In a report entitled: ‘Spain: The Hole In Europe’s Balance Sheet’, Variant argues that the real estate crash in Spain is worse than is widely believed and Spanish banks are hiding losses.
The report says: “We believe that Spanish banks are not marking their real estate loans to market and are extending credit to zombie construction companies. We believe Spain is a disaster waiting to happen.”
The analyst says Spanish developers’ outstanding loans have increased from Euro 33.5bn in 2000 to Euro 318bn in 2008 – a rise of 850 per cent. It says with construction sector debts this debt will increase to Euro 470, or 50 per cent of Spain’s GDP.
Also, the report goes on to argue that Spain’s unemployment rate is now at 17 per cent, with over one million completely unemployed families.
Variant estimates that the country has at least one million empty properties, but its house price index only reports house price decreases of around 10 per cent. It goes on to document evidence that the banks are not marking loans to market and are selling off repossessed properties with 100 per cent, 40-year loans. It also argues that the Spanish banks are continuing to offer credit lines to zombie construction firms.
The analyst goes on to compare Spain to Ireland, which is currently suffering the worst deflation in the world. It says: “We believe that Ireland’s experience is what Spain will see more of in the months ahead. Almost all of Ireland’s banks have been taken over by the government and we believe Spain will be more like Ireland than any of its European neighbours.”
It adds: “Investors are smoking crack if they believe that Spanish banks are amongst the strongest in Europe. We recommend shorting to being underweight Spanish bonds and equities, particularly banks, builders and anything related to the consumer.”