Spain Was a Warning

the year is 2006 and Spain is Riding High the economy has been experiencing incredible growth since the turn of the Millennium with per capita output having more than doubled in just six short years German economists are predicting in as little as 5 years Spain will overtake them in per capita income and Spain will become a central power in Europe certain regions of the country were achieving Full Employment and the government passed laws to make working conditions very comfortable and rewarding the boom was fueled by a belief in the continued growth of the beautiful country and

everybody wanted in on it the Euro Zone opened up International Investment in a shared currency and the best way to own a bit of the Spanish success story was to own a bit of Spain buying a beach house in Mara or a studio in Madrid was not a luxury it was a Savvy investment that could also be used to enjoy some time in the Sun real estate agents were doing so much business that they became local celebrities And Trades people were in such high demand to build enough houses to keep up that it wasn't unusual

to see a plumber driving a Bentley this all became a self-fulfilling prophecy because as money poured into the country and people took on debt to get more exposure to the Spanish real estate market there was more need for construction which made GDP figures look great which in turn made the country look like a great investment of course it wasn't and the economic shocks of the GFC and the Eurozone crisis put a swift end to the debt field party and now almost two decades later the economy is still poorer than it was back in 2007 unemployment

remains High especially amongst the youth broader economic activity has stagnated the country still struggles with debt and perhaps worst of all this slowdown didn't even make the housing market that started this whole mess cheaper for average people Spain is genuinely one of the scariest economies in the world because while it's easy to look back at the speculative exuberance of the early 2000s and conclude with the benefit of hindsight that it was inevitably destined for failure the country in many ways had a less overleveraged economy back then than a lot of Maj Nations do today if

Spain is a cautionary tale it's probably worth asking if we've really leared anything from it so what drove the rapid growth of the Spanish economy what really caused it to all come crashing down why has it stayed down for so long and finally are there major economies in the world today that are really in more compromised position than Spain in 2007 as we reflect on Spain's economic roller coaster from booming growth to sudden downturns it reminds us of the importance of managing Investments wisely this aligns perfectly with today's sponsored trading 212 which offers advanced yet

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their overuse of gold during colonization to their exclusion from the US Marshall Plan Revival to early liberalization policies there's plenty to discuss when it comes to Spain and its Financial history but to get to the bottom of the country's present crisis it would be best to start off with its apparent success story kicking off in the 1990s at the time the country had a high unemployment rate that wouldn't budge the Spanish government started making moves to secure a potentially more profitable seat at the progressively globalized table and they felt the best way to do this

was to join the European economic Community or eec this seed planted in 1986 was initially underwhelming as Spain's GDP per capita remained about 72% of the average eec member however after enduring a global recession in the early '90s the government successfully managed to curb inflation and managed to budget enough to start a steady decline in unemployment by the middle of the decade almost in tanon with these changes the eec was integrated into the first pillar of the newly formed European Union in 1993 prompting Spain to be one of the first Nations to adopt the euro

in 1999 as is often the case with most massive geopolitical decisions like changing a nation's currency and joining a global aggregate this came with a number of costs and benefits When an economy remains independent from outside arbitration there's a bit of flexibility that comes along with it primarily total monetary sovereignty if the currency needs to be devalued to boost exports and Shrink trade deficits having a government capable of doing so on its own can expedite the process before things get out of hand if they need to control interest rates to handle inflation debts or unemployment

they maintain that control with within the country itself of course on the other hand there are plenty of Pros to come along with a more integrated economic model especially among countries sharing the same continent the STS sharing a currency like the Euro makes trade with neighbors a lot easier by simplifying price comparisons as well as helping individual businesses and their consumers find the best prices plus in most cases a shared currency is a stronger currency especially compared to the previous Spanish petta which was not notorious for its stability with a huge network of countries keeping

a currency relevant paying for imports becomes a lot easier and most importantly credit becomes much cheaper which depending on how it's handled can easily join the list of cons all right so how did this all play a role in what kicked off the Spanish bubble and how did this country grow on paper to the point of convincing almost everyone it was on its way to becoming the new Eurozone superpower according to most economists the dramatic shift was first initiated in 1998 just a year before adopting the Euro banking on an immigration increase that started the

same year Spain became very interested in the housing market more than it already was with a wave of new people ready to gain citizenship the focus on constructing comfortable living spaces began to rise this was seen as a positive development for the Spanish government because construction is a labor intensive occupation one that could keep citizens employed for long periods of time and given the troubling history of Spanish unemployment it makes sense why Spain began to theorize that this could be a long-term solution to the stubborn unemployment rates faced in the 20th century at the peak

of the construction boom one can find Historical references of bluecolor Tradesmen driving luxury cars because their work was so in demand and the fuel on the fire of this boom was the euro of course this is where the cheap credit comes in with low interest rates provided by Spanish Banks along with the the Euro acting as a prime Catalyst for transactions and lowrisk foreign exchange fluctuations the property Market became a Wellspring for those hoping to turn a profit the interest in building houses was already favored by Spain but the introduction of the Euro made development

much faster and easier than ever before it also didn't hurt in the eyes of both foreign and domestic investors that the Spanish government favored tax breaks in the real estate sector these policies decreased the user cost of ownership and made the country an incredibly attractive investment opportunity there was non- taxation on imputed rents the basically untaxed capital gains the mortgage interest payment to deduction and what truly set Spain apart from the other players at the time payments on the principal were also deductible from personal income tax all of this with the economic growth model prioritizing

construction caused Spanish borrowing and real estate market to reach jaw-dropping Heights so why didn't the Spanish central government see the riding on the wall and why didn't the rest of the Global Investors buy into this give it a second thought after all debt was climbing dramatically and in hindsight economic indicators were screaming trouble well first it's important to understand that people now look at this from a post crisis lens it's kind of like how most experts saw Bernie made off as the wizard of Wall Street only now coming out to say that everyone should have

been wiser that said there are other major elements that hid the growing bubble one being the unique way the Spanish government and its economy function the official theory is fiscal decentralization the process of Shifting the responsibilities of Revenue collection and expenditure execution from the central to subnational authorities what this means is that the Spanish central government played little to no role in the borrowing process like other countries in the EU in fact as far as the world was concerned at the time Spain's debt was incredibly low because most econ iic figures only look at the

central government and take no account of provincial government branches in an effort to guarantee the autonomy of the regions that made up the country the Spanish government set up a constitution promoting administrative division activated in the late 1970s the nation is made up of 17 autonomous regions including the archipelago of the Canary Islands in the Atlantic Ocean and the archipelago of the Bic islands in the Mediterranean Sea as well as two autonomous cities in Northern Africa of course it was clear that construction firms investors and regular people that just wanted to buy a home were

doing all the borrowing but what wasn't clear was who exactly was doing the lending this is where the whole issue of regional autonomy comes in for a country like Spain a lot of tax collection Health cost and Educational Funding is not operated by Central Authority but rather its respective autonomous regions moreover before the 2008 crisis there were approximately 45 different Regional Savings Banks known as carar scattered across the country most of them went all in on real estate with high hopes of making it big this disconnect is one of many that allowed Spain to actually

report a budget surplus when things were running smoothly and for a Time the world just didn't notice again with EU membership there was also reduced legal barriers to investment coming from other European countries so it wasn't long before investments from wealthy countries like Germany the UK and France began to pour in this Chain Reaction fueled an aggressive building boom which made the country's economy look great which in turn made investors even more excited about the economy's growth which made them invest more money which made the country's economy look even better at its peak more than

12 a half% of the Spanish Workforce was involved in construction Spain alone managed to create more than half of the new jobs in the European Union creating more houses than Germany France and the UK combined credit began to explode and hous prices so by 71% in just 5 short years between 2003 and 2008 and here's where things get really interesting Spain did in a small way anticipate the possibility of a Fallout after joining the Euro Zone Spain central government had a team working around the clock collaborating with banks to set aside money for potential non-performing

loans when things were profitable this was very abnormal in the pre- crisis West and the official record indicat that they set aside about 35 billion but here's the problem it wasn't nearly enough to save the country from what was to come not even close so what were the key issues here what really caused it all to come crashing down well to start like any good relationship communication is key and that's an area where Spain was sorely lacking immigration was one of the primary initial motives for Housing Development and a reason to put many to work

on construction projects as quickly as possible it turns out that Spain overshot their estimates for exactly how many homes were needed and that's a bit of an understatement putting it into perspective by 2006 the country had constructed more than 800,000 homes all the house about 200,000 families to add to this chaos some participants in the Spanish housing bubble didn't even go through the trouble of changing regulations to suit their needs they just lied in a paper published by two professors Jose Maria Rea and Jose Garcia malova the two studied the nature of the Spanish mortgage

system to understand house prices they did this by looking at the loan to value ratio or LTV this ratio is computed using the value between the mortgage which is given and the value of the house seems simple enough but there was a problem the disconnect became more elaborate because this value was determined by outside speculators appraisal companies their job was to provide pricing for the homes according to a set of characteristics and that's how it works according to the study the bank of Spain has estimated that an LTV equal or lower than 80% is a

good mortgage because of the fact that 20% of the value of the house is already been paid however the closer an LTV is to 100% the riskier the mortgage is and the higher the probability of not paying back the debt if the bank was facing a mortgage with an LTV higher than 80% it was unlikely that the bank of Spain would accept it this is where Rea and malova made a gut-wrenching Discovery Banks actually managed to give mortgages that were not following banking Poli and here's how they managed to do this over and over again

if a financial worker noticed that a family had an LTV closer to or equal to 100% they would just called up the appraisal company and changed the price of the house giving the home a lower LTV according to these investigators the appraisal company raised the price of the house so the bank could give them the mortgage the buyer could happily enjoy his or her new home and the Spanish Bank was none the wiser of course this was possibly the most dangerous involuntary risk of Regional Bank or Cara could make giving mortgages to clients that had

no security with high price real estate manipulated by appraisers and financial institutions frankly too hungry to consider the consequences and amongst 80% of Spain's population as homeowners this all felt like a dream come true that is until the bubble finally burst with poor data and incentivized deception everything finally came crashing down in the blink of an eye by the time everything in the housing market imploded Spanish real estate debt equaled almost 50% of the country's GDP thousands of families were unable to pay their massive debts and since the homes were will into negative equity Banks

had no way to recoup their losses the once seemingly Bountiful flow of credit dried up almost immediately leaving speculative developers which were ubiquitous at the time to devolve into a large mass of non-performing loans needless to say that 35 billion EUR Nest EG didn't do too much now again this is all easy to see as a bit ridiculous with the benefit of hindsight but there are a lot of countries in the world today in arguably worse positions who have also Fallen to the Trap of assuming it can't happen to them for example my own home

of Australia now has a high level of household debt to GDP than Spain did right before its generational crash accounting for 11 16.6% of the country's nominal GDP in March of 2023 compared with Spain's all-time high of what now looks like a rather modest 85% the increase in the Australian household debt to income ratio has been more pronounced than in most other countries rising from the bottom half of the distribution across advanced economies in the late 1980s to the top quarter by 2018 there are also the same key warning signs of generous tax policies for

real estate investing Banks willing to look the other way to get a deal done migration and field speculative Mania and a self assurance that just because we have nice beaches our home should be worth 15 times national income then there's Canada as of the the end of 2023 Canada's household debt to GDP ratio was estimated to be 104% which is again higher than Spain's ever was there are also the same anecdotes in a lot of these modern economies about Tradesmen making much more money than their professional counterparts with more training and real estate agents getting

their own TV shows Spain's meteoric house price rise in the early 2000s now almost looks relatively conservative compared to the house price increases experienced in these economies over the past 5 years and as nice as it would be to say that things turned out just fine for Spain the reality is that it is still dealing with the Fallout of this crisis almost two decades later initially Spain did what many countries do when they're trying to revive their economy put simply when and doubt spend it out and spend they did spending more as a percentage of

GDP on stimulus than any other European country all of this would have probably been front page news for years if it weren't for another country stealing the spotlight with its own Financial failures Greece for Greece in 2009 the new government then disclosed that Greece's fisal deficit was Far higher than anyone thought bond market started to lose confidence in Greece's economy and they became the new headline in many ways burying the cautionary tale of Spain's real estate for nearly two decades obviously this didn't suddenly nullify the Spanish problem for Spain itself just because the world's eyes

looked away from the falling tree doesn't mean the Spanish people weren't still there to hear the sound of the Fall themselves there are a number of serious challenges the country still deals with to this very day while most western Nations took a beating at the start of the 2008 housing crisis Spain system was hit particularly hard and even though they managed to see a few years of growth their GDP still hasn't recovered from where it was in 2007 when the country was flying high in the '90s annual salaries competed with the likes of France Germany

and the UK however now it stands far lower than most other developed Nations at 29,100 less than what they were experiencing before the crash with a steady rise in debt and inflation the average spanian is worse off today than they were two decades ago with increased International borrowing and the bailout of Spain's Banks the nation was forced to modify the structure of all but two of the affir mentioned 45 khas referenced earlier in the video making it harder for people to access Credit even to to this day moreover its ties to the euro a once

promising move for the financial stability removes much of Spain's ability to depreciate exchange rates this in tan with lower income saw what economists refer to as brain drain the immigration of highly trained intelligent people from a particular country which as it turns out doesn't bode well for a nation requiring problem solvers the days of bluecar workers riding in sports cars are also a fading memory as unemployment remains higher than in most other European nations as of April 2024 there's been an upward Trend in fact the stats can be somewhat misleading as many of those deemed

employed are just working small gigs to make ends meet with no promise of long-term career opportunities of course it may be too late for Spain and the country will need to grow back slowly if it's to do it at all but for other countries there's always an opportunity to change these habits and this is where the message becomes Crystal Clear these common themes popping up in other nations it's time for those to look at what Spain really is at least from an economics perspective it's more than just a country with a struggling economy astronomical youth

unemployment low growth and ironically High housing costs it is in every sense of the word a warning a warning that an economy cannot fiscal problems unilaterally with one sector assuming Mass amounts of debt a warning that excitement can Eclipse rational judgment a warning that if a housing crash like this can happen in Spain it can happen feasibly anywhere else fast money is exactly that fast money and it can disappear just as quickly or faster than it arrived now Spain's neighbor Portugal experienced a similar set of challenges but they're trying to rebuild their economy in a

unique way that looks like it's working but hasn't been particularly popular you should be able to click to that video on your screen now thanks for watching mate bye