The article below is taken from the AULAN /European Citizens monthly report to it’s members :
Is the crisis past?
Over the past months news, from Spain and beyond, indicates an easing of the crisis. In the USA and Europe, as a result of some leading US investment banks reporting substantial gains in the second quarter, the stock markets are again moving upwards. Some of the market manipulators, short-sighted politicians and professional ‘rose-painters’ are euphoric: The crisis has touched bottom, we are on the way up again!
We remind our readers what we have written several times, the property crisis in Spain, which started in 2005, is not the result of the financial crisis in the USA in 2008 (even though a property bubble there was the main reason for the financial disaster, that was multiplied by sub-prime mortgages).
Sub-prime mortgages were advanced to clients who obviously would not able to meet the repayments. It was a means to keep the profitable construction industry going and, at the same time, to secure extra profits for the banks and insurance companies.
The financial manipulators in New York and London made a new ‘investment tool’ out of the bad mortgages, by packing a few good loans together with many sub-primes, then having them insured by national insurance companies and classified as ‘first class’ by rating agencies, who earned commission on each good classification given. Then the “derivates” were sold to banks all over the world and the ‘investments’ were passed on to their innocent clients.
When property prices and sales started to fall in 2007, the groundwork had been laid for a world-wide financial crisis. With the collapse first banks and financial services companies, the defenders of “Reaganomics” were the first to call for help from the government. The fresh Obama administration and the European Central Bank poured 115,000 million euros into the financial system, but even so the disaster could not be halted. We got the worst financial crisis since the great depression and it is not yet passed. In the books of banks and other financial institutions there still lurk four billion US dollars in so called “toxic” assets. In the end, it will be the national governments who take over the bad papers, financing the deals from the pockets of present and future tax payers.
Moreover, the huge amounts of capital infused into the financial institutions, are not being passed on to medium sized industries and businesses, which have been forced to cut their staffing levels or declare themselves bankrupt: The growing number of unemployed reduces consumption, strengthens deflation, cuts income from taxes and increases non-payments on previous loans from banks. An evil spiral which will become more evident after the summer.
The financial crisis is like a “tsunami” wreaking havoc on everything in its path, and remember, heavy damage is also caused when the waters flood back again to the ocean. A.
The international effects
To evaluate the effects of the crisis on Spain and on the foreigners with properties there, one must also consider the international situation and ask: Is the profit taking of the big banks and corporations in the USA, a firm confirmation that the international financial crisis has seen the bottom and is on its way up again? Some of the best economists are saying no. They point to the enormous sums borrowed on the capital markets by the US Government, to finance the bail-out of banks, insurance companies and other financial institutions, as well as industrial companies (estimated at ………….US dollars) placed by the same banks which brought us into the crisis and they add that there are now less investment banks to fight for the spoils. It is this situation which has provided a few of the big banks with substantial temporary profits.
However, in the real economies of the world, the crisis continues: -
The International Labour Organisation stated at the end of May that there are now 210 to 240 million registered unemployed, up 40-60 million since 2007. Unemployment in USA reached 9.5% at the end of July. OECD expects an unemployment level of 10% in the Euro Zone during 2009, increasing to 12% next year.
OECD reported at the end of July that global foreign investments were down 50% in the first quarter of 2009, compared with 2008. World trade is down 13%.
The International Monetary Fund has estimated that the economies of the world will suffer a retraction (deflation) of 1.4% this year; 2.6% in USA and 4.8% in the Euro Zone.
OECD is expecting public deficits of 5.5% in the EU this year, increasing to 7% next year. The international organisation predicts GDP will fall 4.3% by the end of July. UK’s GDP fell 5.8% compared with the same time a year ago.
The situation in Spain
Due to the enormous property bubble which was created in Spain from 2004 and the economic monoculture based on the construction industry (our readers know the facts and figures, so we shall not repeat them) the unified crisis (home grown property crisis and international financial crisis) is hitting Spain harder than most other countries and will last longer. For the end of July/beginning of August we have the following dark picture:
By the end of July unemployment will stand at 3,564,889, after a small improvement in May and June – due to the start of the tourist season. Over the past 12 months, unemployment has increased by 1,174,465, up 49.13%. Over the first 5 months of this year the number of new unemployed is 1,266,556, an increase of 80% over last year. UBS (Union Bank of Switzerland) is predicting unemployment of 25% in 2010. Negotiations on salaries between the trade unions, the Federation of Employers and the Government have definitely broken down.
Spain is loosing independent workers at a rate 6 times the average in other EU countries. In the first quarter of this year, 64,135 self employed gave up and joined the ranks of the unemployed and during the first half of the year 87,037 small businesses closed their doors.
The Spanish are the most worried in the EU of becoming unemployed. 65% fear losing their jobs; 72% fear their partners will be without a job and 77% worry their children will have to enter the unemployment lines.
In the first five months the Social Security System received 50,855 million euros in contributions; 1.3 % less than in the same period last year, and paid out 40,084 million, 8.8% more than last year. The surplus of 10,771 million was 26.6% lower than last year.
State debts is increasing rapidly and is expected to reach 100,000 million euros or 10 % (in relation to GDP) before the end of the year. Some experts predict public debts of 12% before the end of this year. The credit rating of the ‘Kingdom of Spain’ has gone from the maximum AAA to AA+. – IMF, the International Monetary Fund, warns that Spain’s GDP will contract by 4% this year and 0.8% in 2010 (in April their estimate was 3% contraction in 2009 and 0.7 in 2010). This is the most pessimistic prediction of all developed countries.
The Institute of Economic Studies reports Spanish exports will shrink 22.8% this year. Industrial orders in May were down 29..5% compared with last year.
In the first half of the year 3,106 bankruptcy proceedings were initiated, up 212% over the same period last year. 36% of them were in the property and construction sector.
Sales of new private cars increased 14.5% in June, after 31 months of continued fall. The increase is the direct result of the Government’s incentive plan for the car industry, where 100 million euros has been allotted to subsidise 200,000 private purchases. However, businesses and letting agencies registered a fall in their purchases, creating a minus of 15.9% in total registration of new cars.
The Governor of the Bank of Spain is warning Spanish banks they will have to weather their worst year in 2010, and are demanding that small banks and saving banks join forces to survive. In the coming year three problems will appear that will place the current crisis in the shadows: non-payment of mortgages held by private house owners will increase considerably; the difficulties in transferring the lower interest rates to the mortgages and the limits to the present practice of taking over mortgages or the shares of companies in troubles. He warns that only strong banks will survive. Spanish banks are facing repayment of loans to the tune of 82,982 million euro in 2010.
The rating agencies are warning that the classification of the debts of the regional governments will fall if they do not use the 10,000 million euros they received recently from the Government to pay existing debt. Moody´s has lowered the classification for Banco de Valencia, Bancaja and CAM from C (adequate) to D (weak). Standard and Poor’s has reduced the credit rating of Banco Popular from A to A+ with negative perspectives. Spanish financial entities with debts to the European Central Bank increased in June to 70,703 million euros, 50% more than 1 year ago.
In spite of the huge efforts by the banks, real estate promoters and agents, the surplus of non-sold dwellings is not diminishing. In particular the sale of properties in the coastal regions to foreign buyers has come to a virtual standstill. Current sales are mainly to Spanish buyers (moving from one place to another or young people getting married). On the Costa Blanca alone there is, according to the Ministry of Housing, a “stock” of 46,366 unsold new dwellings. In addition there are a large number of re-sale dwellings, many owned by foreigners, and the new dwellings which the promoters are finishing in projects approved in previous years, add to the stock.
According to the Ministry of Housing, the price per m2 for new construction is now 1,920 euros. The constructors claim they have lowered prices 20% and “cannot do any more” but it is obvious the market demands further reductions and most experts signal the need for cutting prices another 20 to 30%. Professor José Montalvo of the University of Barcelona declared, “Prices must return to where they were before the bubble, meaning a reduction of 40 to 45%.”
Foreigners in Spain
Spain is an important country for tourism. In addition to the climate, it has a varied and interesting cuisine, excellent wines, many historical and cultural attractions, good transport facilities and an enormous number of hotels and restaurants.
The main-stay of Spanish tourism are the middle classes of Northern Europe. This can be clearly seen from the statistics of the Ministry of Tourism. In 2007 the 3 main markets for tourists to Spain were UK, Germany and France, totalling 60% of international tourism, with 93.1% from Europe as a whole. Tourism represents 12% of the GDP.
The Ministry reports that only 63.9 % of foreign tourists stayed in a hotel; 7.4 % stayed in their own dwellings; 13.9 % in dwellings owned by family members or friends and 6.7% in rented dwellings. Of the hotel tourists, 4.3 % stayed in five star establishments; 33.2 in four stars; 34.2 in three stars and 28.3% in lower category hotels.
Meaning: The great majority of the foreign tourists stayed in rented accommodation, or in 3 star or less hotels.
Fall in occupation of hotel beds
The very ‘exact statistic’ of the Ministry can also tell us that, to June this year, 14,643,351 foreign tourists occupied a bed in a Spanish hotel (some of them of course going from one hotel to another during their stay in Spain, thus the actual total number is lower).
Tourism from France fell 4.7% and the number of British tourists declined 17.7%.
When it comes to occupation in the various categories of hotels, the Ministry reports falls in hotel occupancy of 20.7% in 1 star, 17.3 in 2 star, 8.6 in 3 star, but hotels with 4 stars had a fall of only 6.6% and 5 stars of only 1.4.
From this it can clearly be seen it is mainly the tourists from the European middle classes who are turning their backs on Spain.
It is the middle classes in Europe who have been the most affected by the crisis and in the UK, there is also the fall in exchange rates. This situation will be confirmed during the summer of this year.
Due to mass construction and the subsequent deterioration of the coasts, luxury tourism may not be attracted to the Spanish coasts and islands. There are many more un-spoilt and exotic places in the world. Spain has built mainly middle class hotels for the middle class tourists. The problem, however, is that it is the middle class who feel the crisis in their purse and are being forced to save, even on their holidays. The foreign tour operators are squeezing Spanish hotel owners to lower their rates (as they did this summer). Lower rates equal lower services. We are in a vicious circle from which it is difficult to break out of.
Tourists need not only a hotel to sleep in but also want to go out to wine and dine and not become prisoners in a hotel. Good restaurants and bars in Spain have become very expensive, sometimes more so than similar establishments in the big towns and cities in Northern Europe where the tourists come from. It seems restaurant owners ‘up their prices’ as clients disappear, instead of trying the opposite.
Demolition not Construction
We do not know the new Secretary of State for Economy, who coined the phrase “Tourism and construction will pull the country out of the crisis” but it is obvious that he is utterly ignorant of the real situation, just as was the previous Finance Minister who, in August last year said, “..crisis, what crisis?”
The Government admits there is a stock of almost 1 million unsold dwellings (the reality is closer to 2 million). Most of them have now passed into the ownership of the banks, which are trying to sell them through a number of highly paid sales organisations. Despite large reductions in prices, few are being sold and construction is pulling the banks down. The big promoters have stopped construction because they sell nothing (logical!). The total number of plans for dwellings approved in the five first months of this year was only one third that in the same period last year.
Recently we referred to a statement by a Spanish property expert admitting that because of its bad quality a substantial part of the stock of dwellings would never be sold. We have to agree with that expert.. A large part of the hastily and cheaply built macro-projects are just instant slums, where your view is looking at the wall of the next building, badly insulated against heat, cold and noise, where the maintenance costs will be high, where the promoter have left the country and where the municipalities will raise the local rates as much as they can get away with …..
The property expert recommended that such dwellings should be demolished. Again, Mr. Secretary, pull down the constructions, instead of pulling the country out of the crisis.
We advice the Secretary to read the Auken report.
In the meantime, we maintain our recommendation to foreigners not to buy property in Spain, especially in the Valencia Region, as long as none of the recommendations in the Auken report have been taken into account, nor even discussed by the authorities.
Notices:
Many forest fires
Many forest fires have devastated large tracts of the dry countryside. By the first week of August 85,000 hectares had been destroyed, 34,000 hectares more than in the same period of 2008. Five fire fighters have lost their lives. 1,500 people had to leave their houses in Mojacar due to a fire in Sierra Cabrera. Huge fires have also destroyed forests in Teruel, Cuenca, Tarrragona, Burgos, Alava and Madrid..
151 municipalities in Valencia under investigation
151 municipalities in the Province of Valencia are being investigated for illegal constructions. The court have asked the rural police of the Guardia Civil to report all illegal construction in the municipalities which have declared that no such crimes have taken place in their area. In the 151 municipalities that have imposed fines, the court suspect the reason was to improve the bad economical situation of the municipalities.
Less rain during summer
Scientists from the Pyrenean Institute of Ecology have been engaged in studying rainfall data from 1950 to 2006. The resulting climate projections for the coming decades show that less rain will fall on the Iberian Peninsula and precipitation will be more frequent in winter than in spring-summer. The researchers are predicting a significant decline in rainfalls throughout the entire Mediterranean Basin, above all in spring and summer.
Less passengers for The Canaries airports
There were less passengers coming to Spanish airports this summer. In July the airport of La Gomera experienced a fall of 22.1% compared with last year; Gran Canaria 12.2% less; Tenerife Sur 13.2; Tenerife Norte 3.8; Lanzarote 13.5; Fuerteventura 10.4 and La Palma 4% less.
Expensive mobile tariffs
OECD reports that Spain, Canada and the USA have the highest prices for mobile phone calls. The European Commission has demanded a reduction in Spanish tariffs. The cheapest countries are Finland, Sweden and Holland.
50% cheaper in Almeria
Property agents in the area west of the Almeria capital claim, due to banks trying to get rid of their “toxic” property assets, the price of dwellings has fallen by up to 50% in certain areas. The conclusion of the agents is of course, “Now is the moment to buy!” However, we think property in Spain is still overpriced even with the 50% reduction…”
The Spanish know better
Bank BBVA has made a study of the perception of the crisis, which shows 92% of Spaniards consider property speculation is the principal cause for the economic crisis and not the rot in the international financial world. They point to unemployment, the economy and the political class as the main problems for Spanish households.
Mafioso paid mayor
An Italian, connected to the Calabrian mafia organisation Ndrangheta and also to Juan Antonio Roca (mastermind of the Marbella corruption) paid the socialist mayor of Seseña 700,000 euros to approve the macro-project of “Paco el Pocero” which was to build 13,000 dwellings on the barren fields of the Toledo Province. 5,600 of the dwellings have been built but most stand empty. “Paco el Pocero” has joined the colony of Spanish promoters active in Congo.
Protest march in Mazarron
Citizens in Mazarron (Murcia) have staged protest marches against the increase decreed by Mayor Francisco Blaya (PP) of 120% over the past year in the local rates and thus becoming the highest in the Province. The Mayor is paying himself a salary of 84,000 euros a year and there are 600 employees in the Administration in the town of 36,000 inhabitants.
Construction stopped
The 14 biggest promoters/constructors in Spain, organised in Grupo-14, reports they have not started construction on a single new dwelling during the first six months of the year. One of the biggest, Villar Mir from the OHL group has proposed lowing the prices of unsold dwellings saying, ”Because as long as we do not sell, we cannot construct.”
Letting prices falling
Letting prices are starting to fall, due to over supply. Owners of dwellings which cannot be sold due to a lack of buyers are trying to cover their costs by letting. Based on the financial costs of a dwelling, the letting price could be 4.5% yearly on the value of the property; however, many are letting at a price equal to 2%, a price which hardly covers the costs.
Doubling local rates
The Municipality of Muchamiel (Alicante) will double the local property rates to balance its budget. The increase will take place over the next 6 years and will produce an income of 11.9 million euros, up from 4.7 million this year. We have warned our readers that taxes will increase in Spain and we expect all tourist municipalities will do the same as Muchamiel.
Low Euribor eases pressure on mortgages
At the end of July the Euribor was down to 1.412%. This will ease pressure on owners with mortgages with floating interest rates and where the Euribor has been used as the index. On long term mortgages this can mean a rebate of up to 50%. However, as soon as prices start to go up again, we can expect the Euribor rate to rise.
Prices continue to fall
Consumer prices in Spain fell 1.4% in July, the largest fall in 47 years. The Government has – as usual – assured us the country is not suffering deflation. However, the reduction in June represents the fifth consecutive month of falling prices.
Immigrants becoming Spanish citizens
After staying here for the time period required for their nationality, 386,863 immigrants have become Spanish citizens. For immigrants from the Ibero-American countries and former Spanish colonies this is 2 years, and up to 10 years which is the general rule for others. Descendants of Spanish exiled during the civil war also have the right to become Spanish citizens; 40,000 of them applied and 15,288 were admitted.
Two foreign mayors in Spain
Following the local elections in 2007 the Government reports the election of two foreign mayors and 85 councillors in the 8,112 Spanish municipalities. The two mayors, a Frenchman in the town of Rollan (Salamanca) and a Belgian in Alfes (Lleida); the councillors: 37 are British, 17 German, 13 Italians, 8 Belgians, 2 Dutch, and one from each of Austria, Bulgaria, Hungary, Ireland and Checia. There are also some councillors of foreign origin but who have taken Spanish nationality.
Moody´s downgrades 5 Regions
The rating agency Moody´s has downgraded the debts of Catalonia from Aa2 to Aa3 and the Region’s economical perspective from “stable” to “negative.” The perspective for the Madrid Region has also gone from “stable” to “negative,” the same as the Region of Castilla-La Mancha, the Valencia Region and Murcia.
Less Spanish planes
All Spanish air companies are slimming their fleets due to a 13% drop in demand. 110 planes have been grounded since the beginning of the year. In total, 13 million seats have been taken out of the market. In spite of this strong reduction almost all airlines continue to loose money. Iberia lost 92 million euros in the 3 first months of the year, Vueling 3.32 million over 6 months, whilst Spanair lost 218 million in 2008. The air companies Futura, Lagun Air, LTE and Air Class have all ceased trading.
Office space surplus in Madrid
Due to 13% of offices in the capital standing empty, 30% of new office projects in Madrid have been halted at the last minute. Most of the empty offices are located in the suburbs, like Alcobendas, Rivas, San Fernando and Rozas.
Spanish Foreign Minister in Gibraltar
In July Foreign Minister Moratinos visited Gibraltar, an area claimed by Spain, but held by the UK. He had conversations with the Foreign Minister of the crown colony and with Prime Minister Caruana. The visit has come under strong criticism in Spain.
Your mobile phone in danger?
If you have failed to register your prepayment Spanish mobile phone with Telefonica, Vodafone, Orange or Yoigo, you may lose the connection on 8th of November. There are still 12 million phones not registered with their operators.
Support for unemployed
The Government has decided to make an extraordinary support payment to those who are unemployed who, due to the period of unemployment payments being exhausted or they not having qualified for such support, are not receiving any support from the social security system.
15% of drinking water lost
790 hectometres of drinking water, or 15% of the total, is lost every year because of leaky pipes. Households consume 2,544 hectometres or 67.3 of the total consumption. 63.3% of the water consumed is from surface water, 32.6 subterranean and 4.1% is extracted from sea water. Average domestic water consumption is 157 litres per person per day. The average price of water in Spain is 1.29 euros per cubic meter.
Half a million cars less…..
In the first half of this year 527,000 less cars were produced compared with last year. In spite of substantial support for the car sector in the form of subsidies for scrapping older cars when buying a new one, the fall in production continues.. Anfac, the Federation of Producers, estimates the car sector accounts for 3.5% of the total economy in Spain and 8.7% of all jobs. 88.7% of all cars produced this year are being exported, compared with 85% in 2008.
…..and less textiles and shoes
The textile industry produced 30.7% less in the first half of the year compared with last year.. Production of shoes diminished 23.9% over the period. Total Spanish industrial production fell 14.5% in June.
Less taxes to be collected
The Ministry of Finances reports that taxes collected in 2008 amounted to 173,453 million euros, 13.6% less than in 2007. VAT collected fell 6.7%, mainly due to a fall of 21.2% on the purchase of new dwellings. It is expected tax income will fall further in 2009 compared with 2008, whilst public support programs expenses will rocket.
