Spanish chulos

“Sometimes you have to explain things to Mr. Juncker,” De Guindos sarcastically told Spanish daily El Pais, noting that it was unnecessary to detail a precise plan for the banking bailout before Monday, as Juncker had asked. (link)

Juncker being the Eurogroup President, such a phrase seems a little "chulo" having in mind that De Guindos soon is to receive more than 50b€ to save the Spanish banks.

Having in mind that it is possible that Spain soon will have to ask for more money to bail out Spain, it could be interesting to see how long it takes before De Guindos will have to eat his own words. In his situation I'd be less "chulo".

However, as this article says, to be "chulo" seems to be a requirement to be a politician in Spain.

Unsold houses - the phrase of the day

From Forbes:

"Spain is thought to have more unsold housing stock than the United States has – with a population one tenth of the size -  in a country where unemployment is now over 24% and household debt is around 125% of household income. Spanish banks hold the majority of that fragile mortgage debt."

How serious is the crisis in Spain?

First, 

a majority of analysis's agree in saying that the Spanish crisis is not, mainly, caused by reckless state finances (I mention this, as it gives some kudos to the Spanish politicians that I was not willing to give them. The Spanish system gives a lot of economical freedom/responsibility to majors of any local council which allows for a lot of unnecessary spending on Fiestas, Bullfighting and fireworks.)

Second, 

the main problem in the Spanish economy is, and here I agree totally, the construction boom which was mainly financed by loans.

This construction boom was made by private companies/persons and private money. But also here I think that the politicians have a great part of the responsibility. As the local councils are financed, they earn money on allowing terrain for construction, and budgeted every year for more construction, promoting the construction boom (I won't even mention the dirty secrets of how these constructions also financed political parties and even specific persons under the table).

At some point this construction bubble had to burst. During years I kept saying that "the sooner it bursts the beter" as the consequences would be less serious. Unfortunately, it happened rather later than sooner, and now the burst is rather as an nuclear explosion. In the face.
At this point the banks are sitting with a huge stock of buildings and homes which they have financed.
The value of these buildings and homes is registered as an asset. In theory, that is alright. If, at some point, the bank would need money it could sell of some of those buildings to it value, and everything would be alright.
However, and here is the problem. There are no buyers, at least not to the price that the bank is trying to get. (i.e., to the value they have given the buildings in their books).
So, the banks will have to lower the price. Once they have to start selling of buildings to the price that the buyers are willing to pay, they will have to adjust the value of all their assets in their books and the books will look a lot worse than they do today.

So here comes the million dollar question. How bad will it be?

I.e., how much capital must be injected in the system to overcome the crisis?

Unfortunately nobody has the answer for that question at this moment. And there are a lot of guesses out there.

I've read anything from 50b€ to 500b€, but no real consensus on any of these numbers (the 50b€ number seems to be overridden at this point Bankia alone is needing 25b€)

The Centre for European policy studies (CEPS) has an approach to estimate this.

By identifying the "overhang" ("overhang" defined as the investment in construction, as % of GDP, that is higher than the the average between 1970-2000), CEPS think that they can identify how much construction the market must absorbe before the market can start working well again.

According to this estimate, CEPS has come to the conclusion that the overhang in Spain is equivalent to about 380b€ (37% of GDP 2010).

EPS also says: "It goes without saying that our estimated total of €380 billion exceeds by far the provisions and write downs accumulated by the Spanish banking system (and in particular the savings banks) so far."

The key to the recovery is the "absorption" in the curve. 

If, for instance, the banks (and other stakeholders) just writes down the assets with 380b€ and takes that as a loss of 2012, then 2013 will be a fresh start.

That is of course not possible. The banks don't have that kind of money and would go bankrupt, which would harm "normal people" who's money has been used to finance that overhang.

The state could, of course try to help the banks, or the "normal people"... but having in mind that we are talking about 37% of the GDP, it is not something that can be done over a year.

it seems like we will live with the "absorption" during some years. How many years depends on how deep the "absorption" is. With the presetn rythm, CEPS estimates that Spain will not recover until year 2030!!!!

For more information, download the report on following link.

Internet trends according to Mary Meeker

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