Monday, 14 April 2008

Rain in Spain

The onset of the credit crunch has affected countries all around the world in different ways. The UK is in the process of suffering a mortgage credit crunch which may well cause a house price crash.

As well as this, Spain has the Euro as a currency, which some of our Prime Minister's advisers' are recommending as a solution to our probelms.

It is worth reading an article such as this therefore. It makes for a very sobering tale. Spain suffered an even bigger asset boom than we did due to entering the Euro and immidiately reducing interest rates by 2%.

A crazed government also passed tax laws allowing foreign acquisitions (e.g. BAA) by large companies to avoid tax. the net result was a huge growth in debt and over-investment in reall estate and corporate take-overs.

Where has this taken them now? Well house prices are down 20% and falling, the banks are hiding as much of the debt as they can, but the economy as a whole is in a nasty recession. The Government can try and spend its way out as it has a relatively good debt level in comparison to ours; but overall the prognosis is pretty bad.

You would not want to be holding property in Marbella right now. What makes the situation worse, is that there is no end in sight. interest rates cannot rise, so effectively Germany and others are exporting their inflation to the likes of Spain. Meanwhile a strong Euro hampers Spain's exports just when it needs to re-balance the economy.

If the UK was in the Euro we would be in a very similar position, our house prices would be even more crazy than they are now and economy would be suffering the huge distorotions that are affecting Spain.


Old BE said...

The pro-euro crowd here are seeing a strong currency and low interest rates and thinking "ooh wouldn't it be nice if we had that" without thinking through the consequences if we had been in the euro since 1999 as you say. It won't be long till our rates are back below euro rates and then where will the pro- crowd be?

CityUnslicker said...

The pro-euro crowd will get a shock when spain or italy fall out of the Euro as is almost destined to happen given the economic dislocation being caused.

Anonymous said...

But anyway who would buy in Spain now that it seems that your property rights are hopelessly insecure?

Old BE said...

Do you think that Silvio might take radical action to sort out the Italian economy?

CityUnslicker said...

Dearime - quite, the Spanish have an interesting relationship with those that they would sell (or not) their property too.

I remember a trip with my father one time to see some flats in marbella - this is many years ago. They were all nice and white and had great views.

My father being somewhat shrewd was checking most things, to the irritation of the agent. Then at one point, we flicked the light switch (it was midday). Nothing happened. So we removed the cover - no wiring. no wiring in the whole place.

The agent shrugged weakly as we laughed and left.

CityUnslicker said...

Blue Eyes - Silvio has his own interests at heart - whether these involve 'sorting' the Italian economy I do not know.

Certainly the mischief he has made over Al Italia is a poor notch on his cv. Italy is in a similar place to Spain, but Italian politicians don't go for hard measures as the public strike, rather like France.

Silvio may well be like Broon's chum Sarkozy - lots and lots of nice talk, little in the way of action.

Jeremy Jacobs said...

"The pro-euro crowd will get a shock when spain or italy fall out of the Euro as is almost destined to happen given the economic dislocation being caused".

We await the return of the peseta and lira!!

Bill Quango MP said...

Surly the EU would never allow a member to leave the Euro. Especially a senior member state. Wouldn't they bend and twist every rule and target to keep everyone in the same gang. After all if the precedent is set...?
Wouldn't that be The Virginia moment leading to the dissolution of the Union?
Much as I would like to see some Rebs a holler-in' and seceding I thought this club was for life...

Unsworth said...

"The pro-euro crowd will get a shock when spain or italy fall out of the Euro"

Interesting view. Do you want to hazard a timescale? I'll keep the spare cash in gold for the minute, I think.

Richard Elliot said...

Big call on Spain or Italy crashing out of the EURO. I'm not saying it won't happen if their recessions get much worse, but it would be very difficult to do cleanly; politically and economically.

James Higham said...

Given the exorbitant price of property in the UK, out of all proportion to incomes, this must be so - the crash.

Schadenfreude said...

I can't really see Spain falling out of the Euro. Spain suffers from the legacy of moral hazard created by the EU pouring simply enormous amounts of cash into Spain after it nearly had a military coup a few years back. Unemployment went up to 25% - well, not much point working if someone in Germany is determined to give you money for nuthin' and the weather is great all year. The EU will no doubt continue to bail Spain out until the whole system breaks. After all, a lot of very wealthy Germans have holiday homes in Sapin.

Italy is a very different matter. Silvio has never liked those Nazi stormtroopers, sorry, Germans. Silvio has little power in Italy thanks to the crackpot propotional representation scheme they operate, so he might relish kicking some Euro-butt. The Italians have a big problem with immigration and the "one size fits all" Euro charade. I can see Silvio taking his frustrations out on the EU stormtroopers.

CityUnslicker said...

I can't put a timescale on the fall out of the Euro for either Italy or Spain.

However their position in it are so bad for their economies that it cannot go on forever. I agree with BQ that you may see huge funds transfered to dealy any final decision - but leaving the Euro has already been spoken of openly in Italy during the last minor recession and this one is much worse.

Mark Wadsworth said...

"Spain suffered an even bigger asset boom than we did due to entering the Euro and immediately reducing interest rates by 2%".

I read somewhere that real interest rates in Spain went negative!

monoi said...

Yeah right, as if the decision to go into the euro had anything to do with economics.

Methinks some of you are taking their wish for the reality, blinded that you are by your hatred of the EU (I am no fan of what the EU has become) and the euro.

The canard about a strong currency and exports is so simplistic as to border on the idiotic. It makes me wonder how Germany can have an even bigger trade balance than China. Same thing with interest rates, the link with the currency is also slightly more complicated.

I am sorry, but seeing the £ at 1.23 euros does not make me feel that we are getting richer.

I think that it is more the case that the world is telling us that this country is going to the dogs.

CityUnslicker said...

Monoi - I am a bit confused by your post. I agree the euro is a political statement - this is why it will fail.

However, a strong currency is better than a weak one per se. If nothing else it means the markets approve of what you are doing in your economy.

The devaluation of the pound that has occured will come ot haunt the government yet.

As for Germnay and China, of course germnay exports more than China in terms of money - it sells all those extremely expensive cars for a start. much more profitable than toys or t-shirts.

monoi said...

City, I mean that because it is a political decision, it will not fail.

Obviously only time will tell, but I well remember in the run up to the euro in the 90s how everyone (I was usually the only one out of maybe 50 traders in the room...) thought that it would never happen. All had very valid economic reasons, but they all failed or refused to realise that it was not the issue.

The rest of my comment was more directed at your point that Spain could not lower rates to help exports, because it is not that simple.

I hope I have not upset you ! I do enjoy your blog.

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