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Spain’s house of cards has started tumbling down

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MensajePublicado: Jue Ene 03, 2008 10:09 pm    Asunto: Spain’s house of cards has started tumbling down Responder citando

Spain’s house of cards has started tumbling down

By Paul Betts and Jamil Anderlini

Published: January 3 2008 18:46 | Last updated: January 3 2008 18:46

Last spring, the Spanish property developer Astroc started the ball rolling. Its debt servicing problems triggered the first serious plunge in the shares of Spain’s financially over-stretched property and construction companies. Before crashing, Astroc shares had risen tenfold since they were listed in 2006.

Its chairman, Enrique Bañuelos, who had earlier been catapulted into the Fortune 100 list of the world’s richest tycoons, was forced to step down.

Then, in the autumn, it was the turn of Llanera to bite the dust. Over just six years, this Valencia property group had grown ferociously amid the Spanish property boom.

Both cases badly shook the property and construction sector, although many people in the industry suggested that Llanera and Astroc were special cases.

Now it is Colonial, another small property fish that has grown through aggressive debt-financed acquisition into the country’s second-biggest property group, to be hit by the combination of the international liquidity squeeze, a cooling Spanish property market and rising interest rates.

Colonial has been hit by this triple whammy, in spite of the fact that it is not exposed to the riskier residential property market and earns a steady flow of income from its office buildings in Spain and France. Nonetheless, Luis Portillo, its chairman and largest shareholder, has been sacked. The company is selling assets to cut the huge debt burden accumulated during the heady years of expansion and to reassure investors who have seen the value of their Colonial holdings crumble over the new year festivities.

Again some commentators are arguing that Colonial is another special case due to its former chairman’s own heavily indebted position, and should not be taken as a sign of a general financial meltdown in the Spanish property and construction sector. That may indeed be so. But after three serious collapses all occurring at three month intervals, it is difficult not to jump to obvious conclusions.

First, it has become quite clear that the heavily indebted business model that has been behind the spectacular rise in Spanish property companies will simply cease to function in the current environment. And the problem in Spain is all the greater given that during the past five years or so the country has been building about 800,000 homes a year – that is the combined annual total of France, Britain and Germany.

The Spanish building industry now expects the number to fall to about 450,000 a year until 2013. As a result, it is also warning of some 400,000 job cuts in the sector, which has accounted in the recent past for about 7.5 per cent of Spanish gross domestic product. As for house prices, these have increased 280 per cent between 1997 and 2006 and are now starting to fall back for the first time in a decade.

So it is not surprising that the banks, themselves heavily exposed to the sector, are closing their credit taps and that even the more solid big construction companies have seen the value of their shares fall sharply during the past 12 months – 40 per cent for Sacyr and about 33 per cent for both FCC and Ferrovial.

All this must be worrying the Zapatero administration acutely. Spain is due to hold elections in March, which most people consider are too close to call.

If the Socialist government is still claiming a short lead, it could easily be wiped out if Spain’s house of cards keeps tumbling down.

Air China’s priorities

The continuing saga of Air China’s attempts to block an investment by Singapore Airlines in China Eastern Airlines will come to a head next Tuesday, when minority investors will decide whether the deal should go ahead or not.

Air China has sought to disrupt the deal by buying shares in the open market and making noises about a bid of its own for CEA if shareholders reject the SIA offer, as it has urged.

Instead of admiring Air China’s tactics, though, most people who have to fly in Air China planes will probably feel frustrated.

If Air China management put half the energy it has devoted to blocking the CEA deal into improving its services and getting its flights to run on time, it would be so far ahead of its rivals that it would not have to worry about problems in competing with modern airlines such as SIA.

Chronic delays, inedible food, poor organisation and surly service are still the norm throughout the Chinese airline industry.

That is one reason that Air China is so determined to stop SIA, with its reputation for good service and efficient management, forming a beachhead in the all-important Shanghai hub that is currently controlled by CEA.

We will have to wait a few days, though, to find out whether China Eastern shareholders feel the same way.
Copyright The Financial Times Limited 2008
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