S&P Says Spanish Home Prices To Drop Another 25 Percent


After Spain was just forced to take a $125 billion bailout for its banks due to a bursting real estate bubble S&P warns the crash has just begun.

For all the news out of Spain: tumbling sovereign bonds, bailed out banking sector, there really is just one driver of everything: the same one many have been warning about for years: the artificially inflated valuation of the Spanish housing sector. Because the only reason why banks are suddenly finding that their assets are worth much less than previously expected, is because it is now impossible for local banks to keep the real-estate “assets” on their books at marks-to-model (read par) as the bulk of them have long since become impaired, delinquent or outright defaulted.

The common theme of course is that they no longer generate cash inflows. What however is still there are bank liabilities, which most certainly generate cash outflows. And in the absence of retained earnings (but plenty of retained losses), there is just no more cash to mask the capital deficiency. That’s the whole issue with not only Spain, but Europe in a nutshell, the same we have been banking the table on for the past year: the accelerating disappearance of money good and cash-flow generating assets. Furthermore, once the spigot has been turned on, there is no stopping it, and the marks-to-market start pouring in fast and furious.

Which is the worst news for holders of Spanish bonds, now that the entire banking sector is effectively pari passu with the sovereign debt courtesy of priming ESM debt: recall that every incremental dollar, or in this case, euro, of bank capital deficiency will be one more priming bailout euro behind. Effectively there is now an inverse relationship between the Spanish housing sector and the country’s sovereign bonds. And for those who are still naively are clutching to Spanish bonds, even as they tumble to all time lows (that’s the local law, as opposed to the legal arbitrage trade we have been promoting and which today is making even more money), we have some bad news: that perpetual of optimists, S&P, just said that the Spanish housing sector has, wait for it, another 25% to drop!

Categories: ECONOMY

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