Bank bail-out won't end Spain's property nightmare

The Spanish predicament is, as was the case in the US with the subprime mortgage collapse that fuelled the 2008/9 financial crisis, property-led. Recent data from the Knight Frank Global House Price index shows that Spanish residential properties fell by 7.3pc in the year to the end of March. Official Spanish data state that prices are down 20pc from the peak, but those figures are based on bank valuations, rather than actual sales. Anecdotal evidence suggests that the fall from the top of the market is closer to 30pc, but how much further can prices go? In spite of the small but growing number of articles in the British media that ask whether now is the time to buy Spanish property, it is likely, if the case of Ireland is anything to go by, that values will fall by as much as 50pc from the peak before they begin to bottom out. As a result, an increasing number of critics believe that the capital injection being discussed by European leaders for Spain’s banks is merely a sticking plaster, rather than the deep and detailed stitches and wound care its financial system clearly needs. In a recent research note, economists at investment bank JP Morgan estimated that despite the €40bn (£32.4bn) or so that many in the market believe Spain’s banks need to be adequately recapitalised, the full requirement could be as much as €350bn once all is said and done. What is more worrying, as my colleague Philip Aldrick notes in his piece looking beyond the Spanish bail-out, is that one of the sources for the capital may be the IMF’s precautionary credit line, which was set up to help the so-called “innocent victims” of the euro crisis. Whether the IMF, or as seems more likely the European Financial Stability Fund, ends up providing the funds, that Spain as a nation is innocent is somewhat risible. Granted, unlike some of its southern European neighbours, its populous may pay their taxes, and its government may not have over-borrowed, but its current predicament is the result of an overheated property sector from which many have benefited. There are clearly many victims emanating from the eurozone crisis, but Spain, in spite of its size and international standing, is far from one of them. Let’s hope the international authorities, be it the European Union or the International Monetary Fund, do not go easy on the country, for to do so, could mean that the size of the eventual cheque is far larger than the relatively small amounts currently being discussed.

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