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The worst is yet to come. There is still money available to extend unemployment benefits for some of the unemployed. Fortunately, the momentum of the virtual welfare state we come from is considerable, but it is going to be corrected with a series of harsh blows. It seems the near future is peering round the corner, and the wolf’s ears are indeed as hairy as we feared. Social unrest is beginning to make itself felt in the form of demonstrations protesting against redundancies and collective redundancy schemes, a collapse in consumer spending, the black economy and street recruitment, express kidnappings, violent street drinking binges, and so on. And a significant rise in violence and public insecurity will soon become evident.

In early 2009, we wrote an article entitled Do Not «Disturb», which I hate to say is becoming more and more apparent as the months go by. The year 2010 – and perhaps 2011 – is going to be a brutal wake-up call for a generation that was born and raised in virtual abundance. They have known poverty only in the form of marginalisation and social exclusion affecting a minority. But there will be an ever-shrinking middle class and a growing lower class. A lower class that will have nothing to do with social exclusion or marginalisation, but will consist of familiar faces, former work colleagues and entire neighbourhoods mired in poverty.

Whilst economic stabilisation or even recovery will begin to take hold in countries such as the US, Germany and France from 2010 onwards, in Spain we will run out of breathing space. And by that I mean state capacity, as the personal savings of most middle-class people have already run dry in 2009. The hole formula Spanish is a very simple equation: without extremely high and sustained growth, the future looks bleak, unless we’re given a magic hat with a pair of ears peeking out of it. We are also the epitome of inefficiency: in the last quarter we lost a million wage earners, but in the last year we created more than 100,000 new civil servants. And we already have one civil servant for every five workers, as GurusBlog points out in this informative article.

Productivity is a concept that is alien to some short-sighted trade unions who still believe that workers’ problems are caused by employers’ excessive profits. Not this time. The fact is that some workers and trade unionists are still desperately seeking for the State to provide them with their usual dose of the blue pill in 2009. But by 2010 they will have run out in Spain and we will only have red pills. Blessed are those who got used to them beforehand, for the future will belong to them.

It may just be a coincidence, but I recently received an email – a spam message – with the following content:

Today we are not going to talk about economics but about our planet. You may have already seen the link below, but it is a documentary entitled «The world's economy".«Home»The project is a reflection on the sustainability of humanity's management of resources since the Industrial Revolution.

I recommend that you watch it in full screen because it has some absolutely spectacular images. For those of you who do not speak English, the subtitles are activated. The insertion of the video is not authorised and therefore I copy the link:

You will also find it interesting to watch the report on «Global Dimming» which I have attached below in 6 parts:

Why does this magnificent scientific technology, which saves work and makes our lives easier, bring us so little happiness? Simply because we have not yet learned to use it wisely.

Alber Einstein (1879-1975)

The Year We Lived Dangerously (The Year of Living Dangerously). That could be the title for the events that have unfolded since the collapse of Lehman Brothers on 15 September 2008, although in reality we have been living dangerously since the start of the century. But we only began to sense the impending collapse as early as August 2007, when the credit mechanisms of the financial system started to grind to a halt. From then on, everything came crashing down like a house of cards with the momentum of an oil tanker: slowly but inexorably.

A year ago, systemic risk hit rock bottom, at least on the surface. But deflation, negative macroeconomic figures and the destruction of wealth continue. It seems that some indicators of some countries are breaking free from the downward spiral and will enjoy better prospects. Only time will tell whether these will be short-lived or whether the recovery of some will take hold. In the rear carriages In terms of economies, these signs of recovery are like a painkiller. Mere delusions which distract one’s attention, thereby preventing the clear-sightedness needed to row in the right direction.

Investorsconundrum has linked this interactive infographic from Reuters (view the timeline) where we can see, day by day from 9 August 2007 onwards, the worst global economic crisis in history. It is very instructive today to look back and review, through headlines and images, the year that changed the world. Some of the images in this mosaic are not to be missed. Long gone are the images of Bush trying to understand what was happening to ultra-liberalism, when Islamic terrorism was the world’s main concern. May God grant us good fortune in this New Era: The Year 1 A.L.

What was once the Celtic Tiger, Today it is nothing more than a scrawny, flea-bitten, street-wise puss. Tax hikes, which are mortgaging (never better said) future growth, will perpetuate its ragged appearance over time. So far this year, up to 31 August, the Irish public deficit was €18.7 billion, which in just eight months is almost four times the 3% of annual GDP allowed by the EU.. More than twice as much as in the same period last year, which was €8.4 billion, according to the recently published Belfast Telegraph.

The Irish indicators are a litmus test for the EU's solidity, and a real torpedo to the waterline of the monetary union. But the Spanish figures are much more destructive because, even if they are somewhat better (or lagging behind), the specific weight of the Spanish economy in the EU is much greater. Ireland is a small country that, if it were the only case that strained the guidelines of economic rigour demanded by the EU, could be treated as an exception, as a small island whose economy shares even the pockets of its inhabitants with the pound sterling, on its border with its northern neighbours. But it is not alone. Ireland's figures, unsustainable in a € environment with engines such as Germany or France, are the path to the graveyard that follows the Spanish elephant. And although the Irish Prime Minister Brian Cowen said back in March that «.«...sharing the euro strengthens us greatly at a time when immense forces are at work«The reality is that the economies of Ireland and Spain are going to be, are already being, a tremendous stress-test for the European monetary union. All countries that have had their own monetary policy, have made intensive use of it in these troubled economic times. Even the leading economies, with the exception of of the usual dabbler. Politicians, as always, systematically miss (sic) all their macroeconomic forecasts, They proclaim the advantages and benefits of the € in the midst of state bankruptcy, and announce green shoots that they hope will have opiate-like properties for their increasingly famished voters. Because EU monetary union is politically correct, and today it is still sacrilege to speak of a two-speed euro officially (a nauseating cowardice). The majority of ordinary Spaniards believe that the single currency is saving them from who-knows-what, in a perfect Stockholm Syndrome of the €. And the truth is that nothing could be further from the truth when economies, especially the weaker ones, suffer.

As long as hands are still tied in a Spain in technical bankruptcy, its economy will continue to free fall. The latest figures from the Social Security system show that only 18 million members have to support the system, and down. In the meantime, unemployment continues blatantly and dramatically far above the rest of the EU, and rising. But the most serious thing is that from the first quarter of 2010 the worst will come: the 400,000 jobs that Plan E pulled out of the hat will be massively destroyed again on January 1st, the extraordinary extensions of some subsidies will be exhausted, and the destruction of the business fabric and the constant redundancies will continue to be a major problem. drag society into dependence on a bankrupt state. The deterioration is on the verge of being so tremendous that the government still does not dare to cut the panparahoy of the direct subsidy to society in distress, even if it the countdown is short. A sterile waste of money it does not have, and what is much more serious, cannot even create.. In other words, either the Spanish state is given the capacity to flee forward, or Spain is going to live through some terrible years. And for us, in the best-case scenario, to be able to flee forward, we need to devalue our debts to be able to breathe, and our costs to make them more attractive to the rest of the world. To achieve this growing and inflating sufficiently is the only long way out of the tunnel.

Getting out of the hole without using monetary policy is a desert crossing that only the strongest can attempt (and even they do not do it). The weak like Spain, Ireland and the other PIIGS must focus on devaluing their liabilities and production costs. And that can be done through an appropriate monetary policy, but it is impossible without the freedom to increase the cluster M1 and at the same time devaluing the currency itself (we said almost a year ago: «...we must not suffer because the Risk being bought by States is transformed into monetary damage that will break countries with the capacity to manipulate conglomerates...«). Only then would growth pull us, over the years, to the surface and inflation eat into the unmanageable debt we have gluttonously surrounded ourselves with. If the spreads on Spanish-Irish and Franco-German sovereign debt tighten beyond what the monetary union can bear, it will signal an imminent unwinding of much-needed monetary policy.

We need a lot of restraint, sacrifice and jerry cans full of clear water to try to cross the desert in the footsteps of the rich countries. But from the last celebration we barely have a flask with a small canteen of Irish coffee and another with two fingers of carajillo. Oh, and a hangover. This is where the desert begins.

Lottery, inheritance, fortune, wealth, management, advice, investment, money, money, money… These are coveted words that can turn into real nightmares. The million-dollar question – the one that’s vital for a new lottery winner – is: What should I do with the prize and with my life? It’s true that there are many different possibilities and options – in fact, almost a different course of action for every individual. But essentially, the moment someone wins the lottery or receives a substantial inheritance, three very different paths open up before them, leading to radically different outcomes:

1. Carpe Diem
2. Managing it properly
3. To suffer from it to the point of illness

Are there any other options that fall somewhere in between? Well, actually, as multi-family office professionals, when we think about sound management, we do so without losing sight of the enjoyment we’ll derive along the way, nor of the need for appropriate growth. Option 2, therefore, strikes the right balance and covers sufficient ground between the two extremes.

To make the mistake of taking Path 1 is to irretrievably squander one’s fortune in a short space of time. It is a choice from which only the person themselves and their close circle will benefit for a very limited period. The return to the original situation (or one far worse…) is usually difficult and leads to overwhelming personal dissatisfaction, with self-reproach and criticism from others for the mistakes made. Furthermore, the aftermath of such indulgence often leads to numerous social and family problems, contrary to what one might expect.

As for the mistakes that are usually made if we opt for option 3, they are even more regrettable, if that is possible. It is common for a large part of the fortune to be lost in investments and business ventures despite self-imposed austerity, as greed also prevents sound management. Extreme frugality also tends to come to an end with the death of the fortunate individual, and it is common for their heirs to enjoy these fortunes; they will likely opt for option 1, having witnessed their predecessor’s behaviour. In other words, it swings from one extreme to the other, ultimately bringing the fortune’s legacy to an end. Wealth can also be experienced in an unhealthy way, with dangerous tendencies towards gambling addiction, drugs and other vices that will turn the fortunate individual into a human wreck, surrounded by relationships that are unhealthy and destructive both for the person themselves and for their family and wealth.

In fact, it is extremely difficult for someone who hasn’t built up a fortune to manage it properly. I would say it’s almost impossible without the right advice. The coexistence of vast wealth with people who did not earn it but were given it (in the form of a lottery win, an inheritance, certain windfalls, etc.) is an unnatural phenomenon with a very poor prognosis.

For some time now, we have been referring to that artificial, almost always short-lived coexistence as Jurassic Park syndrome. And only with competent and honest advice (which is very hard to come by) will they be able to choose option 2 – that of sound management – from which the fortunate few, as well as future generations, will benefit, without in any way neglecting personal and material enjoyment.

A notice to beneficiaries of inheritances, winners of various lotteries and those who have come into sudden wealth in general: You have three paths before you, and your future and that of your heirs depends on which one you choose now. There is no turning back, nor are there any second chances to correct mistakes.

A Belgian journalist has revealed the casting process that Sarcozy and his team of advisers went through during a visit by the French president to a factory in the north of the country. As you will see, all the extras posing behind Sarcozy in front of the cameras had to be no taller than him: 1.68 cm.

The casting was carried out discreetly, but the journalist, knowing the stature of the president, noticed that strangely no head was above Nicolas Sarkozy:

The smallness of a president should not be measured by his stature, but by the baseness of his decisions.

The debate over the unfairness of bonuses for bank executives began as soon as the first signs of insolvency in the global banking sector emerged. Not before. And that debate has led to a consensus on the perverse nature of the bonus system for top executives at financial institutions.

Some people have completely missed the point and believe that the problem with bonuses lies in their size. Nothing could be further from the truth. The billions allocated to bankers as a whole based on their achievement of targets are a drop in the ocean compared to the leverage, insolvency and bankruptcy of the global banking system. These sums are probably indecent and immoral given the damage the strategies used to secure them have done to the system. But in themselves, they are sums that are far from being the cause of the accounting difficulties the financial system is currently facing. All the bonuses combined amount to nothing more than peanuts the accounting shortfalls suffered by banks around the world. Although, on reflection, publicising these insignificant sums may simply be a way of justifying regulation designed to prevent the perversion of the incentive system that throws us into the Risky Business.

So, what is the real reason for demonising and regulating these bonuses? Why have the G20, central banks and other world leaders made such an effort to control and alter these performance-related payments for global bankers? The reason is very simple: the banking strategies and policies required to secure these bonuses have proven to be lethal to the stability of the system. In order to secure a multi-million-pound bonus, the heads of various banks must take excessive and reckless risks to achieve growth figures, profits and, ultimately, success for their institutions, thereby jeopardising the stability of the banking sector as a whole, and with it the stability of the capitalist system in its entirety. The reward for success, when it comes to companies vital to the system such as banks, which are supposed to provide stability, is perverse because it jeopardises the very survival of the financial system. Thus, most senior executives at major banks did not hesitate to take far greater risks than is desirable, essentially for two reasons:

1. Lack of awareness of the risk involved.
2. An irresistible personal bonus.

As for our naivety, we all seemed to believe we were living in a sustainable, eternal and unassailable system. After all, just over two years ago, who could have imagined that the entire global banking system could collapse? Yet some were dismissed as mad doomsayers they did it five years ago (It’s striking to read Roach’s words again, isn’t it?). But the bankers eligible for bonuses either failed to see or chose to ignore the risks involved in leading their institutions to infinity and beyond.

Today, attempts are already being made to move towards a model that is somewhat less dangerous, though essentially just as perverse. Sarkozy will therefore try to persuade the G20 to apply bankers’ bonuses in three-year tranches, forcing them to maintain their performance throughout the three-year period if they wish to receive the bonus. This will eliminate the absurdity of a banker earning success fee with just one successful year amidst a string of poor ones. But as we have said, The bonus system remains fundamentally flawed.

When we talk about a risk-reward balance such as that found in the banking sector, performance-related pay (profit = bonus)—which is so logical and widespread in the business world—no longer applies. When we are dealing with companies With the ability to leverage assets more than 25 or 50 times, a globally interconnected financial system, and collateral that is susceptible to bubbles such as the property market, bonus payments cannot be left solely at the discretion of the institution. It is therefore inconceivable that sound and prudent risk management should be a concept alien to the bonus schemes of bank executives. For what is being put at risk is the stability of the entire system, and not merely the personal bonuses of a few executives or the institution’s business future. Globalisation; leverage; market monopoly (virtually no one is exempt from having some kind of connection with the financial system) or universal goodwill; or the holding of the entire population’s debt throughout their lives (even more than one), to give a few examples, make the global banking system a Reason for macro-state to ensure its stability and soundness.

As we were saying, there is now a consensus against performance-related bonuses (success fees) for bank executives. Everyone recognises the perverse nature of offering personal incentives for increases in bank profits. If the carrot we dangle in front of the donkey pulling our cart to keep it moving is too tempting, we risk snapping the axle due to excessive speed, overturning on the first bend, or fatally derailing the entire convoy. The fact is that it is not just our family or company travelling in that cart, but, in tow, the stability of the financial system as a whole, and therefore that risk must not exist. It is clear that nationalising the banking sector is a terrible solution that would lead to utter inefficiency; nothing could be further from my intention. But it is also clear that the choice of incentives must be based on criteria that go far beyond the bank’s own profit. Rewarding senior executives solely on the basis of performance, as in any other company, is reckless, inappropriate and has proven to be catastrophic. Objectives and risk management (both at the individual institution and at a systemic level) must be taken into account in the bonuses paid to bank executives, regardless of regulations.

The curious thing is that this very distortion of the bonus system – the negative effects of which we almost all agree on today – is exactly the same perverse concept for those who willingly accept performance-related bonuses for managing a personal portfolio or wealth in general. For those who pay fees based on what an adviser or manager makes them earn, the result is essentially the same: Neglecting proper risk management in pursuit of a bonus that can only be secured through substantial profits. Even so, many who condemn bankers’ bonuses continue to pay their own managers in the same way, without realising that are subject to the same mismanagement of their assets. But of course, in such cases, rather than the stability of the financial system, it is only the stability of the family’s assets that is put at risk. To each their own.

Today we’re bringing you one of those articles which, had it been written by any Spanish blogger, would have had the author branded a baseless doomsayer, an enemy of the nation, a rabble-rouser and economically illiterate. But this one is written by Variant perception (the London-based team of analysts) and supplemented and commented on by the prestigious and outspoken John Mauldin, a prolific economic expert whose writings appear in a vast number of media outlets. It is well worth reading the article in full – which I have translated for you – entitled: «Spain: The hole in Europe’s balance sheet», and you can read the original English version here here:

Spain: The hole in Europe’s balance sheet

• Is Spain = Japan 2.0? Reasons:

1. The bursting of the property bubble in Spain is worse than most people realise.
2. Spanish banks are covering up their losses.
3. Investors must be out of their minds if they think Spanish banks are among the strongest in Europe (see ‘Spanish Banks In Top Form’ at Forbes). If all of the above is true, Spain will soon have ‘zombie banks’ like Japan.

• Banks are covering up their losses: We believe that Spanish banks are not valuing their mortgage loans at market prices, and are renewing loans to ‘zombie’ construction firms and property developers. And they are doing this by exploiting accounting changes, failing to value assets at market prices, renewing loans to ‘zombie’ companies, extending mortgages granted at 100% of the unrealistic value assessed at the height of the bubble for up to 40 years, and engaging in other practices typical of the bubble era.
• Spain is experiencing deflation: In a deflationary environment, servicing debt is even harder, as even with zero interest rates, the real value of the debt increases. That is why deflation is such a terrible thing. Eastern Europe, Spain and Ireland are only just entering their deflationary phases. We believe we will see much more deflation, which will have far-reaching repercussions for the European banking sector.
• Who puts up with all this? The peripheral countries are net debtors, whilst the rest of Europe is a net creditor. When a debtor is unable to pay, the creditor suffers. Germany, France and others will have to cover the shortfall by recapitalising the peripheral countries and Spain.

Strategies:

We recommend going short on, or reducing holdings of, Spanish government bonds in favour of German ones, as well as taking a bearish stance on Spanish equities – particularly banks, construction companies and similar sectors – and any consumer-related sectors.

Is Spain = Japan 2.0?

We have absolutely no wish to be overly critical of Spain, but we believe it is on the brink of disaster. If the severity of the crisis is ignored – given its far-reaching implications for the European banking system – the cost to investors could be high.

Spain is doomed to a long and painful period of deflation, which will manifest itself in extremely high unemployment for an industrialised economy, the collapse of the property sector and widespread bank failures.

Spain experienced the mother of all property bubbles. To put this into perspective, there are currently as many houses for sale in Spain as there are in the US – a country six times its size. And yet its GDP is barely 10%, whilst it accounts for 30% of all the houses built in the EU since 2000. Most of these properties were financed with foreign capital, and therefore the Spanish property crisis is closely linked to the financial crisis.

The impact on the banking sector will be severe. Let us bear in mind that the value of mortgage loans granted has risen from just €33.5 billion in 2000 to €318 billion in 2008. That is an 850% increase over 8 years. If we add the total value of all loans granted to property developers and construction companies, the figure rises to €470,000 million. This is almost half of Spain’s GDP. And the majority of those mortgages will default.

In our view, the Spanish banking sector faces a very challenging outlook. Unemployment in Spain stands at over 17% (twice the EU average); there are more than 4 million unemployed people and over a million households in which none of the members are in work.

Facts:

• The property crash in Spain is worse than most people realise, just as the subprime crisis was also far worse than people thought.
• The Spanish banking sector is concealing its losses and rolling over the debt of ‘zombie’ companies, just as Japan did in the last decade.
• Investors are deluding themselves if they think that Spanish banks are among the most sound in the world, despite articles such as the aforementioned Forbes piece that uncritically praise their strength.

If we are right, Spain will soon have ‘zombie banks’ like Japan and face a long period of deflation, but in its case it will be much worse.

As Edward Hugh, the most prescient guru amongst Spain’s analysts, puts it: «Japan was able to boost savings and achieved a current account surplus of 3% of GDP. Spain has a massive external debt (in 2007, the current account deficit stood at 10% of GDP) and most of its export industries are in a precarious state.».

Let’s lay everything out on the table

We try not to go on too long in our articles. If something cannot be explained with a few charts, it is better not to explain it at all. In the case of the Spanish banking sector, the subterfuges and cover-ups surrounding non-performing loans have forced us to piece together many parts of the puzzle: Interviews with bankers insiders and other sources of information have been needed to find out what’s going on with the puzzle. That reminded us very much of the early days of the subprime mortgages, when all the published banking results looked good – until they no longer did. We believe the same will happen with the Spanish property sector.

The situation in the Spanish property market is far worse than people realise.

The courses of action most widely accepted by analysts regarding the Spanish banking sector are as follows:

• Dynamic Provisioning: In 2000, the Bank of Spain introduced the dynamic provisioning system, which required banks to set aside reserves against future losses. Spanish banks set aside provisions three or four times more than most of their competitors. In fact, the Bank of Spain was creating countercyclical ‘airbags’ to prepare for a potential credit crisis.
• Prudence when borrowing: The major Spanish banks, with their exemplary risk management, were able to concentrate the bulk of the mortgages granted on primary residences, in major cities and with reasonable loan-to-value ratios, thereby leaving developers and buyers of second homes (and speculators) largely in the hands of the savings banks.

However, despite dynamic provisioning, during the recent rally, Spanish banks have been taking measures left, right and centre to shore up their capital. For the most part, they have done so by foisting preference shares on their retail customers retail the most uninformed. It’s a good start, but we don’t think it’s enough. They need much more.

The scale of the problem in Spain is staggering, and it is rapidly eating into the dynamic supply of properties. Even by conservative estimates, Spain has over 1,000,000 unsold homes. Unfortunately, many of them are on the coast, and without the return of a new flood of tourists with deep pockets (GBP/€), many of them are doomed to remain on the market indefinitely. Spanish homes are all in the wrong place.

The construction share bubble bears a striking resemblance to the US bubble and other classic bubbles. They shoot up tenfold and then plummet by 90%. The maths never fails.

Given this deplorable state of affairs, we might conclude that property prices in Spain have fallen to a similar extent as those in the US. But that’s not the case.

As the following chart shows, statistics indicate that property prices in Spain have fallen by just 10 or 15% from their peak.

Why haven’t Spanish banks suffered the same fate as their American, Irish or British counterparts? We have always wondered why the property bubble and the collapse of Spanish industry have not claimed more victims.

We believe that the Spanish banking sector is concealing its problems. Let’s see how it is doing so:

1. Taking full advantage of accounting flexibility
2. Not valuing the collateral at market value
3. Debt roll-over for zombie companies
4. Renegotiating 40-year mortgages at 100% of the initial value

Let’s look at them in detail:

1) Exploiting accounting loopholes

The Bank of Spain is known for being a prudent and conservative institution. And that is true, but things are now changing. It should be deeply concerned and keeping a close eye on the dire situation facing some Spanish banks, and some analysts believe it is helping them to avoid reporting losses this year.

In July, the Bank of Spain changed the rules on provisioning for non-performing loans. Previously, banks had to set aside provisions for the full value of mortgages where the loan-to-value ratio exceeded 80% and where payments had been in arrears for more than two years. Under the Bank of Spain’s new guidelines, banks are now only required to set aside provisions for the difference between the value of the mortgage and 70% of the property’s market value (as stated in this article in the Financial Times and in this one from Economist.com). This has meant that most Spanish banks have not had to report losses this year.

2) Not valuing the collateral at market value

We also believe that Spanish banks are not valuing their balance sheets at market prices. According to an article published on 19 April in *Expansión*, Spain’s equivalent of the *Financial Times* (sic), entitled «Banks and building societies carry out one in every two property valuations», banks and building societies control 25% directly and a further 25% indirectly through their shareholdings.

In the words of Expansion:

The valuation of collateral in the mortgage portfolios of savings banks and banks, and of their property assets, is becoming increasingly important. In 2007, the thirteen companies linked to financial institutions accounted for 47% of the property valuations carried out.

The valuation of property assets has, if anything, taken on new importance for the banking sector in the current context of economic recession. The valuation of collateral in banks’ mortgage portfolios and of properties they are acquiring through judicial foreclosures and debt-for-asset swaps is key to gauging the solvency of the financial system. This situation has once again brought into focus the links between banks and valuation firms, which in many cases go beyond a mere commercial relationship.

Official statistics are not based on anecdotal evidence, internet searches or actual property sales carried out by the banks themselves. According to a El Mundo study, property prices in many coastal areas have already fallen by 30–50%.

Spain is also grappling with the problems faced by banks that record non-performing assets on their balance sheets at the value of the outstanding debts (payment in kind). However, when a property development ends up in the bank’s hands, the bank has, in effect, purchased those properties for the value of the debt. They have turned a non-performing loan into an asset they own. And despite being the owner, the bank is unable to sell the property and will, in all likelihood, continue to carry that debt for the «price paid» on its own balance sheet for many years to come. Banks have no experience as property developers or builders, and are creating problems for themselves which they are forced to mitigate by pushing accounting practices to the limit. As an alternative, they are bundling these properties at a discount and selling them to associates and holding companies, which they finance indefinitely (roll over) through virtual mortgages until the latter manage to sell them, as we can read in Surveyspain.com.

3) Debt roll-over for zombie companies

In recent weeks, we have seen many estate agents and property developers announce that they have refinanced their debts, which allows them to stave off bankruptcy for a while. Realia announced this recently, and Aisa, Afirma, Royal Urbis and Renta Corporación did so earlier. Following the collapse of Colonial and Martinsa Fadesa in 2008, bank share prices plummeted, and very few bank executives are willing to see that happen again.

These loans to ‘zombie’ property developers merely postpone the moment of reckoning.

The Spanish banking sector has realised that pushing property developers or construction firms – which are unable to renegotiate their debts or sell their properties – into insolvency is not in the interests of either those companies or the banks themselves. They are now trying to give these companies as much breathing space as possible so that they do not have to report losses that are excessively threatening to their survival. In the words of one banker himself insider on Cotizalia:

When a small business owner defaults on their payments – even if they have been a good customer for many years – it’s like a «every man for himself» situation, with everyone shunning them as if they had the plague. But in the case of large property developers or builders, as the bank has had enough of taking on assets, it grants them lines of credit so that they can at least continue to pay the interest on their huge debts, thereby giving them a reprieve for a couple of years whilst they wait for the miracle that will enable them to repay their mortgages.

The banks« willingness to give developers free rein is nothing new. As they say in the banking sector: »If you owe me a million, you’ve got a problem. But if you owe me a billion, I’ve got the problem.’

4) Renegotiating 40-year mortgages at 100% of the initial value and other practices typical of a property bubble.

Spanish banks are the largest holders of property in Spain. They have acquired properties in various ways. To avoid the effects of the property crash, Spanish banks have been buying properties before the mortgages went into default, and are trying to offload them through their own property companies. They have also acquired tens of thousands of homes through debt-for-asset swaps. Estimates suggest that the value of properties repossessed by Spanish banks through foreclosure or payment in kind exceeds €16,000 million.

The Spanish banking sector has created websites to clear their stock. The favourable terms include: price discounts of 25–50%, interest rates at Euribor +0%, repayment terms of up to 40 years and guarantees of future repurchase.

Loans to Spanish property developers have been formalised through agreements between the banks and the Spanish Association of Property Developers and Builders (APCE). Banks will provide 100% mortgages over 40 years for all properties on which the developer offers a 20% discount. The buyer will not be required to pay any deposit. Santander and La Caixa signed that agreement with the PACE in a desperate attempt to reduce its stock. And that is another indirect way of providing credit to zombie developers.

Part 2 continues…