3 Sep 2012

When Euro Bubbles Burst

By Charles McPhedran
In Spain's Andalucia region, five families are evicted every day. French banks are getting bailed out. But in Germany, property is booming, writes Charles McPhedran, and that should worry us
They personified one of the most spectacular bubbles — and busts — in the history of capitalism. Spain's fallen property barons, los señores del ladrillo, today symbolise a class that "made it" as Southern Europe boomed last decade, only to lose it again during the property bust of 2007.

Los señores made Forbes rich lists. They spent their money as garishly as Russian oligarchs: on football clubs, yachts, private jets and parties.

If, or when, Spain asks the European Central Bank to start buying its debt sometime in September (in what investors are likely to perceive as a bailout), Spain's property tycoons will again cop anger and resentment from ordinary Spaniards.

After all, they have become the face of decades of Spanish government policies, which favoured property investment and tourism — and failed to ensure the Spanish economy had a tenable base.

The barons are remembered for having left Spain "indebted and paved over", as a profile of the group in Madrid daily El País put it late last year.

Enrique Bañuelos' Astroc was the first company to collapse on the Madrid exchange in 2007. A sell-off of 37 per cent of Astroc's equity in March of that year marked the start of Spain's precipitous economic decline.

"Back then, no one was talking about a property crisis, but rather of a 'slowdown'," journalist Luis Gómez wrote in 2011.

So Bañuelos kept spending tens of millions of euros, anticipating new sales. "You had to keep dancing while the music was playing," one confidant told Gómez.

His firm had risen and risen in the years before the global crisis; its stock price had jumped from six to 70 euros. Bañuelos had broken out of his home region around Valencia, where he was just one of a throng of property promoters. Indeed: he had become the acme of a young, dynamic entrepreneur. When he launched Astroc in the United States, Bañuelos "put on a paella for 25,000 diners in Central Park", said El País.

A year later, Bañuelos' had lost four-fifth of his fortune. But he didn't abandon property speculation. Instead, Bañuelos shifted the focus of his investments to the then booming BRIC nations.

In 2008, he bought into Sao Paolo property firm Agra. A year later, he further increased his Brazilian property holdings, according to a report in Rio paper O Globo at the time. By 2012, his Brazilian company Veremonte was the third biggest property company in the market and Bañuelos' was nicknamed "the Conquistador", Spanish paper ABC reported in May.

And, having overcome charges of price manipulation and improper management relating to his time at Astroc, Bañuelos was ready to further diversify his investments.

In the northern spring, his Brazilian firm Veremonte bought into Australian mining company Gladiator Resources. Bañuelos now holds a nearly 20 percent stake in the company. The Sydney-based iron concern's main project is in Uruguay, Spanish wire service Europa Press said in May. The "Spanish Donald Trump" plans to use that stake in Gladiator as a bridgehead for further investments in the Latin American mining sector, Europa Press added.

Bañuelos' fate has been more auspicious than some of his fellow Spanish property barons. Still, even property promoters currently fighting bankruptcy are doing better than those to whom they sold houses. In Andalucía, epicentre of the Spanish property boom, five families are evicted from their homes every day, experts tell Dutch radio station Radio Netherland's Spanish service.

Meanwhile, a third of residents in the region are unemployed — and the state may have to be bailed out by the Spanish federal government.

More than half a decade after the global financial crisis began with the collapse of the American subprime mortgage market, bank bailouts linked to property exposure continue.

And there's no sign that the property slowdown is abating. In France, the number of home loans is now at a historic low; French banks with an exposure to the mortgage market continue to suffer.

On Saturday, the French government confirmed it would guarantee the debts of property specialist Crédit Immobilier, reports French financial site Boursarama.

The decision was taken to avoid the "collapse" of Crédit Immobilier, which specialised in loans to low-income French borrowers.

In exchange, the bank has agreed to refrain from issuing new loans, and will be gradually wound up, "because its financial model makes it impossible for the bank to pursue its activities", a French economic ministry source is quoted as saying.

Still, French Prime Minister Jean-Marc Ayrault has assured reporters that the French financial system remains "broadly" solid despite the bailout.

Meanwhile, in neighbouring Germany, largely untouched by the economic crisis, property prices have jumped seven percent per annum since 2010. And the number of new developments in Berlin has risen 14.6 per cent in the first quarter of 2012 .

All this sounds like yet another property bubble. However, economists interviewed by the Frankfurter Allgemeine Zeitung caution that German property prices have remained largely flat for decades.

Moreover, the "affordability index" for German property remains below the statistical mean — signalling further price rises in coming years.

Broadly, avoiding property bubbles is a must for policymakers hoping to spare their country long, deep recessions, market economist Jean-Pierre Pétit told French afternoon paper Le Monde in a 2010 interview.

"Real estate bubbles create recessions that are typically longer and more profound than other bubbles," Pétit said, pointing to the destabilisation of the banking sector as one major consequence of the collapse of property bubbles.

And, "while the securitisation of property had become highly sophisticated and opaque in the United States" pre-crisis, making the current crisis is even worse than a typical property-driven recession, that property bubble was culpable for the crisis at the end of the day.

But property bubbles do benefit some: namely retirees reselling their family home, according to Pétit. Which means, in general terms, "a social order benefiting seniors, rentseekers and heirs", one that is typical of an "aging society."

This, in turn, reflects a system in which wealth is correlated with age — and where the social security system aggravates this effect, he concludes.

ABOUT BEST OF THE REST: It's a big world out there and plenty of commentators and journalists are writing about it - but not always in English. And not surprisingly, ideas about big events of the day shift when you move away from the Anglosphere. Best of the Rest is a fortnightly NM feature by Berlin-based journalist Charles McPhedran. Charles reads the news in French, German, Spanish and Portuguese and reports on what the rest of the world is saying about the big stories.  

Log in or register to post comments

Discuss this article

To control your subscriptions to discussions you participate in go to your Account Settings preferences and click the Subscriptions tab.

Enter your comments here

jackal01
Posted Tuesday, September 4, 2012 - 20:16

Well Done. Charles McPhedran

But how else do you employ the great unwashed if they don't build houses and they don't work for Telco's.

Telstra used to employ 120 thousand people, now, Privatised, 40 Thousand. Who Benefitted? The Nation in lost Tax revenue. What lost tax Revenue, those people payed 33% tax out of 100% Income off the Tax Purse and retained 67% of money that they did not create. Did the Consumer benefit?
Who did and what for.

So why DID we Privatise, so that the three Amigos could pay themselve 3 million dollars each in Executive sallary, money that originaly went to the other 80 thousand who are no longer employed by Telstra and then spent their portion at the local butcher etc.

We have a serious problem with a mental disconnect in this country and its caused by a lack of thought or thinking and our own greed.

jackal01
Posted Tuesday, September 4, 2012 - 20:19

Was creating Mom and Dad investers to prop up the share market thru put or turn over such a good Idea.

This user is a New Matilda supporter. aussiegreg
Posted Thursday, September 6, 2012 - 13:05

@jackal01

Most of those 80,000 ex-Telstra employees are off doing other jobs, so their tax revenue continues. More importantly they are off doing something productive, insread of just featherbedding at Telstra, so they are adding to the wealth of Australia and to the source of yet further tax revenue.

Not all of them. I once purchased a PABX system for my business and soon had a problem with it – the technician who came to fix it carried one of those huge toolboxes in Telstra orange with Telstra logos, over $3000 worth in today's money. Happy to talk rather than start work – I didn't care, it was a warranty job – he told me Telstra's post-Keating-part-privatisation redundancy packages were so generous he had paid off his mortgage. The toolbox had <i>not</i> been part of the package, but when he had just walked out with it, "no-one had stopped him".

He proceeded to tell me how much tougher it was to be working for private enterprise (and this while <i>not</i> working, just talking to me). At Telstra, the routine he and his fellow techies followed, he told me proudly, was to hang around the depot first thing pretending to be working until it was too close to morning tea-time under the award rules for them to be sent out on a job. After morning tea they would go out on a job, and make sure it stretched long enough so that when they got back to the depot it was too close to lunch for them to be sent out again, or ideally, so that it stretched into the prescribed lunchtime and thus kept them out on the job into the afternoon, preferably late enough so that when they got back to the depot it was too close to afternoon tea time for them to be sent out on another job until after afternoon tea. This meant he did an average of two 45-minute jobs each working day.

Reluctantly, he wandered over to look at the PABX, and after 15 min or so of desultory do-nothing fake work, Telstra style, he came back to tell me the problem was with the line. Now I had already established the problem was <i>not</i> with the line, by the simple expedient of disconnecting the PABX and plugging in an ordinary phone. Okay he said, then the problem was interference from other equipment. I'd already tested for that, by the simple expedient of disconnecting everything else within cooee. Well he said, it had him beat, he'd have to send out someone more familiar with the equipment. Which he didn't, surprise surprise, I had to follow it up myself.

Because Telstra was paying 80,000 people they didn't need, they always claimed they couldn't afford to offer the kind of service available to the customers of American telco's. My visiting American friends couldn't believe that in Australia not only did telephones only come in black and only in rotary dial, but they also came with a fabulous choice of two cord lengths: 6ft and 8ft. And you actually <i>broke the law</i> if you installed your own cord! Not to mention that we charged for local calls – in America they were free – and that our trunk calls were about five times the cost of similar calls in America, and international calls ten times.

And that despite the telcos in America being a byword for inefficiency.

So don't give me that crap that the customer has <i>not</i> benefited from the simple expedient of only employing the number of people needed to actually do the job (or at least of a number closer to it). And if you like the old system, how many people are you employing to clean your house, cook your food, look after your garden, et cetera et cetera? Don't tell me you can do those jobs yourself (or your wife can) that's not the government enterprise way.

Now that's what I call a mental disconnect.

Labyrinth
Posted Saturday, August 10, 2013 - 15:56

These issues inhibit the development of society. If they allow that multiple political parties and free expression of speech when it comes to tackling some of the problems, another problem might arise. - Scott Safadi