The Drain is in Spain
PIM of SPAIN | May 24, 2009 at 11:47 amby
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Spain is set for a long, painful deflation that already is under-lined with the highest rate in the world of unemployment of 17,5% that yet isn’t put to an end, by the end of this year that could be 5 million jobless people. Further facing a real-estate collapse that without surprise is going to cause a general banking insolvency not yet witnessed. “The value of outstanding loans from the banks to Spanish real estate developers went from €33.5 billion in 2000 to €318 billion in 2008, a rise of 850% in 8 years”. Adding the construction and suppliers’ debts, the overall value of outstanding loans to developers, constructors and suppliers rises to €470 billion, which is about 50% of Spain’s GDP, and even worse from which a majority for sure will turn sour. The conclusion is justified that Spanish banks are facing a miserable outlook. Spain's unemployment rate is now of over four million from which over one million families don’t have anyone employed. Spain with Ireland have the worst housing bubbles in the whole of the world, nothing compared to the US. In Spain are over one million new homes and another one million second hand unsold.
These facts almost certainly are known by the authorities, but kept under wraps for as long as possible, because Spain’s banks are not counting their real-estate loans to today’s market value, which is about 50% lower than it was two years ago. According to a recent issue of ‘Expansion’, the Spanish equivalent of the Financial Times, was an article published, titled 'Spanish banks control half of all real estate appraisals.” With other words the banks do dictate the book value of their loan-assets that evidently aren’t reflecting reality.
Besides most European banks may be in poorer shape than US banks, because of a higher leverage - capital invested to loan-value issuance.
"European banks are only restricted on the basis of risk-weighted assets”. Is read. European banks have ‘assets’ of about 330% of their country’s GDP, compared to US banking assets, which are about 50%. They have an accumulated $700 billion in loans to Asian businesses, that recently have seen their exports trade collapsing by on average over 30%, and additionally $1.3 trillion in loans to Eastern European Countries, which are in very serious recession, and many of those loans are likely to end in a fiasco. Massive amounts of money are needed to bail out European banks otherwise their economies will simply implode.
The toughest problem will be to find this quantity of money needed. All governments around the world at the same time are responding to the global recession by running massive deficits, so there are not many, if at all, places to go for a loan. In addition to the US, the UK, Japan, Russia, Spain, and Ireland are all running deficits of over 10%, while Japan's economy will stagnate. Banks are cutting back on lending. Home prices are dropping all over the world. Commercial real estate is rolling over, exposing banks all over the world. "Recession turns malls into ghost towns" is the headline in the Wall Street Journal. Personal savings are rising and retail sales are flat to down. Unemployment still is rising. Not too good prospective at all.
England has been put on negative watch for its debt rating the US could lose its AAA rating. “Total debt-relieve in Europe and US together is estimated at $15 trillion in the coming years. And could top $21 trillion by 2019”, is said. The interest alone on this amount could cost $1 trillion/year. A miracle is needed to see the light at the other end of the tunnel. Let policymakers take heed to look through the here-described tunnel. For the time being all what remains is an all-over the world ruthless drain. China and Brazil are very wise by taking the decision to using their own currencies in trade transactions rather than the US dollar. Debt built-up during the last quarter century is the culprit. Finally the one trillion dollar question where has all this money to come from? → Nobody knows in this world, better not to think about is apparently the dictum.
Concluding, a global depression like the one in the 30s or even worse looks inescapable.
Uwe PaschenThese members have powered this story: