SAREB: S Must Stand for Sucker

Spain’s bad bank swerves critical questions | Reuters.

Anyone who invests money in the Spanish bad bank, SAREB, deserves to lose their money. The problem with the plan to take bad loans from Spain’s banks and isolate them in a so-called bad bank  is that the crisis is still ongoing. Spain has a central government ready for a bailout, an economy in a depression and an insolvent banking system. In order for a bad bank to work, each of these issues must be resolved.

SAREB has proposed to purchase up to €60bn in bad loans from various Spanish banks. This will barely put a dent in the bucket. Spain’s bad loans are already over €100bn and rising at a rapid clip. Note the steep slope since 2010:

The housing market has to fall to about 150 for it to reach a bottom and still has a long way to go.

Compare the U.S. and the Spanish housing bubbles. Spain’s prices rose nearly 50% higher. The bad loans placed into SAREB will not be able to be sold until the market bottoms. Why buy assets that are still plunging in value? This will take a couple of more years at the present rate of decrease.

After prices bottom, the Spanish property market will not recover for a generation, because it rose so high and so fast. Additionally, increased unemployment and decreasing GDP mean that no one can afford a house.  Spain’s housing market may hit a bottom but will not recover until the economy begins growing.

SAREB wants to begin selling these bad loans by the end of next year and generate returns of over 14% a year. It will be able to accomplish neither due to the economic reality of Spain’s position.

As long as their are bad loans in the system, an overhang of supply will keep the prices low for the loans in SAREB, so it will not be able to sell and make a profit. In order to begin offloading these assets to investors, Spain will have to enter an economic recovery. Even the rosiest forecasts emanating from its finance ministry do not see growth until 2015.

Ultimately, SAREB will wind up purchasing over €300bn in bad loans to clean the Spanish banking system. It will be able to begin selling these loans only after all of them are recognized and placed within its structure. Even at this point, Spain will have to enter a period of prolonged recovery to lift property markets enough to interest investors in purchasing these loans and other assets.

It is no wonder the only investors in SAREB are politically connected banks and insurance companies in Spain.


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