Expat Living – The Credit Crunch In Spain

Ten years after it was launched, the euro is propelling Spain towards disaster. In giving up control of domestic interest rates to the European Central Bank, [Spain] handed over a vital instrument of macroeconomic management.

If you read the Jeff Randall article in the Telegraph recently you would think that the end is nigh, that or he had a really aweful holiday down in Marbella: “For a place that’s called the Sunshine Coast, Spain’s Costa del Sol was unusually wet and cold last week. Friday and Saturday were particularly miserable in Marbella, as the rain lashed across the main promenade, forcing restaurants to bring in tables and pull down shutters.”

Now to be fair the weather has been pretty poor in Spain recently. In Madrid they have had snow, and in Almerimar it has been as cold as I can remember it for the last 7 winters, so anyone taking a snap shot of expat life here at the moment would be mistaken for assuming the worst I guess. Spain is predominantly an outdoor culture, especially in Almerimar where I would say that 80% of the bars, cafes and restaurants ’space’ is outdoors. So if the weather is bad (which it is very infrequently) then trade suffers. Would be unfair to blame this on the credit crunch though, although global warming may be contributing but that is another (cheerful) story ………

The main thrust of his article was that the surprisingly bad weather was a reflection of the declining economy, and that Gordon Brown did a great job for the UK keeping out of the Eurozone, as it means that the UK is free to set the policies that it feels are right for it, unlike Spain, he argues, that is dictated to by Germany in particular where initial estimates have growth virtually halving in 2008 to 1.3%

The Spanish economy is weak; it needs lower interest rates and a softer currency. Such a prospect, however, doesn’t suit Germany, the eurozone’s dominant force, so [Spain] has to sit and suffer while its people cry for help.

So let us look at the facts:

• Inflation has dropped to 1.5% since the summer when it was 5.3%
• Unemployment is at a 12 year high of 3 million, around 13% of the workforce
• Unemployment in Spain has risen by around 47% i.e. one million in the last year
• The 5 million immigrants means that the number of foreigners claiming benefits has doubled

So what of the future? Well if the pound stays where it is many are predicting disaster:

If that analysis proves correct, parts of Spain will face devastation, and social policies that seemed generous during the go-go years will quickly become unaffordable. For example, in some instances the state pays 70 per cent of salary for up to two years when a worker is made unemployed. How will that be funded if, as some are predicting, Spain’s jobless total reaches four million in 2010?

Before you go getting all depressed remember though that this is the guy that is currently advertising his show on Sky with the phrase “What would I do if I was in the cabinet? Resign!” and Simon Heffer recently posed some interesting questions, “If you ran a public limited company, would you ask Hazel Blears to join the board? Would you want Jacqui Smith chairing your remuneration committee? Would you be happy for Lord Rumba of Rio to sign off your accounts, or little Miliband to mastermind your product development? ”

The implication being that it is more through luck than judgement that the UK isn’t in as bad a position, and you wouldn’t bet against the government messing it all up anyway! All very well to have the option to make decisions, but if you don’t have the ability to make the right decisions you are no better off.

That said they are not alone in forecasting doom and gloom for Spain with rating agency Standard & Poor warning Spain that its credit rating (currently the highest) is under threat from the deterioration in public finances being produced by the government’s attempt to support the banking system and put a brake on the dramatic decline in the domestic economy. As in the case of Ireland and Greece recently, S&P said Spain faces a painful process of rebalancing of its economy and a consequent marked deterioration in its public finances.

One year ago the financing of Spanish government debt was barely more expensive than it was in Germany, but yesterday the 10-year bond spread between the two reached an unprecedented 92.6 basis points (or nearly a full percentage point) before settling at 92.3 basis points. The spread, or additional interest, between Spanish 10-year bonds and similar German debt rose 9 basis points, or nine hundredths of a percentage point on the day

That said the early indications aren’t good for the tourist trade in Spain, and as that is a significant part of Almerimar’s income it isn’t great reading …..

• In 2008 145.8 million people flew out of the seven (7) main airports in the UK, a 2.8% drop over 2007
• Year to date the figures gave dropped a further 0.5%, with the biggest fall being flights to Europe
• UK travel agents are reporting stronger enquiry levels for UK based holidays than they have seen for many a year
• Internet travel searches dropped by 42% in the week after Christmas

As you walk around Almerimar it is easy to see the effect that the general decline of the construction industry has had locally, with many unfinished developments, more and more properties for rent (selling isn’t a realistic option until the banks start lending again), and already this year the closure of the odd business. The decline in the construction industry is by far the biggest contributor to the Spanish economic ‘crisis’, but to blame it all on that industry would be wrong, as the cause is deep rooted over the last 6-10 years according to reports, with the economy operating “beyond capacity” as evidenced by the external debt caused by the inflow off foreign funds, and the resultant increase in migrant workers, especially locally in El Ejido and Almerimar.

All doom and gloom then? Well no! It is easy to focus on the negative, and the banks AREN’T HELPING at all. I was talking to a friend who owns a bar and he was telling me that the banks are reducing the terms on overdrafts, and one effect of this has been on the construction industry where they are struggling to pay the wages when they aren’t getting paid themselves for 90 days. Now this is just a case of cash flow, with low risk attached and if they aren’t prepared to back that ………

On the other had the same friend said that while business wasn’t great, it was certainly a lot better than he thought it was going to be …..

On the more personal level we have friends who are struggling now that a weekly shop for basic essentials has risen to 150€ from 100€, while at the same time hours and hourly rates have been cut, and other friends where one partner is having to work away from home on a contract basis for the first time in their lives. For Sands and I things are tighter. In the UK the interest rates mean that the yields on the properties are much better, so the short term is good, but the equity has reduced and although we don’t need (and hadn’t planned) to take any out for several years yet it is disconcerting to have the option if not taken away then at least made a lot less appealing.

Still I wouldn’t want to be anywhere else other than Almerimar at a time like this! For one, as an expat you tend to find a sense of community unlike that at home, so there is a real sense of people pulling together. The restaurants may not be as busy, but the supermarkets are as more and more people entertain at home. The basics are still a lot cheaper than in the UK, the ability to sit and have a coffee for 1€ while sat outside talking to friends is worth its weight in gold, or should that be coffee beans, and that fundamentally is the crux of the matter …….

On the whole expats have moved for a better quality or life and culture. It isn’t a ‘investment’ decision for most, it is a desire to be somewhere different, to experience a different culture, to adopt a different lifestyle and for those reasons I don’t see a mad rush back to the UK.

Personally I don’t see it getting as bad as in the UK, primarily because of the difference in culture. The younger generation that I mix with here don’t have huge mortgages, car loans, interest free this and that items. They live within their means, use credit a LOT less, and seem far less focussed on material things. For them, as with the generations before them, good food, good drink and good company are the key ingredients to a good lifestyle.

And for the pensioners that are suffering with the poorer exchange rate, as one pensioner here told me, we had the good times, so we should expect and accept the bad times as it will pick up again one day, and for people that are digging into their savings …… remember the saying ” save for the future or a rainy day”, well as Jeff Randle pointed out, it is a rainy day, and that is what savings are for!

Articles Referenced In This Post

• Staying out of the euro has spared us a Spanish-style catastrophe
• Standard & Poor’s Puts Spanish Sovereign Debt On Ratings Watch Negative
• Spain jobless hits 12-year high
• Internet searches for flights down 42 per cent in a year
• Why Spain’s Economic Crisis Is Something More Than A “Housing Slump”
• Interest rates and the economy: Does anyone in charge have a clue what to do?

About Almerimar

Almerimar is located in the region of Andalucia, Spain. The nearest airport is 30km away in Almeria. Other airports that are within 3 hours include Malaga, Murcia, Granada, and Alicanti. Other holiday resorts in the region include Mojacar , Aguadulce and Roquetas de Mar

Almerimar is also one of the largest marinas in Spain with over 2,000 berths and excellent boatyard facilities.

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