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OPINION

Titanic

By Per Svensson

miércoles 22 de octubre de 2014, 11:21h

During the Spanish Prime Minister's visit to China, aimed at encouraging Chinese investment in the ailing financial sector of his country, especially the saving banks, he extolled his confidence in the Spanish economy, comparing it to  “a powerful transatlantic which continues to navigate in spite of difficulties…”

I do not know if the Prime Minister had any specific vessel in mind, but for me, and I believe other commentators, the maiden voyage of the greatest and most luxurious ship, the Titanic, considered unsinkable, sprung to mind.  In April 1912 it steamed incautiously across the north Atlantic, struck an iceberg and sunk.  1,513 people lost their lives.

 

Prime Minister Zapatero assured Chinese investors that the Spanish economy is “strong, solvent and resilient” and that it's “banking sector has weathered the financial crisis better than the rest of Europe.”  He placed responsibility for the crisis squarely on the USA financial sector and later declared triumphantly that the Chinese would invest up to 9,000 million in Spain's financial sector.  The next day the Asian giant stated, that “the information was without basis and did not match the truth”……..

 

Will Chinese and Norwegians be trapped?

Representatives of the 'investment happy Sovereign Funds' of both China and Norway have signalled their interest in investing in the process of restructuring the Spanish saving banks.

I am confident that both the Chinese and Norwegian investment funds are cautious and shrewd, with the best advisors money can buy and that they will study and analyze the balance sheets of each bank they are invited to invest in.   I just hope they know sufficiently well Spanish business mentality, and especially the accounting practices of the Spanish banking sector.

Spanish saving banks are not in a restructuring process due to excessive capacity, as Zapatero tried to make the Chinese believe. But because many of them could not meet the solvency requirements imposed by the Spanish and European authorities, they have gone at break neck speed from 45 banks to 13, having been forced into mergers to avoid asking for funds from the Government agency FROB, which would have meant their nationalisation.

In last week's Report (we have reported on this previously) we referred to information from Variant Perception that outstanding loans to developers by Spanish banks and Saving Banks have risen from 33,5 billion*  euros in 2000 to 318 billion in 2008.  If the constructors' debts are added, the overall value of outstanding debts in the construction sector, total 470 billion (still US denomination).

 

A chest of tricks

The bank of Spain has altered the accounting rules to help banks hide their enormous exposure to the property sector.   Banks are permitted to value the properties they have repossessed, based on the appraisals made for mortgages; they do not have to show their true market value.  Today, the mortgage values of 2008, are way above real market values.

As mentioned in last week's article, banks control nearly half of the companies performing real estate appraisals and dictate which appraiser to use.  Thus, they control the official property prices statistics, which show only a meagre fall of 18% from the peak of the property boom. Everyone trying to sell their home in Spain knows that the fall in market values is much greater than this, with many experts claiming a fall of around 50%.

Moreover, the banks want to avoid including any more 'bricks and mortar' on their assets sheets.  Even if a developer is bankrupt and cannot repay the huge sums borrowed, banks often renew the loan and add the money needed for the promoter to pay the interest due.

Buying shares in a Spanish saving bank may mean buying property that cannot find a market at those inflated prices.

The transatlantic ship “The Spanish Economy” has had several scrapes with icebergs, but is still afloat, and continues its erratic course supervised by captain Zapatero, who has now decided to leave the helm next year, opting instead for a life boat…….

In British English, a billion used to be a million million (i.e. 1,000,000,000,000), while in American English it has always been a thousand million (i.e. 1,000,000,000).  British English has now adopted the American figure, so a billion equals a thousand million in both varieties of English.

 

 

 

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