Nightmare for residents trapped in Spanish ghost towns

Source:http://www.guardian.co.uk/world/2011/mar/28/residents-trapped-spanish-ghost-towns

By Aditya Chakrabortty 

Sightseers come to Spain for the Alhambra, the Gaudis, the beaches. But Spaniards talk about a new set of landmarks, a kind of tourist anti-attraction. You can find them clustered on the outskirts of big cities and around holiday resorts, in Madrid and Valencia. They are half-completed housing estates, often vast areas of empty flats and foundations and property-developers' hubris. Now they are nearly deserted. The Spanish call them ciudades fantasma: ghost towns.

Anyone who wants to understand the challenges facing Spain – and by implication the rest of the eurozone – should visit one. Take the route I did, to a place called Valdeluz in Guadalajara. It's easy enough: board the fancy high-speed train from central Madrid to Barcelona and get off half an hour later. If my experience is anything to go by, only a handful of passengers will spill out on to what is a nearly new station. And there, beyond the bored security guards and the metal railings is … nothing. Another platform for cheap commuter trains, completed but never used, and then acres of red dust and weeds.
Valdeluz was meant to be a dormitory town, with 9,500 houses for nearly 30,000 residents. But the lead developer hit the rocks a couple of years ago, with only around 1,500 units completed and 700 people moved in.
Joaquín Ormazábal is one of those Valdeluz residents. Forty-four years old and separated from his partner, he bought a three-bed flat in the development four years ago for €240,000 (£211,000). Four years later, it's now worth less than €140,000.
His black Mazda is the only car on the road up to Valdeluz. As we go, he points out the sights we should be seeing but that were never completed.
That side, a parking lot for 2,000 cars (nothing). Over there, a shopping mall (less than a storey completed). A school (with 300 pupils rather than the intended 1,700). Every so often a couple of residents walk by, but the development is so empty they look more like middle-aged squatters.
"We thought the Spanish property market was one giant party, in which prices would always go up and up and up," Ormazábal says. Parking on a hill, we look down at a giant plot of land that is only a quarter built. It's a vast rut from which for the foreseeable future homeowners will not be able to move without losing 40% or 50% of their equity. "Some mornings I feel like such an idiot." As a joke, he mimes sticking a knife into his chest.
And there in a nutshell you have the recent history of the Spanish economy: a giant game of pass-the-parcel in credit and real estate on which the clock was suddenly stopped, and an entire country got caught out. That applies to the government, too: at the start of 2008, even as the great banking disaster loomed, the prime minister, José Luis Rodríguez Zapatero, dismissed nail-biting economists and voice-of-doom rightwingers as "anti-patriotic", and declared that very soon the Spanish economy would leapfrog France.
In some ways, it's a tale that echoes Britain's. Just like the UK, it was not the government that borrowed too much in the good years, but families and businesses. Just like Britain, the social-democratic government asked few questions during the bubble, but just used the artificially high tax revenues to fund a programme of good works and social justice. Now the leftwinger Zapatero is having to push through spending cuts, just as Gordon Brown and Alistair Darling were preparing to do last year. Oh, and policy-makers in both countries like nothing more than to lean back in their chairs and talk airily about a "new growth model" in which the economy is "rebalanced".
Still, two key differences apply. First, the Spanish boom was a lot more straightforward than ours: whereas Britain had rampaging investment bankers and weirdly acronymed toxic assets, Spain had semi-imperialistic property developers often fuelled by loans from cajas, the national equivalent of building societies. In the short term, that could mean that clearing up the aftermath of the bubble is less complicated and eventually cheaper – or so central-bank officials hope. However, set against that is the second big difference: Spain will have to rebuild its broken economy while playing by the rules of the single-currency club.
One of the methods used by the UK to get out of its slump is by engineering a posh version of a peseta crisis. British policy-makers have let the pound fall by around 25% in value against other currencies (we call it "depreciation" rather than the more brutal "devaluation", of course) and have also allowed the economy to down a small shot of inflation (which reduces the real value of our debts). Locked into the 17-member euro area, with an interest rate set in Frankfurt, the Spanish have no such options.
But that is only the most obvious and general way in which the euro is shaping Spain's future. Talking to officials and politicians, it's clear that Madrid's freedom over setting its own budgets and policies has also been curtailed.
Here are examples: speak to economists, advisers and even ministers in Madrid and two terms will pop up within a few minutes. The first is Pigs – the acronym used by lazy financial traders to refer to Portugal, Italy, Greece and Spain (although nowadays the i is sometimes taken to mean Ireland). "I find it offensive and pejorative and useless," one senior and otherwise softly spoken central banker told me.

It's actually worse than that. Being bracketed with three other countries in southern Europe has helped pull the Spanish into a financial-market conflagration that has lasted the best part of 18 months, and forced the policy-making elite into a series of U-turns and crises. The economy has some huge long-term problems but, even if you squint, the similarities with the other peripheral nations aren't especially close. Unlike Portugal, Spain has enjoyed decades of economic development. Unlike Italy, Spain ran its public finances before the crisis with iron discipline. Unlike Greece, there are no question marks over the official budget figures. "I don't mind the term Pigs," José Manuel Campa, the deputy finance minister, said. "But I think it should be singular – Spain isn't part of any southern European problem."

The other term that constantly pops up is perhaps even more extraordinary. Spanish policy-makers talk a lot about "spreads", or the difference between the interest rate financial markets will charge Berlin on government loans, and what they extract from Madrid. "We check the spread every morning, at lunchtime and when the markets close," one of the prime minister's senior advisers told me. I tried very hard to imagine anyone at No 10 confessing to checking the financiers' verdicts on their policies so often; I couldn't.
To be fair, such twitchiness is fairly recent in Madrid too. Up until four years ago, there was barely any difference between how markets treated Germany and Spain. Given that the two countries are part of the same monetary zone, that made sense. Then the credit crunch began and the spread started to grow: almost a percentage point on 10-year government loans at the start of 2009, growing to two percentage points by last July.
The result was to create policy-making pandemonium in Madrid. Just before Christmas of 2009, Zapatero announced a programme of modest, gradual spending cuts; Nobel prize-winning economists Joe Stiglitz and Paul Krugman applauded it at a private meeting in Madrid.
By last spring, as first Greece applied for a bailout and then doubts rose over Ireland, Zapatero was under overwhelming pressure to go in for full austerity. The pressure came from both markets and from the German chancellor, Angela Merkel, and other European leaders. "The message was: if you don't do this, then the whole European project is at jeopardy," is how one senior insider put it.
Eventually, after even Barack Obama phoned Madrid, the Spanish prime minister caved in and ditched a raft of spending pledges that had won him the last election.
The result has been to raze the platform of the governing socialist party to a charred mess. Even Zapatero's own advisers are not convinced he will retain power next year. When it comes to economics, the government is still in crisis-management mode.
Today, the troubled cajas had to present their plans for fixing their balance sheets to the Bank of Spain. The sharp deficit-reduction programme remains in place.
If there's one victory government advisers will claim, it's that the moment of maximum financial danger – the prospect that financiers would refuse to lend to Madrid at any but the most exorbitant rate – has passed. "We have managed to turn market and eurozone perception of a general Spanish crisis into two local problems in the real estate sector and the cajas," I was told. When the Portuguese MPs rejected the government's austerity plan last week official after official said that the interest rate on Spanish bonds had not gone up. The spread remains around two percentage points: some triumph.
So much for the finance; the economic recovery looks set to be a painfully protracted affair. As part of the eurozone, Spain spent a decade enjoying super-low interest rates – and wasted the benefits on a real estate boom. One in five of the workforce is unemployed and few economists expect that proportion to fall any time soon.
Up on the hill in Valdeluz, Ormazábal tells me that he is the manager of a local bank – one of the ones that has been in the headlines for its history of bad loans. His neighbours have €300,000 mortgages on houses now worth €200,000 – and some of them have lost their jobs.
"Even if they live for a long time, they'll never repay those loans," he said. "They're stuck."

Madrid fails to get alternative to PIGs off the ground

At the height of the eurozone crisis last spring, Spain's prime minister, José Luis Rodríguez Zapatero decided he would try to change market perceptions of his country by countering the traders' term PIGS. His office asked thinktanks and other organisations to come up with a name for an alternative bloc of which Madrid could be a member.
"The idea was to try and remove Spain from association with Greece and Portugal," said Carlos Mulas, director of the Ideas Foundation and former Zapatero economics adviser. "The ideal term would bracket Spain with Germany or countries in northern Europe."
No one managed to come up with a name that would stick, says Mulas. Instead, government officials made clear to media and investment banks that they saw the acronym Pigs as insulting.
Organisations such as the Financial Times and Barclays Capital began to be very sparing with the word in their publications but it continues to arouse strong dislike among Madrid's policy-makers. "I don't mind the term PIGS," said José Manuel Campa, the deputy finance minister. "But I think it should be singular -– Spain isn't part of any southern-European problem."