The rain in Spain falls mainly on the……….. Mount Fuji.  Didn’t see that coming did you? I have previously written about the state of the broad European economy and some of the countries therein. Specifically of interest are the PIIGS (Portugal, Italy, Greece, Ireland, Spain).  This note contains a brief update on Spain – and how it resembles Japan and to a lesser extent – the USA.

• Spain accounts for close to 10% of the EU’s GDP.
• Has unemployment near 20% and headed to 25%
• Spain contains roughly 30% of the new houses/apartments built in the EU over the past decade.
• Has as many unsold houses as the US!
• value of property developers + other construction sector debts = $670B. almost half the size of Spain’s economy!!!

A lot of the debt related to Spain’s miraculous property boom is going to start coming due next year and is going to go bad.  A lot of that debt will likely never be repaid.

So what is likely to happen? Enter Japan. Japan went through the same property boom then bust – only bigger. Japan then spent the next 2 decades (it is still going on) unwinding the debt via “zombie banks”. During this time period Japan tried tax cuts, quantitative easing, 0% interest, and bridges to nowhere projects. They are still trying unsuccessfully to stop deflation.

How might this impact us?

• The USA can learn (has learned) from Japan’s experiments with monetary policy during the period after a construction bust.
• We need to be mindful of international bond funds with European exposure because Spain’s economic malaise will be felt by its creditors – Germany, France et al.
• Do issues with Spain’s banks adversely impact the rest of the EU / slow economic growth ?  Yes. Heads-up international equity positions.