In recent months, the data coming out of Spain have been bad, but not quite as bad as before. The unemployment rate, for example, looks like it’s finally starting to fall. Still, at around 26%, this is hardly a cause for celebration.

Spain Unemployment Rate

Many of Spain’s woes relate to the real-estate boom and bust. The average house in the country has lost around 40% of its value since a peak in 2007. Prices have been falling for more than five years, although the pace of decline has mercifully slowed in recent quarters. ‘

Annual Change Spain Housing Prices

Estimates indicate that housing prices should fall by another 10% to 15% before they stabilise. The IMF’s latest report on Spain indicated 15% overvaluation. With the labor market improving very slowly, borrowers will continue to struggle to service their loans. The economy is out of recession, but growth remains anemic. Despite the more positive economic outlook, demand for mortages has not improved much and real wages are not expected to grow.

Housing Investment

The combination of high unemployment and plunging property prices is bad news for Spanish banks. Non-performing loans have set a new record. Doubtful loans in December were worth a whopping €197 billion ($270 billion). Spanish banks’ bad debt is worth roughly as much as the entire economy of Singapore, and growing. Just under 14% of all Spanish bank loans are now behind on payments, and this ratio is likely to get worse before it gets better. Banks have been reining in lending, with credit falling at a 10% annual pace in the latest data.

Doubtful Loans

At the same time Spanish bond yields have collapsed to their lowest since 2006, yields in some cases are hitting record lows and marginally above those of the US. One might be surprised to learn that unemployment is at record highs, youth joblessness is at record highs, and Spanish bad loans are at record highs once again.

Increased optimism or Investors reaching for yield.

Japan - Italian & Spanish Bonds

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