According to the IMF (International Monetary Fund), the bad bank created by Spain in efforts to ease the mounting pressure on wasteful real estate assets has shown signs of setting a yardstick for the property market in the country, and is reducing the prices of houses. The efforts made by the Spanish government to safeguard the value of properties in the market may be overwhelmed by the volumes of buys made by the bank.
Reports published by the IMF said that the European Commission had approved the purchases and SAREB as the bank is also known, the bad bank will purchase foreclosed properties from lenders who are having trouble finding investors. The bank bailout program’s chairman, Fernando Restoy, said that the average discount at which these properties would be sold will be in excess of sixty percent. However, he went on to say that those prices mustn’t be referred to the rest of the country’s real estate market, which happens to have fallen by around thirty percent since the property market boom.
Loss of Employment and Decline of the Property Market
The report released by the IMF said that the operational rationalization of this objective won’t be straightforward as further significant declines are very possible in the Spanish real estate sector. Meanwhile, the country’s biggest bank in line to receive bailout funds from European lenders, BFA-Bankia is expected to cut around 6,000 jobs this year, or over one fourth of its entire workforce, while losing approximately nineteen billion Euros, the lender revealed.
On a monthly basis, the volume of transactions recorded in Spain with regards to real estate has dropped by around seventy percent from the market’s peak in 2007. The reason for this significant decline has been attributed to the drop in mortgage lending, where volumes fell by over eighty five percent to just under four billion Euros towards the end of the third quarter of 2012.
Large Risks for the Spanish Economy
The IMF revealed that the bad bank will purchase and offload assets at prices which have the potential to become a reference value for the rest of the market, considering the low turnover in Spain’s real estate industry. Spain will be aided by the European Commission to seal another thirty billion Euros so that its banks can strengthen their system against massive risks, if the economy doesn’t succeed in showing a projected recovery in a couple of years’ time. In July 2012, Spain sealed a deal that would help it receive around hundred billion Euros from Europe so as to boost its banks.
If Spain’s banking systems deleveraging is pushed through too quickly by officials, it is feared that ithe country’s entire economy may fall into a bigger and deeper financial pothole, thereby drawing the credit out of the nation. The report said that the various conditions listed above have the potential to prove harsher than anticipated, leading Spain to a spiteful circle of reduced growth, damaged confidence, tighter credits, fiscal overruns and higher rates of interest.