Fears over Spain’s precarious fiscal situation continue to mount. Yesterday, Standard & Poor’s downgraded Spain’s sovereign debt by two notches, to BBB+. The yields on government bonds rose, as did the volume of commentary that suggests the country will need a bail-out.
The state of Spanish banks represents the biggest worry. The country’s property bust is only halfway finished, if Ireland’s experience is anything to go by. Spain’s aggressive commitment to austerity and eye-watering unemployment rate are also major concerns, particularly when it comes to borrowers keeping up with their sizeable debt burdens.
For his part, Alfredo Saenz, chief executive of Santander, thinks that anyone citing mortgage delinquencies as a problem for the Spanish financial system is “saying something stupid”. It is difficult to explain, however, why Spain’s modest mortgage delinquency rate, at less than 3%, looks so out of sync with its extreme unemployment rate, at nearly 24%. A non-performing mortgage ratio on par with Ireland’s would boost the stock of dud housing debt in Spain nearly five-fold. A decline in loan quality on this scale would indeed push many Spanish lenders into a bail-out.
Limiting the rescue to the country’s banks—without also pushing the beleaguered sovereign over the edge—is the best case scenario for Spain, according to the Economist Intelligence Unit. To some, this makes us sound stupid. It is a risk we are willing to take.
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One reason that I would put forward for the lower delinquency rate is that in Spain when you default on your loan it is the responsibility of your family to repay that debt. So delinquency will have a different relationship with unemployment in this country.
Given that the majority of the unemployed are young people on short term contacts their family, on much better pay scales should be able to support a much larger burdon of debt and hence lower the delinquency rate.
I suspect that as unemployment continues to rise and more people on permanent contracts fall out of work we will see a ballooning delinquency.
In addition it is claimed that many of the Spanish unemployed work in the black economy, this would of course help them to continue to meet their payments while also seeming out of sync with the data the government can provide.