A recently published report by economic analysts at Variant Perception suggest that the crisis in Spain has not even begun: “Assuming the worst has passed in Spain does not pass the common sense test”, it appears anyone hoping for a quick recovery will be in for a big shock. Variant’s report states: “…Spanish politicians and international investors have grossly misjudged Spain,” citing a series of facts on which they base their judgement.

The essence of the report evolves around banks and real estate: “We believe that Spanish banks are not marking their real estate loans to market and are extending credit to zombie construction companies. We believe Spain is a disaster waiting to happen.”

The report puts perspective on the situation: “Spain had the mother of all housing bubbles. To put things in perspective, Spain now has as many unsold homes as the US, even though the US is about six times bigger. Spain is roughly 10% of the EU GDP, yet it accounted for 30% of all new homes built since 2000 in the EU. Most of the new homes were financed with capital from abroad, so Spain’s housing crisis is closely tied in with a financing crisis.”

Variant also unveils the magnitude of the problem: “The impact on the banking sector will be severe. Consider this: the value of outstanding loans to Spanish developers has gone from just €33.5 billion in 2000 to €318 billion in 2008, a rise of 850% in 8 years. If you add in construction sector debts, the overall value of outstanding loans to developers and construction companies rises to €470 billion. That’s almost 50% of Spanish GDP. Most of these loans will go bad.”

Spanish banks, in our view, are now facing a very bleak outlook. Spain’s unemployment rate reached over 17%; there are now four million unemployed Spaniards and over one million families with not a single person employed in the family.

Spain’s future according to Variant:

• The real estate crash in Spain is worse than is widely believed, much as the subprime problem was much worse than people believed
• Spanish banks are hiding their losses and rolling over debt to zombie companies, much as Japan did in the last decade
• Investors are deluding themselves if they believe that Spanish banks are among the strongest in the world. (This is a new theme. See Forbes’s latest “Spanish Banks In Top Form” for an example of the new fawning articles on Spanish banks.)

Variant suggests that Spain is now in a situation similar to the subprime days in the US, when all the banking results still looked good, until they suddenly didn’t.

It adds: “Investors are smoking crack if they believe that Spanish banks are amongst the strongest in Europe. We recommend shorting to being underweight Spanish bonds and equities, particularly banks, builders and anything related to the consumer.”

Variant Perceptions also accuses the Spanish government and the Bank of Spain of “behaving like ostriches with their heads in the sand”.

Download the original report: Spain: The Hole in Europe’s Balance Sheet.