Bailout Insufficient: Spain Will Need More Money

By Danny Esposito for Investment Contrarians | Jun 15, 2012

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I’ve penned articles recently describing how the European debt crisis began. Too much debt needs to be paid back. Not only do the southern countries in Europe not have any money to pay it, but also the global economic slowdown is reducing government revenue, moving up the timetable of the European debt crisis to today.

One month after denying that Spanish banks would need a bailout, Spain’s leaders asked the European Central Bank (ECB) for money. The bailout currently stands at 100 billion euros. It is not going to be enough, as the European debt crisis deepens.

Spanish banks hold 400 billion euros in mortgage-backed securities (MBS), but the value of those securities is diminishing fast. The bailout of 100 billion euros might be sufficient if Spain’s economy grows again and the housing market stops falling. Of course, the housing market has a greater distance to fall, because, like the U.S. housing market, prices reached lofty levels that were completely unsustainable.

With the European debt crisis, there is no chance Spain’s economy will stop falling and magically start growing again. As a matter of fact, the economic contraction in Spain will only get worse, because the European debt crisis is deteriorating—and fast.

The unemployment rate in Spain is currently 24.3%. That is one-in-four people in the country who are unemployed. Youth unemployment is over 50%: one-in-two young people are unemployed. Just-released figures showed that the poverty levels in Spain have continued to worsen. Twenty-five percent of the population lives below the poverty line, as the European debt crisis prevents job creation and growth.

With this backdrop and the continued European debt crisis, home prices are still too high. They have just begun to fall and should continue to drop further.

Standard & Poor’s (S&P) has conducted studies surrounding the European debt crisis and the Spanish housing market. It believes Spain’s housing market has another 20% more to drop, which is probably conservative given the high unemployment rate and high poverty levels.

If housing prices drop another 20%, then Spanish banks lose another 80 billion euros (400 billion euros in MBS * 20%). This money does not include the states. Officially, Spain’s 17 states has debt of eight billion euros. However, it was just recently uncovered that the 17 states were hiding more debts on their books from the government.

Instead of eight billion euros of debt, the states have 36 billion euros of debt. That is 28 billion euros more in debt that Spain needs to add to its mountain of debt from the housing market. To cut down this extra debt, the states need to cut back on spending, which they are unwilling to do with the European debt crisis, because so many families are in need.

While the central government in Spain attempts to deal with all of these problems, the country’s own debt-to-GDP is starting to exceed 100%. With the European debt crisis, revenues are falling, putting the country deeper and deeper into a black hole.

This reprieve for Spain will not last long. With no job creation due to the European debt crisis, the housing market will continue to fall and Spanish banks are going to need at the very least another 100 billion euros, and that is just for starters.

Tags: European debt crisis, housing market