With Greece and Cyprus in turmoil, we believe that the smart money is still on Spanish property.
Greek government bonds are in free fall, but markets elsewhere in the eurozone barely reflect the stress, for now. This may not be the case shortly.
Last week, as the prospect receded that Greece could hammer out a deal with creditors to avoid a debt default, bonds issued by Italy, Spain and Portugal weakened in sympathy. But the drops were small.
It was a far cry from the darkest days of the eurozone debt crisis, when any sign of trouble in Athens sent all bonds from Southern Europe’s highly indebted nations tumbling.
Many big investors say they are sticking with Italian and Spanish debt, which offer a better prospect of returns in a market where many bond yields have fallen below zero. They view any bouts of weakness as a chance to buy more bonds. The effects of the European Central Bank’s bond-buying stimulus program, and a recent improvement in the eurozone economy, are likely to outweigh any fallout from Greece’s struggles with its creditors, these investors say.
Stock markets tell a similar story. Athens’s main index, the Athex Composite, already crushed by the long-running debt crisis, has lost 15% of its value this year. Stock markets in Italy and Spain, meanwhile, are riding high, up 22% and 11%, respectively, in 2015.
Morgan Stanley gives these probabilities of what will happen in the days and weeks ahead:
- Greece eventually goes back to the bailout programme: 55% likelihood. In this scenario Greece gets no haircut on its debts (which the government wants), it gets its international funding but also has to implement continued austerity and economic reforms.
- Greece has a “staycation”: 25% likelihood. This would mean Greece implements capital controls – strict rules that halt the outflows of money from banks – like Cyprus did during its 2013 crisis.
- Greece leaves the eurozone: 20% likelihood. Without European assistance, the life support Greece’s banks are on is pulled away. It’s hard to say exactly what the risk of a Greek banking collapse is to the rest of Europe.
The Economist Intelligence Unit puts the Grexit risk at more like 40%. No country has ever left the euro before, so there are huge unknowns here.
What we do know is that Greece has a lot of repayments to make in the next few months. Here’s how that looks (the numbers mean millions of euros):
Bloomberg, Morgan Stanley Research
On top of the possible sudden disappearance of the bailout money, Greek tax revenues have also tumbled, down 23% below the budget target in January.
So what happens if Greece can’t fulfil these payments? Capital Economics, a consultancy that won the Wolfson prize in 2012 for its plan of how Greece could leave the euro, Barclays and Oxford Economics have all discussed this in recent research notes:
- The drachma would be back. The euro would be effectively abandoned, and Greece would return to the drachma, its previous currency (it might take a new name). The drachma would likely tumble in value against the euro as soon as it was issued, and how much the government could print quickly would be a big issue.
- It would have to be fast, with capital controls. There would be people trying to pull their money out of Greece’s banks en masse. The Greek government would have to make that illegal pretty quickly. The European Central Bank drew up Grexit plans in 2012, and might be dusting them off now.
- European life support for Greek banks would be withdrawn. Greek banks can currently access emergency liquidity assistance from the ECB, which would be removed if Greece left the euro.
- Likely unrest and disorder. Barclays expects that this sudden economic collapse would “aggravate social unrest”, and notes that historically similar moves have caused a 45-85% devaluation of the currency. Capital Economics suggests that the drop could be milder, closer to 20%, and Oxford Economics says 30%.
- Greece would resume economic policymaking. Greece’s central bank would probably start doing its own QE programme, and the government would likely return to running deficits, no longer restrained by bailout rules (though investors would probably want large returns, given the risk of another default).
- Inflation would spike immediately, but both Capital Economics and Oxford Economics say that should be temporary. It might look a bit like Russia this year — with the new currency in freefall until it finds its level against the euro, prices inside Greece would rise at dramatic speed. The inflation might be temporary, however, because with unemployment above 20%, Greece has plenty of spare labour slack to produce more.
The short-term effects would be painful and fast, but Oxford Economics analysts note that Greece “might be better off leaving the Eurozone in the long term”. Capital Economics similarly argues that a well-managed exit “could even end up as a favorable economic development for both Greece and the rest of the euro-zone”.
And for the rest of Europe and the world, Wells Fargo analysts think that the effects may be manageable:
Obligations to “official” creditors such as the IMF, the ECB and the governments of other European economies account for the vast majority of Greece’s $500 billion worth of external debt, so these institutions would bear the brunt of foreign losses from a Greek default. Foreign bank exposure to Greece totals only $46 billion, which is widely dispersed among countries, so the direct effects of Grexit on the private sector in other countries should be manageable, at least in theory. Of course, financial markets may react negatively if Greece were indeed to leave the Eurozone, and we worry that contagion could spread to other European countries.
In 2011 and 2012, Greece’s fate seemed closely tied to the rest of Europe. Losing Greece would have signaled the first domino falling, followed by perhaps Portugal, perhaps Spain or Italy, unravelling the whole project.
Right now, however, Greece looks like its own separate case, and very few people think that Grexit would force that chain reaction.
Spain had a huge property boom and then a collapse: yes we know, but it was largely caused by entirely inappropriate interest rates as a result of being in the euro.
It had absolutely nothing to do with the tourist foot fall, tourism in the whole was unaffected by the downturn in the property sector and today it is booming.
The current turmoil in Tunisia will only add to the numbers of tourists looking to the their old favorites on the Costa del Sol and the Canary Islands
Spain has also largely done the structural reforms that were necessary to recover from that disaster. It isn’t actually obvious that Spain would benefit all that much from not being in the euro these days.
We expect Spain to attract a record total of 8.3 / 8.5 million tourists in in August 2015. Spain’s economy is also expected to register substantial growth for the first time in more than two years over the summer of 2013, the knock-on effect being a continued return of confidence in her property market.
At the start of 2014, there was still some concern among British and other foreign buyers about buying into a flat market, (flat as opposed to falling) property market, not helped by a strong euro, but it seems the market sentiment has returned in earnest as bargain-hunters have returned to popular parts of the Costas.
Spain’s property market remains highly regional, though, and while prices in sought-after areas with controlled stock may have stabilised to some extent, other areas with an oversupply and high concentration of bank repossessions are expected to fall a little further, as banks are forced to offload unwanted stock.
The key is always think, High Rental Yield with a view to a Long Term Capital Gain. Do this and you will not go far wrong!
“You have to take good Legal Advice from experts who specialise in the Spanish Market, do not just walk into an estate agents and hand them your life savings on the back of high returns. Remember to keep your head in the game and minimize the risk.
No market is totally transparent and this goes for property, however by doing things correctly you can maximise your returns. There are still plenty of vendors with unrealistic expectations,”
But if you make an effort to contact H&G, we will go the extra mile for you, there are some great deals out there.