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Spanish Debt Shows Better Recovery Than Expected

News Posted On: 11 January 2013

Spain’s sovereign debt is in better shape than expected as reports from the European Central Bank suggest that Spanish banks are buying up Spanish bonds. A reduction in Spain’s debt should be a good thing across the board, but what are its implications for the Spanish property market?

The news comes as Bankia, formed from several Spanish banks last year and promptly embroiled in scandal, revealed that it would be virtually wiping out the savings of 350,000 people, mostly small investors in the bank and many of them pensioners. Bankia was nationalized in May of last year and will now be recapitalised with almost €18bn of European money, in an attempt to drag the institution back into profit before it can be sold.

But the institution’ claims that it will protect shareholders are derided by inside sources talking, on condition of anonymity, to the Reuters wire service. ‘Are we looking into leaving shareholders with something? Yes. How much? That's too soon to say. Will it be very little? For sure,’ said the source, an individual close to the Bank of Spain, last week.

The source went on to warn readers that ‘they will lose up to the shirt on their back.’ As another round of EU money goes into subsidizing failure on the supply side, Bankia’s investors are furious and outspoken. ‘I’ve been duped on the preference shares and I’ve been duped on the ordinary shares,’ related Enrique Martinez, a 66-year-old retired technician and Bankia investor. Mr Martinez went on to describe the bank’s behaviour as ‘an abuse of trust’ and ‘a total cock-up.’ Bankia’s hopes of rescue rest on slimming down its toxic debt over the next 5 years by more than 60%, and some of this will be siphoned off into Spain’s ‘bad bank,’ a financial wrecker’s yard set up explicitly to deal with toxic debt.

Real estate loans and properties are the first assets to be transferred to the ‘bad bank’ and the majority of these will come from Bankia, which has transferred €22.3bn to the asset management company known by its Spanish acronym Sareb.

Although tranfers to Sareb take some of the load off Bankia and place it on investors recruited by the government, the Bankia will still struggle to be sold by 2017 according to experts. Its workers will also struggle: unions say Bankia has made around 6, 000 staff redundant and asked the remainder to take a pay cut of 40% to 50%.

With sovereign debt taking precedence over institutional debt, which takes precedence over individuals, the housing market in Spain will suffer from a lack of Spanish investors as those who might have bought their own homes cannot afford it. Meanwhile, rental markets can be expected to take a blow from lowered demands for higher-priced properties as young people move in or stay with parents and potential upgraders wait out the crisis for lack of funds.

However, there are clear opportunities for foreign investors. In many Spanish cities rental demand remains strong. While the likely yields from properties bought during the present crisis will be low compared to boom years, careful buyers should be able to purchase property in Spain and make moderate rental income in the short term, while benefitting from the equity in the property later on.

View our cheap property for sale in Spain

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