Clouds over the Spanish economy
By Carter Dougherty
Wednesday, August 13, 2008
MÁLAGA, Spain: Oscar Agudo, a successful architect who has designed everything from apartment blocks to soccer camps along the Mediterranean coast of Spain, is now keeping busy mostly by valuing repossessed houses and analyzing real estate disputes for the courts.
In less than a year, Spain has gone from brisk growth to acute distress as a global housing bust, high energy prices and the world financial crisis have drained its lifeblood - an epic building boom built on constantly rising property values - at a frightening speed.
"The longer the crisis goes," Agudo said, "the harder it will be to live off the past."
It may be time for Spain to look to a different future. The country's love affair with building made construction a signature Spanish industry in Europe, even larger as a share of the economy than it was in Germany in the early 1990s, when the large-scale rebuilding of the former East Germany was under way.
But now, with its flagship industry in tatters, Spaniards are re-examining the sustainability of their once-thriving economic model.
On Wednesday, Prime Minister José Luis Rodríguez Zapatero of Spain called an emergency cabinet meeting to ponder policy responses to an economy that is now delivering an uninterrupted stream of bad news.
Data released the same day showed that inflation rose to 5.3 percent in July from a year earlier, the highest level in 15 years, proving firm evidence that prices are soaring even as the country slips into recession.
"We cannot just grow from real estate and construction," said José Manuel Campa, a professor of finance at the IESE Business School of the University of Navarra. "We need to produce goods and services that we can sell to the rest of the world."
"The question is," Campa asked, "can you build that up in the next 18 months?"
Probably not, which is why Spain is likely to suffer particularly badly in the current economic downturn. Not only did it play the housing game to the fullest, but its current quandary has also been exacerbated by the global financial vortex that has only seemed to gather speed for most of this year.
New housing starts peaked at over 900,000 in 2006, but home building in Spain is likely to fall to about half that level this year, the country's minister of economy and housing, Pedro Solbes, said recently. Home prices fell 4 percent in the second quarter, and most economists now say that they expect years of stagnation of property values.
Unwinding that imbalance, economists say, would be painful enough even in the best of times. But gyrations on world financial markets have also raised the cost of the adjustable-rate mortgages most Spaniards chose.
"It is getting far worse than we would have expected at the beginning of the year," said Julián Cubero, chief Spain economist at Banco Bilbao Vizcaya Argentaria, one of the largest Spanish banks. "We're suffering a perfect storm."
Zapatero belatedly used the word "crisis" to describe the country's situation last month, touching a nerve with Spaniards who have not suffered a significant economic recession since the big downturn following the Barcelona Olympics in 1992.
"There was a state of denial," said Roger Cook, managing director for Spain at Cushman & Wakefield in Madrid. "There was not an appreciation that this was not a slowdown, but a serious crisis."
Here on the Costa del Sol, where business leaders say that they expect flat or at least declining business through the end of 2009, the sun is still shining. But the outlook is decidedly cloudy.
Virtually synonymous with tourism among Spaniards and most other Europeans, the Costa del Sol runs along a strip of the Mediterranean that begins east of Málaga and ends near Gibraltar.
Its natural attributes in the summer are stunning. Azure seas wash up on grayish sandy beaches, or lap against rocky outcroppings. Mountains colored a soothing ochre but punctuated by deep-green vegetation seem to leap upward from the ribbon of land that leads to the water, all beneath a sky unacquainted with clouds.
But the region is also a monument to bricks and mortar.
Málaga, the birthplace of Pablo Picasso, has a city center with ruins that testify to its birthplace as a Phoenician trading post, but they quickly give way to endless apartment high-rises. A winding coastal highway leads to Torremolinos, a Spanish holiday spot since the 1950s, through Fuengirola, a town notorious for unruly tourists, to Marbella, a once-glitzy resort town that has lost a bit of its shine recent years.
And unless geography or building regulations stop them - and sometimes not even then - there are densely-packed buildings. High-rise apartments occupy much of the prime territory, while ridges and valleys are filled with wedding-cake constructions in the signature whitewashed Mediterranean style.
A newer section of Marbella, known as Nueva Andalucía, went from a sparsely-built neighborhood 10 years ago to one seeded with buildings wherever free earth could be found.
Manuel Ecijas, owner of Constru España 2000, has watched the cycle turn along the Costa del Sol and in much of southern Spain.
His construction business used to employ 66 people, but they all lost their jobs in March when one of Ecijas's main clients went bankrupt. New contracts have largely dried up, and he is owed €270,000, or $402,000, by developers who apparently have their own problems.
"A lot of these companies have disappeared," Ecijas said. "I simply cannot find them."
The Spanish government now projects unemployment, which slid to 8 percent last year, to rise to 12.5 percent in 2009, a direct result of mass dismissals in the construction business. Distress is spreading rapidly in associated industries; Roca, a bathroom equipment supplier, recently laid off 400 people.
Constru España's brokerage business is also feeling the heat, as Christina Gomez can testify.
Gomez, 30, survived a round of cuts that included halving the number of estate agents it employed, to two from four, but she has not sold anything in the past three months. She is nervously eyeing one potential buyer of a villa in Marbella, but since the price has dropped by 20 percent, to €600,000, her potential commission is shrinking as well.
In the meantime, she has buckled down.
Gomez, a mother of two children, sold her beloved BMW automobile and a motorcycle. She now takes the bus to work. New clothing purchases and visits to the hairdresser are also on ice, all so that her two children have the books and clothes they need as the new school year begins.
"If we continue like this," she said from behind her desk in an empty office, "it will be all over soon."
Spaniards are being squeezed not only by their own excesses but by the global reach of ravages emanating from the depressed mortgage market in the United States.
Spanish mortgages have variable rates linked to the 12-month Euribor contract, an interbank lending benchmark for the 15-nation euro area that has swerved sharply upward over the past year. The rise reflects suspicions among bankers that their peers, many of whom made bad bets on U.S. mortgages, might still have hidden losses on the books that could cost them billions of euros or even tip them into bankruptcy.
People like Agudo, the architect, pay directly for this lack of trust. The mortgage payment on one of his properties - he owns three - has risen to 750 a month from 600, draining his disposable income. Those weeks of eating out five nights a week, he said, are long gone.
On a pad of paper, Agudo drew a large "V" and said he had expected a quick rebound, as the letter's shape would suggest. But now his best hopes resemble his sketch of a "U" indicating a more drawn-out slowdown.
And Agudo, who is 38, confessed that he was now uncomfortable with any predictions. After all, he was still a student when business last dipped in Spain in the early 1990s.
"This," Agudo said, "is the first crisis I have ever seen."
http://iht.com/articles/2008/08/13/business/spainecon.php
By Carter Dougherty
Wednesday, August 13, 2008
MÁLAGA, Spain: Oscar Agudo, a successful architect who has designed everything from apartment blocks to soccer camps along the Mediterranean coast of Spain, is now keeping busy mostly by valuing repossessed houses and analyzing real estate disputes for the courts.
In less than a year, Spain has gone from brisk growth to acute distress as a global housing bust, high energy prices and the world financial crisis have drained its lifeblood - an epic building boom built on constantly rising property values - at a frightening speed.
"The longer the crisis goes," Agudo said, "the harder it will be to live off the past."
It may be time for Spain to look to a different future. The country's love affair with building made construction a signature Spanish industry in Europe, even larger as a share of the economy than it was in Germany in the early 1990s, when the large-scale rebuilding of the former East Germany was under way.
But now, with its flagship industry in tatters, Spaniards are re-examining the sustainability of their once-thriving economic model.
On Wednesday, Prime Minister José Luis Rodríguez Zapatero of Spain called an emergency cabinet meeting to ponder policy responses to an economy that is now delivering an uninterrupted stream of bad news.
Data released the same day showed that inflation rose to 5.3 percent in July from a year earlier, the highest level in 15 years, proving firm evidence that prices are soaring even as the country slips into recession.
"We cannot just grow from real estate and construction," said José Manuel Campa, a professor of finance at the IESE Business School of the University of Navarra. "We need to produce goods and services that we can sell to the rest of the world."
"The question is," Campa asked, "can you build that up in the next 18 months?"
Probably not, which is why Spain is likely to suffer particularly badly in the current economic downturn. Not only did it play the housing game to the fullest, but its current quandary has also been exacerbated by the global financial vortex that has only seemed to gather speed for most of this year.
New housing starts peaked at over 900,000 in 2006, but home building in Spain is likely to fall to about half that level this year, the country's minister of economy and housing, Pedro Solbes, said recently. Home prices fell 4 percent in the second quarter, and most economists now say that they expect years of stagnation of property values.
Unwinding that imbalance, economists say, would be painful enough even in the best of times. But gyrations on world financial markets have also raised the cost of the adjustable-rate mortgages most Spaniards chose.
"It is getting far worse than we would have expected at the beginning of the year," said Julián Cubero, chief Spain economist at Banco Bilbao Vizcaya Argentaria, one of the largest Spanish banks. "We're suffering a perfect storm."
Zapatero belatedly used the word "crisis" to describe the country's situation last month, touching a nerve with Spaniards who have not suffered a significant economic recession since the big downturn following the Barcelona Olympics in 1992.
"There was a state of denial," said Roger Cook, managing director for Spain at Cushman & Wakefield in Madrid. "There was not an appreciation that this was not a slowdown, but a serious crisis."
Here on the Costa del Sol, where business leaders say that they expect flat or at least declining business through the end of 2009, the sun is still shining. But the outlook is decidedly cloudy.
Virtually synonymous with tourism among Spaniards and most other Europeans, the Costa del Sol runs along a strip of the Mediterranean that begins east of Málaga and ends near Gibraltar.
Its natural attributes in the summer are stunning. Azure seas wash up on grayish sandy beaches, or lap against rocky outcroppings. Mountains colored a soothing ochre but punctuated by deep-green vegetation seem to leap upward from the ribbon of land that leads to the water, all beneath a sky unacquainted with clouds.
But the region is also a monument to bricks and mortar.
Málaga, the birthplace of Pablo Picasso, has a city center with ruins that testify to its birthplace as a Phoenician trading post, but they quickly give way to endless apartment high-rises. A winding coastal highway leads to Torremolinos, a Spanish holiday spot since the 1950s, through Fuengirola, a town notorious for unruly tourists, to Marbella, a once-glitzy resort town that has lost a bit of its shine recent years.
And unless geography or building regulations stop them - and sometimes not even then - there are densely-packed buildings. High-rise apartments occupy much of the prime territory, while ridges and valleys are filled with wedding-cake constructions in the signature whitewashed Mediterranean style.
A newer section of Marbella, known as Nueva Andalucía, went from a sparsely-built neighborhood 10 years ago to one seeded with buildings wherever free earth could be found.
Manuel Ecijas, owner of Constru España 2000, has watched the cycle turn along the Costa del Sol and in much of southern Spain.
His construction business used to employ 66 people, but they all lost their jobs in March when one of Ecijas's main clients went bankrupt. New contracts have largely dried up, and he is owed €270,000, or $402,000, by developers who apparently have their own problems.
"A lot of these companies have disappeared," Ecijas said. "I simply cannot find them."
The Spanish government now projects unemployment, which slid to 8 percent last year, to rise to 12.5 percent in 2009, a direct result of mass dismissals in the construction business. Distress is spreading rapidly in associated industries; Roca, a bathroom equipment supplier, recently laid off 400 people.
Constru España's brokerage business is also feeling the heat, as Christina Gomez can testify.
Gomez, 30, survived a round of cuts that included halving the number of estate agents it employed, to two from four, but she has not sold anything in the past three months. She is nervously eyeing one potential buyer of a villa in Marbella, but since the price has dropped by 20 percent, to €600,000, her potential commission is shrinking as well.
In the meantime, she has buckled down.
Gomez, a mother of two children, sold her beloved BMW automobile and a motorcycle. She now takes the bus to work. New clothing purchases and visits to the hairdresser are also on ice, all so that her two children have the books and clothes they need as the new school year begins.
"If we continue like this," she said from behind her desk in an empty office, "it will be all over soon."
Spaniards are being squeezed not only by their own excesses but by the global reach of ravages emanating from the depressed mortgage market in the United States.
Spanish mortgages have variable rates linked to the 12-month Euribor contract, an interbank lending benchmark for the 15-nation euro area that has swerved sharply upward over the past year. The rise reflects suspicions among bankers that their peers, many of whom made bad bets on U.S. mortgages, might still have hidden losses on the books that could cost them billions of euros or even tip them into bankruptcy.
People like Agudo, the architect, pay directly for this lack of trust. The mortgage payment on one of his properties - he owns three - has risen to 750 a month from 600, draining his disposable income. Those weeks of eating out five nights a week, he said, are long gone.
On a pad of paper, Agudo drew a large "V" and said he had expected a quick rebound, as the letter's shape would suggest. But now his best hopes resemble his sketch of a "U" indicating a more drawn-out slowdown.
And Agudo, who is 38, confessed that he was now uncomfortable with any predictions. After all, he was still a student when business last dipped in Spain in the early 1990s.
"This," Agudo said, "is the first crisis I have ever seen."
http://iht.com/articles/2008/08/13/business/spainecon.php
