Anyone with US dollars to invest must be rejoicing at the sight of worries about Greece and the ECB’s potential QE program undermining the strength of the battered euro. The US dollar is trading at an 11 year high against it. What does that mean? Time to go shopping of course! And put European real estate debt at the top of the list.
That’s what US private equity groups have been doing, with something like a 79% market share last year. The Financial Times reports:
‘European banks have stepped up their sales of distressed real estate loans, as investors flock into the continent’s property sector. Sales of loan portfolios rose 133 per cent year on year to €49bn in 2014, according to research by CBRE Capital Advisors.’
The deals must look even sweeter as the falling euro makes it cheaper to buy in. The good news, if you’re in the market, is that European banks still have €264 billion of real estate loans they want to get rid of. 40% of that’s in Spain. Discounts to property values are still in the region of 44%. Irish property must look especially compelling for British investors, with the pound sterling up against the euro as well.
Here, perhaps, is the key quote in the context of the wider economic picture:
‘European banks still have a long way to go to unwind their pre-2008 problems, according to the research — more than three-quarters of loans on their books still date to 2007 or earlier.’
The European economy remains hobbled because the banks are carrying deadweight on their balance sheets. Until this process — selling off the bad debts, recapitalising the banks and creating new loans — is complete, the EU economy will be mired in slow growth.
People who cite the reason for this as Europe’s poor demographics, high government debts and more regulated environment are missing the point. Those factors were all present before the crisis.
The actual problem is its banking system financed rampant property speculation, the effects of which they’re still nursing. In Cycles, Trends and Forecast,we explain this process and how you can take advantage of it.
The ripples from this show up in different ways. According to the FT, apartment prices in middle class areas of Athens are still down by as much as 40% since 2009, with second homes and island building lots even worse, down 50%.
As part of the reforms demanded of the Greek government, properties became subject to a new levy called the ‘Enfia’. This was an emergency fund raising measure. With 80% of Greeks owning property, it cast a wide net. It recently became permanent.
The problem is that the tax was levied on properties at their pre-crisis valuations. I can’t say for sure, but this may have been to obscure the big losses European banks were nursing on their Greek property loans.
In this case, the Greeks appear to be paying an unfair tax. These are properties most can’t get rid of when pension, jobs and assets have been put through the wringer and then some.
This is feeding public discontent and swinging support toward the Syriza party, which wants to repudiate at least a third of Greek debt. They are leading in the polls. This raises the spectre of the dreaded ‘Grexit’ again.
Indeed, according to the FT, two Greek banks have applied for emergency funding from the ECB ‘as a “precautionary measure” against a possible run on deposits ahead of a critical general election later this month’. That election is in four days. Do they know something we don’t?
What we do know is that €3 billion fled the Greek banks in December as depositors took their money out. Foreign banks are in turn cutting their exposure to the Greek banks. The more illiquid the situation becomes, the more trouble the Greek government has financing its short term debt.
A little further out, the concern around the upcoming election has lifted the government’s three year borrowing rate to 13.5%. Germany, in contrast, can finance a five-year bond at practically zero.
But it’s the total debt, including long term, that is the heart of the issue. It’s 177% of Greek GDP. That’s a figure of €317 billion. Three quarters of Greek debt, according to the FT, is held by either the IMF, the European Central Bank ‘or the European Financial Stability Facility. Half of the bailout funds granted to Greece are going to pay off the interest on its existing debts.
Of course, Greece’s debts can’t be repaid. What its lenders want to see is a continuation of the interest payments. As long as the debt can be rolled over, even for decades, it suits them.
If Greece were to leave the euro, the currency Greece replaces it with would be practically worthless, which would mean Greece and its assets would be hellishly cheap for anyone with foreign money. That is, if you trust the government enough to put your money there.
If they stay in the euro, the Greek government will be forced to sell off more national assets to meet its budget and debt commitments. Either way, after six years of recession, Greece remains on the auction block. The question is only who holds the hammer.
For The Daily Reckoning