The Spanish banking system is in far worse shape
than most realize because of unrealized losses related to Spain's imploded
housing bubble. Various austerity measures and tax hikes to bail out French
and German banks will greatly exacerbate this problem.
Please consider Spain Banks Face 43% Price
Fall on Repossessed Homes
Spanish home prices fell for the
14th consecutive quarter as unemployment surged and a drop in mortgage
lending crimped demand for property. The average price of houses and
apartments dropped 7.4 percent in three months ended Sept. 30 from the same
period a year earlier, according to the National Statistics Institute in
Repossessed houses in Spain are worth 43 percent less on average than the
valuations assigned on the mortgages for the properties, according to Fitch
Price declines range from 20 percent to 58 percent, analysts Juan David
Garcia and Carlos Masip in Madrid wrote in a report
analyzing 8,235 properties funded by loans from banks including Banco Santander SA (SAN) and Bankia
SA. The mortgages are in asset-backed securities with high loan-to-value
Unemployment Rate is 22.8% and rising.
Austerity measures in Spain will force down home prices, force up the unemployment
rate, and force up losses on Spanish banks.
As I have noted before, Spain needs to restructure work rules, make it easier
to fire people (which will eventually make it easier to hire people), get rid
of government workers, lower taxes, and implement various reforms.
Unfortunately, the Merkozy agreement demands many
counterproductive austerity measures and tax hikes that will crucify Spain in
the short-term. Banking losses will soar, GDP will plunge, and deficits will
The same setup applies to Portugal and Greece. Thus, the idea there will be
no more sovereign debt losses will soon be smashed on the hard rocks of reality.