Spain:Navigating through an Economic Crisis
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Case Details:
Case Code : ECON043
Case Length : 19 Pages
Period : -
Pub. Date : 2013
Teaching Note :Not Available
Organization : --
Industry : -
Countries : Spain
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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.
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The Origins
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The 1990s saw a spree of house buying among Spaniards due to various favorable economic conditions. Two events that triggered the housing boom were the Maastricht Treaty and a law passed by the government that increased the extent of land allotted for development.
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In 1992, a treaty was signed in Maastricht in the Netherlands, called the Maastricht Treaty. The Treaty laid out plans to establish a monetary union and prescribed five important criteria that European countries had to meet to become a member of the Economic and Monetary Union (EMU). (Refer to Exhibit I for the 5 criteria to be met under the Treaty of Maastricht). This called for Spain to lower its long-term interest rates. The lowered interest rates provided easy accessibility to low-interest housing loans; and thus the housing sector became more attractive to both businesses and individuals. The countries of north Europe started buying up land in Spain and thus foreign investment in the housing sector also increased.....
In 1998, the government of Spain passed a law to increase the extent of land allotted for development. The developers sold the idea that owning a house was a good proposition as housing prices would see a consistent escalation. With the introduction of the euro and adoption of the common currency in 1999 , Spain was able to provide loans at lower interest rates. The mortgage interest rates that were at 15% in 1991, fell to 10-12% in 1995-96 and further dropped to around 3.5% by 2003. The ‘cajas’ or local banks of Spain and commercial banks made funds easily available to the public at low interest rates.....
With the encouragement of the government, the banks offered and issued significant mortgages and long-term loans to the public. Government policies and tax incentives on interest payments encouraged more people to pay even 20% more than the actual home prices to buy houses. Encouraged by government initiatives, the banks also offered long-term mortgages of 40 years and more. After 2004, the house prices were at a peak and hit record levels relative to the income in Spain......
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