Spain, Europe’s Riverside County, California

Over the years immediately preceding the global financial collapse, Spain was a real estate speculator’s paradise, with the largest boom in new construction – particularly residential – in all of Europe. This entire sector fueled massive job growth in construction, providing equipment and raw materials for construction and in connection with the underlying financing required to build and sell these units. Why Spain? First, the period of Generalissimo Francisco Franco’s reign (1936-1975) was a time of moribund economic growth and severe political repression; even after his death, Spain was well behind her European neighbors as to lifestyle and quality of life. It would take decades to catch up.

Even when Spain became part of the European Union, she was well behind her neighbors in economic standards, eager to accelerate lifestyle and spending habits into the mainstream. This, combined with her milder, southern European, climate and lots of ocean (the Atlantic and the Mediterranean) coastline, made Spain a prime candidate for both second homes to neighboring Europeans and new homes to her own economically-aspiring population. “The boom and bust of Spain’s property sector is astonishing. Over a decade, land prices rose about 500 percent and developers built hundreds of thousands of units — about 800,000 in 2007 alone. Developments sprang up on the outskirts of cities ready to welcome many of the four million immigrants who had settled in Spain, many employed in construction.

“At the same time, coastal villages were transformed into major residential areas for vacationing Spaniards and retired, sun-seeking northern Europeans. At its peak, the construction sector accounted for 12 percent of Spain’s gross domestic product, double the level in Britain or France.” New York Times, December 17^th. While Spain is hardly the largest European nation, with 45 million people, she is still very significant, and a further financial demise here could severely threaten the value and stability of the entire euro-based economic structure.

Of course, when the markets collapsed, so did the Spanish real estate boom. Today, housing developments in many planned communities lie empty, new apartments vacant and the underlying financial exposure bordering on tragic. With local borrowers unable to walk away from debt incurred to finance a new residence, the pain among once zealous buyers is immense. Unsold housing tracts resemble the now-abandoned new homes constructed for American subprime buyers (who really couldn’t afford houses at all) in outlying areas, once held too far from urban amenities and jobs to be desirable, like Riverside County, a distant Los Angeles bedroom community.

As Spain eyes the continued fall of Ireland (where debt-rating agencies have dropped that country’s credit rating to near “junk” status, raising the cost of borrowing) – even with EU Central Bank support – they are seeing reflection of possible further misery for themselves as well: “Just how big a loss the banks are facing is unknown, at least publicly, and that has investors worried — the cost of financing Spain’s debt rose 18 percent in the last month alone. But the potential costs of failure go far beyond that. Spain’s economy, the fifth largest in Europe, is much bigger than Ireland’s or Greece’s, and a bailout of its banks could be far more costly, an event that could push the government into default and end up dooming the euro itself.

The Bank of Spain says the banks have about $240 billion in ‘problematic exposure’ out of $580 billion invested in real estate and construction, a situation, they say, the banks are capable of handling… But not everyone believes that. Unlike American banks, Spanish banks have done little to open their books. Along with other banks in the euro zone, they underwent a stress test last July, and all but five of Spain’s smaller savings banks passed. ” New York Times.

While most Americans are justifiably focused on our domestic markets and our own recovery, we must all remember the linkage across the planet, where economic chaos almost anywhere has a strong ripple effect onto our own shores, particularly as we try to use exports to create new jobs at home. The European austerity strategy and the fall of Portugal, Ireland, Greece (some add Great Britain) and Spain – the PIGGS countries – have created a corresponding contraction in their willingness to import… definitely not in our best interests. The further erosion of global debt markets also impairs the restoration of our own credit structures.

I’m Peter Dekom, and looking at Spain and our own severe economic pain, it is hard to look at the rising success and return of Wall Street with anything but anger.