Is it time to buy a country home in Spain? Not yet. The bottom is still to come.
Forget about Greece. It is Spain that the European Union is concerned about, the 12th largest economy in the world at $1.5 trillion, compared to Greece at 35th with a $303 billion economy. Last week, we thought that there would be a reprieve when the EU announced it would be lending up to $125 billion to shore up Spain’s banking sector through a recapitalization plan. On that news the Spanish stock market, IBEX, shot up 5 percent. Once investors realized that the loan was to the country Spain, who in turn would lend it to the banks, which would only increase the already high public debt, the IBEX ended that same day down 0.5 percent.
Spanish banks are experiencing the highest percentage of “bad loans” in their portfolios since April 1994, mostly due to the real estate bubble bursting. But the sovereign debt is more disturbing with public debt to GDP at 72 percent. (Greece is at 130 percent.) Some have claimed that it is really as high as 150 percent. This has caused the credit rating agencies to aggressively lower their ratings for Spain: Moody’s at Baa3, one rank above “junk” status; S&P at BBB-Plus with a negative outlook, two ranks above “junk”; and Fitch BBB with a negative outlook. More downgrades may be coming when you consider that median debt to GDP of countries rated BBB by Fitch is 39 percent.
On June 18, the bond market reacted. Spain’s 10-year note now yields over 7 percent, a level that most consider “unsustainable,” as investors are commanding a higher yield to off-set the risk. The world’s central banks have indicated that they are ready, willing and able to ease monetary policy on a coordinated effort if the bottom does completely fall out for Spain. How successful that would be is debatable as Spain is a real economic risk with 25 percent unemployment, negative growth exasperated by strict austerity measures and an estimated $350 billion minimum bailout necessary when you add in its regional debt.
A comprehensive effort is needed sooner than later and not more of this “kick the can down the road” mentality. Spain continues to need to fund its government operations and pay the interest on the debt. (There are two Spanish bond auctions scheduled for this week.) Once we see that happen, I would wait one year then start looking for that country home, my preference being in San Sebastian, the Basque area of northern Spain. The price will definitely be right.