My mother always said, drastic times call for drastic measures, and it was certainly a drastic measure when Spain finally admitted it needed bailing out by the EU, although not this time for government debt but for the survival of its beleaguered banking system – most countries bailed out their banks and then needed a bail-out for themselves, but Spain it seems wants to take the other way round.
I don't mean to come across negatively on Spain, admitting it needs help was the right thing to do, but it should have been done sooner and much more decisively. Because it wasn't Spain is now an even greater threat to the EU, because unlike the last time Spanish banks were recapitalised, this time investors have grown no more confident about Spain, and its borrowing costs have continued to rise.
A lot now hinges on the Greek elections, rather whether or not the Greek people elect in favour of staying in the EU to austerity it out, or to leave the EU and go it alone. Either way investors have adopted a wait and see outlook for the moment.
The biggest problem for Spain is uncertainty. Spain has been in a state of constant denial since the crisis began, denying the true extent of the crisis, denying it was as bad as we all knew it was, denying how far house prices have really fallen, and denying it needs a bailout. Now that it has admitted it needs help investors are wondering how much of the rest of its denials can be trusted, and especially wonder if banks have yet admitted the true extent of the bad loans they are holding.
Ireland is the one nation that has needed a bail-out and then gone on to meet its austerity targets, and what's more Ireland returned to growth last year with a 0.7% GDP increase fuelled by exports. The difference is that Ireland went for the bad bank option, whereby a state-owned and run bank was created to buy all the toxic debt from the nation's banks.
Controversially this laden taxpayers with all the bad debt, but also made admitting the full amount of bad debt the best course of action for all banks, and allowed Ireland to come to grips with the full problem in one bite, and then in full knowledge of the depths of the problem, to act accordingly. Ireland has done this, and NAMA (the state owned bank) is now moving onto phase 2 of its objectives, which is investing in the recovery.
There has been debate recently over whether Spain should adopt the bad-bank approach. However, one gets the feeling now that the EU crisis is building up to a crescendo, and wonder whether Spain could even create such an entity in time for the EU, or certainly whether it would have time to do any good – one gets the feeling that is no one comes up with a drastic measure to save the EU, then these drastic times will lead to the drastic end of the EU, or at least the EU as we know it now.
But why would I say such things when I am known for promoting Spanish property as a good investment. This is because as far as I am concerned the two aren't mutually exclusive; for me Spain can be the EU's demise in a hand-basket and still be worthy of attention as a property investment destination, simply by looking at investment pragmatically and over the long term. Most people who buy property in Spain buy as a holiday home first and an investment second, this is how it always was and probably always will be.
For holiday home buyers there are some real bargains to be found, and at current prices appreciation over the long term is a near-certainty, with 200% a realistic aim over 10-20 years. Once you accept those two statements as fact it becomes simply about due-dilligence to protect the money you are investing against fraud and bad developers, and to assess the rental market and try to estimate rental yields. If all the sums add up for rental and long term appreciation then why care about volatility in the short term.
Murcia has become particularly attractive to investors of late, because construction of the new Paramount Theme Park has finally begun, along with a new international airport in the region. Investors find resorts like Condado de Alhama just minutes from the theme park site, with prices discounted by about 50% and up to 100% finance available, and realise that this is pretty much a no-brainer if you can forgive the possibility of some short term reductions that might never happen.
- Tuesday 19 June 2012