is what is reasonable.
I'm in Spain as I'm writing this (now returned) and what comes over
again is just how opaque the market is, and just how much corruption
still exists.
The
latter comes out in the allegations in the Spanish press against
Prime Minister Rajoy and other members of the Government, accused of
receiving payments from construction companies via a slush fund.
Paul Mason
has previously written of similar corruption in relation to Bankia
and various regional banks.
Banks
are also selling repossessed properties, often at massively reduced
prices. I've seen places in the Costa Blanca going for between
€20,000 – 40,000. Yet, this process is far from transparent.
For example, some of these properties are sold in auctions, but they
are not open auctions. Only selected companies are allowed to take
part. That means that in some of the more sought after locations,
for example, around Javea (Xabia), these companies can buy up
property at very low prices, thereby relieving the bank of a
liability, whilst the property company can put it on its own books at
a similar price to the rest of its portfolio, in the process
preventing it from putting downward pressure on their prices.
Yet, as
in the case of the UK, the consequence of this failure for prices to
correct is that the overhang of supply relative to demand continues
to rise. One agent told me that he had 900 properties on his books!
Many analysts believe that just to match what happened in the US and
Ireland, prices in Spain would have to fall by as much again as they
have already fallen. The prices of property on Spanish Bank books
certainly do not reflect that. Yet, its likely they need to fall
more than that. After all, Spain is in a Depression that is getting
worse. Neither the US nor Ireland faced the same kind of fall in
GDP, neither suffered 26% unemployment, and 60% youth unemployment.
Even in
the more affluent areas of the Northern Costa Blanca that is
apparent. About half the shops are closed down. Moreover, although
rich Europeans will continue to be able to buy property in exclusive
areas anywhere in the world, it is not the rich who are the backbone
of the property market in the costas. That comes from middle class
and working class Northern Europeans, looking to retire to the sun,
or who have found themselves employment in more pleasant
surroundings. But, with wages and pensions being squeezed, interest
rates on savings next to zero, and for Britons, uncertainty and
additional costs arising from not being in the Euro (especially with
a sharply falling pound) conditions for the property market in the
Costas are not good either.
And, of
course, its not just European Banks that are still in trouble. UK
banks, like Spanish Banks are engaged in a huge attempt to paper over
the cracks of the housing market. Like the Spanish Banks, there
balance sheets remain a fiction based on grossly overvalued property
assets, and with debtors that are clinging on by their finger nails,
only due to extensive forbearance and near zero interest rates. The
same banks now face, new large pay-outs like those for pensions
mis-selling, and PPI mis-selling, this time for mis-selling interest
rate swaps to small businesses. They may also face civil actions
for compensation over the LIBOR scandal, and Barclays is under
investigation over the Qatar deal that enabled it to avoid a state
bail-out in 2008.
With
European banks now having to pay back some of the cheap money they
borrowed under LTRO (effectively money printing by the ECB) the
potential exists again for a tightening of credit conditions within
Europe. That comes just as the Euro itself has leapt to new recent
highs, as a renewal of global currency wars has seen the US, China,
Japan and the UK act to reduce the value of their currencies. That
means peripheral Europe will be squeezed even harder, as it finds it
even more difficult to export.
Yet, as
I have pointed out before, the paradox could be that as the global
economy experiences a cyclical upturn, during the second part of this
year, so that could provoke the bursting of the asset bubbles
previously described. It may be that there is a bust without a
preceding boom, but also that the bust, collapsing those asset prices
is the necessary precondition for any such boom to occur. Only when
its no longer possible to reflate those bubbles, creating fictitious
capital, will money begin to flow again into productive investment,
creating real economic growth. Without that, the US, and Europe will
continue to fall behind China, and those economies in Asia and Latin
America that now represent the vanguard of global capitalist advance.
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