All those who thought only our brilliant financial alchemists had the ingenious idea of sweeping all the toxic assets plaguing bank balance sheets under the rug of taxpayer bailouts "until things get better," are in for a surprise. It appears that recently insolvent Spain is not only as big an offender in this regard, but has been ahead of the curve for a several years. In an attempt to pretend all was good, Spain's banks, which are now locked out of financial markets for good reason, onboarded worthless mortgages as long ago as two years back. This was done with the hope that sooner or later (but definitely in under two years) prices would pick up and these homes could be sold for at least one dollar of equity. Alas, something happened on the road to financial nirvana: the Keynesian model collapsed, and the properties are now worth less than they ever have been, are generating the same amount of cash as they did two years ago (none), and now, finally, banks are forced to start accounting for these loans in a manner at least marginally close to reality. The result: a scramble to reflate the housing bubble like never before, in the hope to get at least a few mortgage payments out of the newest batch of greater fool. As the WSJ reports: "Banks are piling on incentives. Midsize Banco Espanol de Credito SA offers deferred deposit payments and 100% financing "for many of our houses," according to its website. Larger lender Banco Bilbao Vizcaya Argentaria SA and smaller Banco Pastor SA offer generous financing and lower teaser rates, as well." In other words, all the ingredients that were present in the creation of the first housing bubble are here once again. And just to be safe, Spain has decided to multiply the dosage by a factor of ten. When this little scheme implodes, which it will, the consequences for the economy will be comparably be about 10 times as bad.
From the WSJ:
Spain has one of the world's most-troubled housing markets, yet some buyers are suddenly able to get mortgages with 100% financing, and developers are building new homes on empty lots despite a huge glut. The reason: Spain's banks took possession of a large inventory of homes, buildings and land two years ago, forgiving the debt in hopes of heading off defaults. The plan was to resell the properties when the market bounced back and evade the worst impact of the looming housing crisis. But Spain's housing market has only gotten worse, and now the bill is coming due as the banks labor under the weight of an estimated €59.7 billion ($73.8 billion) in real-estate assets on their books. Under pressure to make further markdowns on the assets by their main regulator, the Bank of Spain, many banks are now scrambling to unload the properties as quickly as possible.
In some cases, that means offering deals to consumers that are suspiciously like those that got the global housing market in trouble in the first place. The tactics include not just 100% loans, but also low initial teaser rates for buyers or initial payment deferrals for as long as three years.
At the same time, banks that own big plots of unbuilt land are announcing plans to build new houses to give the illiquid lots more value, despite the country's estimated glut of one million empty homes.
"On the one hand, they are selling the properties that already exist, and on the other, they are building houses," said Fernando Encinar, the director of research at www.idealista.com, a Spanish real-estate website.
There is just one word for this strategy: idiocy. Yet for generations of brainwashed Keynesian demon economist, this is the only option. Taking a haircut on fair values would result in a toxic tailspin that would destroy not only Spain's eocnomy, but that of Europe, and the US, eventually, as well. A more P.C. way of saying this is as follows:
Some analysts, however, suspect the strategy is simply kicking today's housing problems into the future. "They're making a bet," said Alfonso de Gregorio, director of wealth and fund management at Gesconsult, a Spanish fund manager. "Wait for the economic crisis to resolve itself, push forward the problems by three or four years, and try not to let it show too much on the bottom line."
Others worry that the generous financing, which helps maintain the prices, is muddying the long-term picture for a sour Spanish housing market. Unemployment in Spain is currently 20% and is likely to rise with the austerity measures recently announced by the government of Prime Minister Jose Luis Rodriguez Zapatero. A recent Standard & Poor's report said that housing prices, which have fallen 16% from their peak in 2008, could fall another 12%.
And let's not forget those very Cajas, that would not exist if it were not for the government's most recent effort to bail out Spain's depository institutions:
"Need a home? Now is the moment!" says Caja Madrid on it website, where it also advertises financing options and special offers, such as an apartment in the small city of Manresa, near Barcelona, for €247,000.
"Escape your old home!" says the site of Valencia-based savings bank Bancaja, which advertises no payments for as long as three years at the start of the mortgage.
Such programs are having some impact. Santander sold 2,045 of the 2,745 homes it has placed on sale through its Altamira subsidiary since January, 2009, said a spokesman. Caja Madrid said it sold 10 times the amount of properties in the first five months of 2010 compared with a year earlier.
Just as US attempts to reflate the housing market have failed, and as Meredith Whitney said earlier, a double-dip in housing is now a certainty, imagine how ugly things will get in Spain, which not only does not have a reserve currency at its disposal, but has no real currency, due to the ubiquitous presence of the euro. At this rate of deterioration, one won't have long to wait. In the meantime, expected many more bailouts of Spain and its banks by everyone and anyone who has even a marginal dollar of liquidity, in the hope of delaying where the lack of cashflow finally encounters the most underwater debt tranche.