Claims about Iberia

In Portugal, non-financial companies (NFCs) have debt that is 16 times their pre-interest profit. An interest rate of little over 6 per cent would wipe that profit out. In Spain the numbers are 12 times and 8 per cent, respectively. So its entire NFC sectors are junk – a designation that kicks in at a ratio of about 10 times. The somewhat less dire Spanish ratio is exactly where Japan was in 1995-96. Japan had no real GDP growth between 1996 and 2002 – an ominous precedent – and finally emerged into growth again after a massive bank-debt write-off in spring 2003.

Here is more.


Does this mean that Iberia will become a very nice place to retire to?

Even if this is true, don't the implications hinge very much on the nature of Spanish/Portuguese insolvency law? One can imagine, in principle, a system in which companies enter bankruptcy protection, wipe out equity, stretch out or reinstate secured creditors, replace unsecured debt with a mix of debt and new equity, shed uneconomical contracts, and re-emerge, all without significant disruption in operations. This would be bad for stockholders (it would eliminate their potential upside, which has some value even if it is improbable), slightly bad for secured creditors, and the effect on unsecured creditors is unclear. But the macroeconomic impact need not be painful at all, unless I am missing something.

I have no idea if Spain and Portugal have anything remotely like this, but non-financial companies really can go into and out of something like chapter 11 without losing too much value. Or is the point supposed to be that this would have a devastating effect on those countries' financial sectors?

Good point. I understand that under Spanish law, homeowners are not obsolved from mortgage debt upon foreclosure.

"under Spanish law, homeowners are not obsolved from mortgage debt upon foreclosure."

As a small side note, when I, a Dane, once tried to explain to a couple of family members that in (parts of) the US you can just give your house to the bank and walk away from the debt you owe (while admittedly taking a big credit hit the next 7 years), they pretty much refused to believe me because it seemed such an outrageous claim to them. It's a common mistake for an individual living in country X to implicitly assume that the national bankruptcy laws of country X match those of countries Y and Z.

I should have also added, what I thought was implicit, that they are not obsolved either under bankruptcy as it is a nondischargeable debt.

As I hope was clear, I am merely pointing out that if Spain and Portugal have something like chapter 11, they need not suffer severe macroeconomic consequences from over-leveraged non-financial companies.

There's an interesting Posner opinion that makes the same point that you do. I'll see if I can dig it up . . . Ah yes:

"The [lower court] judge added that Mora’s 'purported assumption that United States and Andorra substantive and procedural rules governing court proceedings are alike so he did not have to take any action (such as retaining counsel in the United States to verify his assumption) is equally mindboggling.'"

. . .

"[Andbanc's] casual assumption, when it learned that Lake Shore’s assets had been frozen, that it need do nothing in order to recover its share of the assets—an assumption based in part on the fantastic belief, for an Andorran bank to entertain, that Andorran and U.S. law coincide (the bank’s Andorran lawyer must have known that Andorran law is a compound of French, Spanish, Catalan, and even ancient Roman law, A.H. Angelo, “Andorra: Introduction to a Customary Legal System,” 14 Am. J. Legal Hist. 95 (1970))—is inexcusable."

For example, bank's mortgage to a borrower has a greater chance of recovery in some countries than in the US, since the debtor carries the burden for his working life as it is not discharged.

There are not in most US states either (California and Arizona being conspicuous exceptions).

More claims about Elbonia, please.

I've said it before and will likely say it again:
The problems won't end until the debt is dealt with, one way or another.

Japan survived the lack of growth because its own citizens financed its large deficits. The PIIGS won't be so lucky, unfortunately.

Yes, that is how it works in Spain. You own the Bank the money, not just the house. If you cannot pay, you get expelled, the bank sells the house and you still own the difference.
Usually there is a difference because, during the housing bubble, morgages were given for the 100% of the value of the house. This value was already oversized, since valuation companies, owned by banks, were forced to add about a 20% to the real value, wich already was 'unreal'. People were happy this way: they got money for the house, the furniture and sometimes even a car!
Now people has morgages 25% or more over the house value and cannot just simply walk away, except in the case, quite usual, when they simply cannot pay.
In this way, it is more interesting for the bank just expell the 'owners', take their money and sell the house, even now when selling is quite difficult. However, the bank usually is ready to renegociate the debt term, lets say from 20 to 30 years or give a couple of years paying just interests.

Well, talk about misaligned incentives and poor regulation, but you won't see it here. Regulation is bad, at least for the banks.

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