For anyone that doesn’t know (I suggest moving out of that cave and coming to join the modern world) the PIGGS anagram is given to Portugal, Ireland, Italy, Greece and Spain, for being the most indebted countries in the world. All the PIIGS are in a lot of trouble, but this is presenting the opportunity to buy properties at bargain prices, the question is whether or not these properties are a safe purchase at any price with the potential for an EU collapse still on the cards.
Spain is the second biggest of the PIIGS (after Italy), so after Portugal became the third of the PIIGS to ask for emergency financial aid in the middle of last year (after Greece and Ireland), the spotlight lurched over in Spain’s direction, as it seemed to be travelling up the GDP chain. Of course, Portugal’s need for a bailout had been called inevitable for some months before, and so the fact that Spain was the next in the contagion line had long been discussed.
No one is calling Spain’s need for a bailout inevitable, which is good considering the fact that a Spanish bailout would almost certainly force more severe consequences for the EU. However, there is more to it than this. The very next day after Portugal requested assistance, Spain successfully sold a three year bond, earning 4.1 billion Euros of a target 3.5-4.5 billion at yields lower than the last comparative sale.
The average yield was 3.568pc, just below an average yield of 3.592pc at an auction of a three-year bond a month ago.
"That should allay any contagion fears," said Peter Chatwell, rate strategist at Credit Agricole.
Since then Spanish bond yields (basically the cost of Spanish borrowing from the financial markets) has had its ups and downs, and even hit around the 5% mark that has heralded the three bailouts before. However, things have taken a turn for the better this week as Greece’s second bailout funding package was finally agreed.
Following the decision Spanish and Italian bonds rose for the fourth straight day on Tuesday. The yield on ten year Spanish bonds fell 5 basis points to 5.11%, and arguably more importantly at the moment the spread on German Bunds (the extra yield investors demand for taking Spanish bonds instead of German Bunds) fell to as little as 308 basis points, the narrowest since Feb. 8. Since then Spanish yields have continued to fall and the 10 year yield is at 5.08 as of today.
At a recent auction Spain sold three-month bills at an average yield of 0.396 percent, down from 1.285 percent at the previous auction of the maturity on Jan. 24. It sold six-month securities at 0.764 percent, compared with 1.847 percent at the previous auction.
In fact, Spain’s borrowing costs have been in a continued decline ever since the ECB agreed 489 billion Euros worth of three-year loans to the regions banks just before Christmas. The ECB is planning a similar longer-term refinancing operation on Feb. 29.
Because that is what it has always been about for Spain, the banking crisis, or rather the worry that the banking crisis would get so bad as to become a sovereign crisis, when it would add to thing debt levels and cause investors to lose confidence. Now it seems that this won’t happen, then it does indeed seem that Spain is on a trajectory away from a bailout, which would in turn lessen the threat of any further more severe crisis for the European Union.
So on the face of it, it does seem like we are safe to start snapping up some of those Spanish property bargains. However, just below that there lies a vicious circle of irony. The biggest problem faced by the banks is the amount of toxic mortgages and repossessed properties on their books, so if investors do indeed continue to buy properties in Spain and buy up all this repossessed property, then they will be fuelling their own positive outcome, but if too few lack the confidence to do so, then by staying away they will be forcing the outcome they fear.
According to data recently released by the Bank of Spain foreign property investment increased by 27.8% in 2011 compared to 2010. Some see Spain having built a wall between itself and the debt contagion which spread from Greece, through Ireland into Portugal, a wall, which is of course on top of the divide that already exists between 3 small economies and two of Europe largest. It seems that investors put a lot of weight in these divides and have confidence that Spain can avoid the need for a bailout and with that any further consequences for the wider EU.
Of course, debt is not the only risk faced by Spanish property buyers; owners in the Andalucían town of Albox, Spain, are once again facing lengthy court battles to try and avoid the demolition of their homes. Worse, according to John Hillen of local protest group AUAN, "the homes were constructed with planning permission from the local council in 2002 and possess all of the necessary paperwork". This is a side of Spanish planning law that all investors should be aware of to cover all the bases.