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The Spanish Banks Are Liars And The Truth Will End Up Hurting You

By Andy Shaw | January 26, 2010

Originally posted 11th September 2009


Quick update:

I’ve been off for a while now as I have been travelling to the UK and am in the process of the final few stages of some new businesses starting. So time has not been my friend for the last few weeks and probably won’t be much for the next few either. The trouble is when you want a big result you have to knuckle down and make it happen.

Anyway, moving on – There has been a huge amount of stuff coming out in the last month, most of it dis-information where the experts and the media alike have assumed one thing when in reality the truth will be very different.

Before I do an update on Spain as I think it could easily lead to huge problems for us, I’d like to say that over the next few months and especially in October we are going to see the US go into a period of growth. The madness will show that it may go into growth for the next quarter as well and even the one after that before turning to recession again. Officially two quarters of growth means that a recession is over…but that’s just bull**it. Though when the US says they have entered a period of growth next month you will have the world and his wife declaring an end to the recession.

The real recession/depression we are in, is the one that economists have trouble understanding because it does not fit neatly into their models. Firstly, dropping 4% and then growing from there by 0.01% does not mean we have growth, does it? But it does if you are an economist. So watch out for the rubbish they are about to start promoting.

What Happens In Spain Will Affect Us

As I have mentioned before, Spain has as many unsold homes as the USA, yet it has 1/6th of the population. What is more is that nearly all of the homes in Spain are on the books at pre-credit crunch prices. I’ll come onto why this will be a killer when it unravels later.

Spain is likely to become the 2nd Japan. The crash in Spain is far worse than people realise simply because the banks are lying about how bad the situation is. I.e., when they do tell the truth this will cause a ripple that will affect us. The ripple could be the size of Bear Sterns or worse, if handled badly.

Spain is now clearly in deflation and in this environment servicing debt becomes even harder. Even with rates at zero the real burden goes up. This is why deflation is a terrible thing and now Eastern Europe, Spain and Ireland are just at the beginning of deflation taking hold. Deflation is a cancer that could easily spread to us as both France and Germany will be drastically affected by Spain’s problems.

They have got the real property crash still to come, they have got serious banking failures due and they have got further massive rises in unemployment. Spain is roughly 10% of the EU GDP yet it accounted for 30% of all new homes built since 2000 so that is going to cause some real problems in Europe.

Now if you can imagine for a moment that the loans in the construction sector total €470 billion and it is currently expected that most of those loans will go bad. There are now four million unemployed and over one million families without a single employed person. Unemployment is currently at 17% but still has much further to go.

The Spanish banks are hiding their losses in exactly the same way as the Japanese banks did, so this will result in Zombie banks in Spain as well. In fact they are already there, they are just in disguise as live banks. They obviously have looked at all their options and thought they are all sh*t and so decided that they might be able to make Japan’s model work! This could lead to a double decade period of deflation like that which has crippled Japan.

However, when Japan did this they had savings, they had a current account surplus of 3%, whereas Spain has a massive external debt. In 2007 the current account deficit was 10% of GDP and Spain does not have much in the way of export industries. In other words, they are in a far worse state to try and make a play like this work, especially when it didn’t work for a better player…

The subterfuge that is now going on with the Spanish banks has all the hallmarks of what went on with the banks who were most exposed to the sub-prime crisis. This is where all of the banks results looked good until suddenly they didn’t.

The mad thing is that at the moment people think Spanish banks are strong and so this is why they have been able to raise cash by tapping into their hapless customers for investment into preferred shares. But even their customers do not have deep enough pockets to get the banks out of this and in the process they will eat up most of the good money that the Spanish have.

Spain has over 1,000,000 unsold homes and most of them are on the coast and reliant on the British tourists. So most of these will go unsold for a long time! When Spain does eventually succumb to gravity and an appropriate period of time has passed then there will be some outstanding deals for people with cash.

The Bank of Spain is going to help its banks hide their losses this year by allowing them a boost from accounting charges. In other words they are lowering the capital reserves required. This has allowed them to not show a loss, so that they can go and rob the hapless in the futile attempt that they can survive.

Getting To The Core Of The Problem

They are trying to buy time for the banks, the problem is that there is no market. It is therefore a dead market and unless they can buy a decade they should cut their losses now and face the fallout. If Japan had done that then they would be strong now instead of being just another severely damaged economy. The trouble is shooting yourself in the head is a hard thing to do, even if you know you will eventually be re-born. Why? Because entrepreneurs and business people are optimists who specialise in getting over the impossible. So this time it is impossible, yet they still believe they can get over it. That is the core of the problem. They are either not realists, or they do not possess the correct info to be realists.

According to the Spanish papers property prices on the coast have fallen by 30 – 50% yet the banks still have them at full price on their books. Banks are actually now taking back property developments onto their books. I.e., they are taking a non-performing loans and adding the asset to their balance sheet, even though they are not developers and have no skills to build out or to sell. They can only do this for so long to hide the truth.

The banks are also actually rolling over loans to Zombie developers just so these developers don’t go bust and they have to face that in their books. All this is doing is postponing the day of reckoning.

Here are the words of a banking insider:

As soon as a small business becomes delinquent, even if it is a longstanding client, it is “everyman for himself” and everyone runs away as if he has the plague. But in the case of the big builders, the bank is fed up with taking on more assets and gives them a line of credit so that they can at least pay interests on their existing debts and give them room for two years to see if things fix themselves and if they can pay the loan back.

The reason for banks to do this is simple, if you owe a million it is your problem, if you owe a billion they have the problem.

The banks, however, are unbelievably still offering some 100% LTV deals on 40 year terms!

This doesn’t shock me at all though as it is obvious that this is what they should do. If they want wealthy people’s money (or just the people who think they can pay for at least a while) then they have to make the deal exceptional. The banks now have their own websites to sell these deals and are offering 25-50% off deals at 100% LTV with rates of Euribor+0%.

How the deal works is the developer puts in 20%, the bank loans 80% and even banks like Santander are doing this openly. We knew they did it before if you could make it work, but now it is above board! That’s desperate!

So How Is This Going To End?

The country can either massively increase production (not gonna happen) or they can cut wages and prices by 20 – 30% and go through a long, painful process. When this happens there will be another €250 billion wiped off of the banks’ assets by failed mortgages. So for Spanish banks to absorb €700+ billion is really going to hurt the country for decades to come. This is why they are unwilling to admit the truth.

Spain’s trade deficit was once the 2nd largest in the world next to the US. In other words, Spain was like a giant consumer sucking up all the other European countries savings. Spain’s external debt now is the fifth largest in the world, behind USA, Great Britain, France and Germany. So their eventual demise is going to send shock waves to the creditor nations. We are one of the biggest, of course.

Will The Ostrich Ever Take Its Head Out Of The Sand?

Inflation in Spain has been negative for the last three months in a row. Spain has not experienced a similar decline in inflation like this in over 47 years. However, the Bank of Spain and the government are behaving like ostriches with their heads in the sand.

Spain is not the only country facing deflation. It is a problem for the entire European region. Ireland, for example, has the highest rate of deflation in the world! Prices in Ireland are falling at an annual rate of 5.9%, well ahead of the drops in other countries – only Thailand, at 4.4%, comes even close.

Ireland of course has held its hands up. Spain hasn’t, so I believe that Ireland’s experience is what Spain will see more of in the months ahead as the economy slowly adjusts to new realities. Almost all of Ireland’s banks have been taken over by the government, and Ireland is struggling to decide how best to dispose of its bad assets. I think Spain will be much more like Ireland than any of its European neighbours.

Anyway that’s enough doom and gloom for one day. Where this will end for those who have the ability to keep paying their mortgages in Spain is in some very cheap holidays there in a few years time. Mind you given that the countrymen are going to be desperate for money I would say setting up a house alarm business in Spain is probably going to be the only growth business out there.

Best wishes


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