Situation in CEE (Poland, Czech Rep., Slovakia, Hungary, Bulgaria, Romania)
Any thoughts/data on this?
Same situation – I mean, economic situation. I wonder how those countries would fare through the crisis.
I don’t have any specific data yet, will get into it soon, but there are some serious issues in eastern europe. Real estate bubbles have emerged in Romania and Bulgaria to my knowledge, and there are several other countries I suspect, but I do not wish to reveal until I check my sources. There are growing concerns that housing bubbles in eastern Europe will have a significant impact on the Austrian financial market, since Austrian banks have 80% of their total lending portfolios in, until now, rapidly growing eastern european economies.
The question you should be raising, however, is not how eastern europe is fairing – which is likely to be ugly, but how Spain is fairing – which is heading for a cataclysmic downfall. Let me give you some details -The following information is translated from norwegian (http://www.dn.no/forum/?display=topic&forum_id=614&topic_id=7266). I have added some comments which I have bracketed .
The next financial crisis emerges in Spain. A country which media does not write too much about. When it comes to the foundation for this alledged financial crisis, no media are writing about it either. Neither in Spain, nor outside of Spain. Therefore this coming crisis is likely to erupt even more as a gigantic suprise, as todays crisis was not that much of a surprise for everyone.
During the last 15 years, from 1993 to 2008, spanish economy has grown extremely fast. The phenomenon has been referred to as an economic miracle. The miracle is however founded on the wrong premises, and therefore it will fail. In 1993 there were 12 million jobs in Spain. In 2008 there are 20 million jobs. 8 million jobs have been created in 15 years, and this increase in jobs has been created by ONE business area, and the secondary effects of this business area alone. JUST one business.
The business may simply be called expansion. Spain has built herself to wealth. They have built more hotels, more malls, more offices, more banks, more roads, restaurants etc. than any other western european country if scaled to the number of citizens. First and foremost they have been building residences. Spain has built neary 1 million houses per year for the last 10 years. With 40-45 million inhabitants, this compares to if Norway built 100 thousand houses per year. Norway has never built more than 40 thousand, and the building activity in Norway has been significant some years.
The result of this building is that Spain has way too many houses today. About 1 million new houses are unsold. Furthermore, about 4 million used houses are empty and never utilised. This means that out of the 25 million registered houses in Spain, about 5 million (20 percent) are unused, in addition to a few million illegaly built residences which have never entered the statistics. [Corruption is fairly rampant in Spain].
Spanish housing prices have risen the most in Europe for the last 10 years. They have tripled. To the contrary, Norway where prices have risen markedly, they have only doubled. How is it possible that way too many residences are built, and the prices are still rising insanely? The answer is that the spanish housing market has NOT been controlled by the common market influences. They have been controlled only by a select few large corporations.
Builders, entrepeneurs, bankers, appraisers, real estate agents and speculants have in perfect disharmony managed the elaborate work of inflating a gigantic housing bubble.
Building contractors have set prices for new residences higher and higher. What they have not been able to sell has been kept by the builders and entrepeneurs, [thus inflating their capital base]. Banks have given them full access to credit.
The appraisers (I think this is the word – the people determining the market value of a house), who are hired in companies owned by banks, have appraised new and used residences in accordance with the prices set by builders and entrepeneurs. In combination, they have generated price statistics based on their own appraisals.
Both spanish and foreign speculants have joined the fray and real estate agents have done the work by further fuelling the notion that the housing market is perpetually increasing. [Spain is a preferred holiday country for many europeans. Brithish and scandinavian people, predominately, have summer houses in Spain if they can affort. From 4.8 mill people, there are for instance 100 thousand norwegians with a summer house in Spain]
This summer, it was definately over. The largest building contractor Martinsa-Fadesa went bankrupt. In spite of a registered capital of more than 50%. This means that their assets were recorded to be more than twice their debts. Great appraisals do not help as long as the revenue is not sufficient to cover costs of debts. With a collected debt of 7.3 billion €, this was Spains larges bankruptcy ever. This August, the time had come for the next largest building contractor Colonial [and since this thread was first posted yet 2 more have failed]. This time the banks just took control over the whole company [Colonial] such that the losses could be concealed a little better.
Building contractors and entrepeneurs have unsold residences, half finished residences and vacant lots as active assets. And, altogether about 500 billion € in debt given by the Spanish finance sector. Additionally an unknown amount of billions from foreign banks. For spanish banks a whopping 27 % of the total debt is given to building contractors and entrepeneurs. A number far larger than the total capital base of the finance sector in Spain.
The sales of residences has ground to a halt. In August 18 thousand residences in Spain were sold. Of about 4 million residences for sale. This implies a rate of sales which empties the store of residences for sale in about 20 years.
At this moment, starting of new housing projects has stoppet. However, there is extreme activity as a result of previously engaged projects, such that the employment rate is, as of now, still not too affected. From the nearly 2.5 million craftsmen which were working, 2 million still have their jobs. Not for much longer, however.
Already the unemployment in Spain has risen exponentially. It has reached 13 %. As a consequence of reduced building activity, but also as a consequence of reduced activity in every sector. The impacts have this far only reached companies which service construction, but on every level in a society where employment rates drop dramatically. Only in October, about 200 thousand jobs were lost (1 percent of the total work force in Spain).
Spain has no natural population growth. [Together with Italy and Greece the third lowest birth rate in the world – 1.39 childern per woman I think]. The growth they have had is a result of immigration. First and foremost from workers joining in the extremely fast growing economy, but also from northern europeans who have chosen to enjoy their retirement in the warm climate. Now the arrows have turned. Those who have lost their jobs go home again, in addition to the fact that the economy in the remainder of Europe is not sufficient for europeans to move to Spain with their insane housing costs.
Spain are tumbling back to the employment rates at the 90-ties. The sudden halt in residential development and all other construction activity rapidly dismantles the workplaces generated the last 15 years. And probably then some. With one adjustment – The tourist business is bigger now than for 15 years ago [but also declining recently – http://www.expatica.com/es/news/local_news/Spain-reports-sharp-fall-in-tourist-activity-_48303.html%5D. As an assessment about 5 to 6 million jobs will be lost, and the unemployment rate is heading for 30 %.
What about housing costs? Todays prices are insanely high. So high that the rental market rarely give more than 2 % net profit. You have 5 million unsold houses, which no one use, some million holiday residences which Spanish or foreign people wish to sell, a population in decline, declining tourism and an unemployment rate already the highest in Europe and rising fast.
The housing market is crashing so hard that the world has probably not seen anything like it. To sell a house, the prices need to go to the bottom already. Offers like – buy one apartment, and get the neighboring for free have already started to become common. Forced sales have yielded prices between 70 % and 90 % lower than appraised market value. This megacrash has only just begun.
Building contractors and entrepeneurs will almost without exception fail. ["Over 1000 Spanish property and building firms will have filed for bankruptcy protection in 2008 and more than 1300 could follow suit next year as they struggle to repay over 470 billion euros ($657.9 billion) in debt, according to PriceWaterhouseCoopers." – http://www.guardian.co.uk/business/feedarticle/8167814]. As a consequence the construction business will not have any foundation to exist. In an equal fashion the values will have no foundation to exist. Under the burden of extreme debt continued existence is not possible.
Private lenders already struggle with vast housing mortgages and high unemployment. It will however become much worse. Small businesses of all fashions already struggle, and the bankruptcies are exploding in amount. Loans are not maintained.
The financial sector will get everything falling into its lap. Their already vast quantity of real estate will increase as they take over businesses they cannot afford to bankrupt. Only the losses from the building contractors are too high to sustain. And then the loans from private lenders and small businesses land on top.
The banks shuffle the problems in front of themselves, like the building contractors and entrepeneurs have done [just storing residences as wealth whenever they are unable to sell them]. They have been passed a relay stick that they cannot pass on. Someday they will have to own up to the losses. If not earlier then by the time that the finance markets incomes are obviously not large enough. Most likely before when some instance gets its eyes open for more than a few banks, and BOOM. The entire Spanish finance sector goes bankrupt.
When this happens, one of the worlds largest banks – Banco Santander, is bankrupt. With all its world wide activities. By then the losses will show up in all the foreign banks which has lent to building contractors, entrepeneurs, small businesses and private persons.
[Now some discussions on Norwegian situations are made. This has not been translated]
Spain is our new Iceland. But opposed to Icelands 300 thousand inhabitants, more than 40 million people live in Spain. Spain is one of the largest countries in Europe. An EU and Euro country which the rest of the wearied european economies will have huge problems helping. The catastrophe may become nearly total. This will be the biggest economic disaster of our time in Europe. It will become an economic Tsunami of historic proportions.
I can only speak for Romania having lived there for the last 2 yrs. There was (still is) indeed a relatively massive boom in RE prices especially in the capital. Prices strated out from 1/100th to 1/10th what they were in Western EU and have risen occasionally 100 fold over the last 7 years to reach the EU median. The percentage increase is extraordinary but as I see it the overshoot not overwhelming. While most RE developers have stopped building, the actual number of housing units built is barely sufficient to cover current demand. This means that once the initial shock passes, people could start building and buying again, especially as their incomes slowly approach their western counterpart levels. In addition, the Romanian economy is kept fairly busy with infrastructure and other developmental work.
On the downside, the use of gold and silver as money or as a store of value is unfathomable to 99% of the populatrion, despite having lived through significant inflation for 15 of the last 20 years.
Interesting commentary Knut.
I knew it was bad in Spain (Der Spiegel has had several articles of prophesizing the collapse and hardship to come) but you really make it sound cataclysmic.
I hope the population at large has mercy on the banks management?……Not that they deserve it