As you could probably tell — from all the stories I have been writing about the Baltics, Denmark, Sweden, you name it — I believe that Europe is the next leg down in the global housing bubble. As such, it will pay to focus as much attention on events outside the US, where the housing bubble began as it will to focus on the continuing U.S. problem.
Make no bones about it, with distress in Alt-A, Prime, Option Arm, and Negative Amortization mortgage products still rising, the U.S. has many more writedowns to come and some bankruptcies. Yet, it is Europe where the next leg down will be interesting.
In Britain, many of the larger financial firms have already suffered massive writedowns from U.S. exposure. They are in no position to take on more losses. Yet, this is what they must do as the UK price decline has gathered speed. Particularly vulnerable are Bradford & Bingley, HBOS, and RBS. Barclays and HSBC will have their share of losses too. However, Lloyds has weathered the storm much better than the other lot.
In Spain, Martinsa Fadesa marked the coming of age for the Spanish property bust. Spain is in or on the verge of recession. Yet, it is all quiet there. In fact, the two largest Spanish banks, BBVA and Banco Santander have performed wonderfully. I expect the situation to darken when the summer holiday recedes into the past.
In Denmark, recession has already hit. And prices are in decline. The result was that one prominent Danish bank went to the wall. Denmark is not on many people’s radar screen. So, this market will be a nice test case for what happens going forward in many European markets.
In Sweden, housing is hitting the skids as well, in part because housing there is overvalued. But, it is also because the Swedes went on a credit binge in the Baltics and those countries are slowing rapidly. We should expect major losses from Swedish banks going forward.
Ireland has been relatively quiet recently. But, prices there are still in free fall and its only a matter of time before we hear from Irish and British banking losses. Ireland shows the curious difference of a non-securitised market to the new securitised U.S. model in writedowns. While the U.S. has shown massive banking losses from Mortgage-Backed Securities, markets like Ireland have seen significant declines without any major writedown news. Either there are major losses hiding on the balance sheets of Ireland’s creditor banks or the U.S. has been overzealous in its writedown party. I’m sure you can guess I favor the former scenario.
As for the rest of Europe, there is significant weakness across the board. However, I should point out that Germany had its own housing bust and depression in the 1990s after a botched currency union. The lingering effects of that crisis have meant that Germany never really participated in the housing free-for-all earlier this decade.
How ever one looks at it, Europe is weak and this means more pain to come for European banks and another test of confidence in the credit markets. Stay tuned.