When Euro Bubbles Burst


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.

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