Investment Newsletter June 2012
A Spaniard in the Works Euro 2012 got underway last weekend, perhaps providing some welcome relief from Euro Crisis 2012. On the pitch, Spain completely destroyed the Irish and off the pitch their economic woes are also putting the Irish in the shade! Whilst issues in Greece have been caused by an over-indebted government who have spent too much and took in too little in tax, the issues in Spain have arisen in the banking sector. Spain’s property boom dwarfed even that in the UK. From 2004 to 2008, house prices rose by 44%.
Prior to the crisis, Spain’s government ran a relatively balanced budget. However, the banks had lent huge amounts to fuel the property boom and, once the credit crunch hit, default rates started to rise. Since 2008 house prices have dropped by 25%. Much of the lending from Spanish banks had come from international money markets, rather than depositors. Since the credit crunch it has become much harder to borrow on the money markets, and many Spanish banks therefore ran into funding difficulties. Spain has always insisted that this situation was under control and they had set aside enough capital to bail out their banks. Up to the end of April, the government had injected £34bn Euros into the banking system. However, many were worried that the full extent of the drop in property prices had not yet been factored in. This came to a head when Bankia, Spain’s fourth largest bank, asked for 19bn Euros of funding. Bankia had only been formed last year by a merger of several small regional banks which had ran into difficulties. This led to rampant speculation that Spain might need to be bailed out so they could in turn bail out their banks. Spain has now been given up to 100 billion Euros from the European bailout fund. It appears that this is specifically targeted at banks and is technically a “loan” rather than a bailout. It therefore does not appear to come with all the conditions that a full bailout would come with. This is important, as Spain’s economy is suffering badly and unemployment is running at almost 25%. Around 50% of the under 25s are out of work. If economic conditions were attached to the bailout funds, their economy could suffer even more. Markets initially welcomed this deal and the FTSE 100 rose by around 1.3% to over 5,500 on Monday morning on the day after the package was announced.
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