Apr

6

The situation in Spain puts the US housing market into perspective. There is plenty of sub-prime lending plus steep sales taxes (6% plus) which would exacerbate any problems if they have an economic downturn.

"The chill winds of the home loan crisis in the US are having a sobering effect in Spain, where mortgage lending and house prices have risen faster than anywhere else in continental Europe.

"As with the US, low interest rates and a buoyant job market have made home ownership affordable to lower income groups in Spain. Fierce competition has driven some Spanish banks into the riskier segments of the market. In particular, Spain's 4m-strong immigrant population - young, low-skilled and with no credit history in Spain - have proved to be too large and tempting a group to ignore. Mortgage brokers who specialise in arranging loans for immigrants are doing a roaring trade."

John Floyd writes:

 Spain has gotten itself in a difficult situation now that requires a lot to maintain current stability. The Spanish economy is roughly $1 trillion versus Germany at roughly $ 2.7 trillion. Spain's current account deficit is running around 8% of GDP and the country has lost about 35% in competitiveness to Germany over the past few years. The funding on the capital account side has come in part from direct investments and debt as the sovereign and corporate are in many cases highly rated and bought by pension funds despite tight spreads. The government fiscal accounts are in good shape with a surplus of 2%.

The fact the Spain is somewhat pinned by monetary, fiscal, and currency policy constraints makes this a difficult predicament.

The market currently has a very benign scenario priced with Spanish sovereign credit in the 5 and 10 year trading about 5 basis points over Germany. The heavily bank weighted stock index has also been doing well.

It is unclear what the trigger is but the sustainability of the situation seems tenuous at best. The likely sequence of events may be a weakening economy leads to strains on the fiscal accounts that lead to downgrades of the debt and political noise.

Opportunities to investigate seem to be the stocks that may be heavily levered to the housing market and credit spread widening.


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