Wednesday, July 16, 2008

No Longer Blowing Bubbles

That crashing sound you hear is the noise made by a Spanish construction company going into administration to try and hide from its creditors for a while. The company in question is one of the biggest in the sector, Martinsa Fadesa. This company is run by Fernando Martín and has grown very quickly on the back of the housing boom in Spain. Perhaps too quickly, the company is unable to pay its debts which currently stand at over 5,000,000 euros. This is not just a short term liquidity crisis although the cause of the move by the company has been its inability to raise further funds.

Probably the first law of bubble economics should be that you always believe that your particular bubble is different from all of the others and will never burst. That was certainly the attitude taken by Martín who was scornful of suggestions that the housing market could not keep booming indefinitely. Indeed, the major cause of the huge debt his company has was the purchase of Fadesa, which he bought early last year. The man who sold Fadesa is now being regarded as a visionary, there is no doubt he got out at the right time. Pedro Solbes, a man who is hardly prone to exaggeration, says that excessive risks have been taken. That, in Solbes speak, is equivalent to making an accusation of fantastic recklessness. But if you believe your bubble will never burst these are the sorts of things you do.

Maybe the second law of bubble economics should be that those who get most hurt by the bursting bubble are not those who got most benefit from it while it lasted. The 28% of the company’s workforce currently facing the sack are going to take the immediate brunt of the company crisis. Indirectly the company is also responsible for many other jobs. Over 12,000 people have put down money for homes from the company which have yet to be built. Even some of the banks, normally immune to almost everything, are going to feel the pinch at least temporarily as they are forced to provision against the huge amounts of money lent to Martinsa. South of Watford says never trust a builder who has been president of Real Madrid, even if Martín was only there briefly to fill the gap between Florentino Perez and his successor.

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