Guest post by Amy Harris
Mayhem in the Med
The Spanish financial crisis can be traced back to 2007, but there is no doubt it has worsened in recent months. The usual financially sound country was forced to ask for a bailout from its European neighbours.
Of course, Spain is not the only country to be affected, Greece also needed a bailout after coming close to bankruptcy in 2011. Long term loans had a big role in what resulted in a major financial dilemma for Spain.
The Spanish Housing Market
80 per cent of the Spanish population own their own homes. The governments of the 60s and 70s encouraged Spaniards to buy their own houses even offering them tax relief on their mortgages.
Demand for houses from 2003 onwards was high and over half a million new houses were built in 2005. Banks began to offer 40 year mortgages and recently even 50 year mortgages were available. Spaniards and foreigners alike flocked to buy properties in Spain.
Property Bubble Burst
With the economic downturn of 2008, the property bubble burst and Spain was one of the worst hit countries. The long term mortgages that seemed a good idea just a few years previously suddenly started looking like a risky move. If people defaulted on their mortgage, banks were unlikely to reclaim all their money.
Construction came to a halt and businesses were going into liquidation all across the country. Indeed, Spain had the worst figures for the drop in property sales in the whole of Europe between 2007 and 2008. Sales for this period dropped by over 25 per cent compared to the previous year.
Although long term loans were not offered across Europe, the continent soon felt the force of the Spanish financial crisis. Indeed, in 2010, the UK section of the Spanish bank Santander announced loses of 8.5 per cent. This loss was attributed to the bad loans of the bank’s home country. Europe had to sit up and take notice or there was the real possibility that the whole Eurozone could be pulled deeper into the financial wilderness.
The Solution – Europe’s Bailout
As was the case with Greece, the governments of the Eurozone had to bail Spain out with significant loans. In June 2012, it was agreed that Spain would be given a rescue loan of 100 billion Euros, which would be funded by the Eurozone. It was hoped that this substantial amount of money would enable Spain to recover from the crisis and stabilise. A stronger Spanish economy would then sure up a weak Eurozone.
The Spanish financial crisis is by no means over and, the future still remains uncertain. The bailout provided by the Eurozone was only agreed in June so it is impossible to assess its impact so quickly.
What is evident is that Spanish lenders must learn from the past and show much more caution in offering long term mortgages – just as British lenders have learned their lesson from handing out 95 to 100 per cent mortgages.
Whilst the Spanish economy’s future is uncertain, it is hoped that a general Eurozone recovery, together with the large bailout, will allow Spain to once again become the strong stable economy it used to be known for.
Amy Harris is a writer for FinancialTraining.co.uk – which helps British and international students find the right financial courses in London and the UK. Amy is an American expat herself, and enjoys helping people with their careers and financial advice.