Spain is not Japan: banks should reprice their real estate assets now

We’d like to bring to your attention this note from Nordkapp; not a detailed one but its wording is direct enough: the message is that the Spanish government should push the country’s banking sector to acknowledge the actual value of its real estate assets, instead of tapping capital holes with ever more sovereign debt. The Japanese option, i.e. overprotecting financial entities, is not applicable in Spain. Why? Well, one needs to compare yields, Spain’s versus Japan’s…

The opening shot is a reference to job losses: indeed, Spain’s unemployment numbers during the last three months have seen a rise by 144,700 , that’s 3pc more than over the previous three months. The general number is 21.52pc, a record since 1996.

“Unemployment in Spain continues strong. The cause is to be found in the sorry state of the construction sector, which is practically flat and haunts the rest of the sectors of the economy.

“Unfortunately, the only way to end the housing sector crisis is a fall in prices so they become palatable to investors, but because of the measures taken in Spain, that downward action is occurring at a very, very slow pace. The decision of protecting the banking system has allowed banks to value their real estate portfolios at unreal prices.”

According to Nordkapp, this lets banks to recognise their losses only partially, year after year, but free from pressures to “get rid of their portfolios quickly.”

“This protects banks from bankruptcy, but generates a long-lasting type of crisis and makes unemployment to increase recursively. The other alternative is a violent, fast breakdown that will lead in little time to create employment once housing prices reach attractive levels.

“It takes no more than attractive valuations for the capital to flow again. At the end of the day, the reason why someone who has the money or access to credit prefers not to buy a property is because he knows that properties are still expensive and they will lose money. If investors were convinced to return to the property market, that money would run through the economy and would generate economic activity and employment.

“Plugging the holes constantly using public debt and overprotecting the banking system is what the Japanese have done for 20 years, and they have lived those 20 years under crisis.

“The difference is that while Japan issues debt to 0.1pc yield, even if debt to GDP ratio is 200%, the rest of us are punished by the market with much higher yields, as we have seen it happening to Greece and to Portugal, Ireland, Italy and Spain. Therefore, trying to get out of this crisis with “the Japanese option” is a mistake.”