Are you struggling with money issues in Spain? Do you find yourself being short of cash every month? Solicitor Raymundo Larraín gives us ten tips to cope when the going gets tough. Interested? Read on.

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By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Abogados
8^th of September 2020

Introduction

As I’ve been hammering over the last four months, the advent of the Covid-19 outbreak has brought upon the country a financial hardship unseen in over 84 years, since the fratricidal Spanish Civil War. Spain’s economy is one of the worst hit in the world, and as I contend in this article, the underlying reason for this is it’s unhealthy overreliance on tourism.

A reflection of this devastating blow is Spain’s high unemployment rate, which ‘officially’ stands at 15.6%, but in practice could easily double this amount if you factor in the 4.7 mn unemployed who haven’t worked over the last 7 months as they are under ERTEs (‘temporary’ paid leave). In Spain, ‘temporary’ is code for permanent.

Politicians have cozily relied for decades on the tourism & hospitality industry - Spain’s golden goose - which pulls in over 200 billion euros every year. An industry ingeniously set up in the 60’s by General Franco in tandem with his brilliant Tourism Minister, Mr. Manuel Fraga Iribarne. Embarrassingly, six decades on, tourism is an anomaly that accounts directly for over 12% of Spain’s GDP, by far the number one contributor, and indirectly by at least a further six points, or more. No modern economy should have almost 1/5 of its GDP contingent on any one activity as this entails huge risks, such as the ones we are now witnessing. This overarching influence must be tempered. Moreover, out of all the countries that make the OECD, Spain is hands down the most reliant on tourism.

Successive generations of politicians have systematically failed to address the elephant in the room, with their attention all-consumed in petty domestic power struggles. Spanish politicians are obsessively engrossed by the country’s past and devote little energy to the nation’s future. They should have diversified the Spanish economy long ago to make it competitive, so we are not over-reliant on tourism. This is a gross dereliction of duty that needs to be addressed to bring balance to our economy. Covid-19 has been like the tide receding revealing the ugly weakness of the Spanish economy; the naked truth is that the Spanish economy has a crippling dependence on tourism. Before the virus took us by storm, Spain was the second largest tourist destination in the world, with 84 million tourists visiting us every year, trailing only behind France. If you take the U.S. as an example, which ranks number three in the world as a tourist destination, tourism only accounts for 2.7% of the U.S.’s economy. Compare this to Spain, which is almost seven times more! It’s ludicrous.

Social distancing has killed one of our major strengths and has thrown the economy into disarray, more so than in any other developed country in the world, precisely because of this overreliance which has now proved to be Spain’s Achilles’ heel. Although Spanish politicians are always quick to blame one another, it is what it is; they are all to blame. Our political class lost long ago the golden opportunity to devise a consensual grand long term strategy to modernize and diversify the Spanish economy, with education standing at its forefront, making it stronger and more resilient to any backlash, including global virus outbreaks. Because of their neglect, young generations and even our elders, will now suffer greatly from the laid back attitude of our irresponsible political class which now shamefully relies on European handouts.

I’m of the opinion that any financial help from the Union should be closely monitored to the last euro-cent, to ensure taxpayer’s money is wisely spent on whatever our socio-communist authorities actually claim it is being spent on.

With all this in mind, I have been publishing a series of articles, since May, to hopefully help ease the pain for the expat community based in Spain. This article rounds up the different strategies laid out in previous articles to mitigate the challenging financial ordeal we are now up against.

Ten tips for struggling families

1. Fraction your payment of local taxes. Because of the Covid-19 outbreak, many families' finances are underwater. Regional tax offices now allow struggling owners to spread out payment over long periods of time, accepting to settle it in instalments. Contact us for more information on this tax service.
2. Request your landlord a rental reduction. Particularly in commercial premises, tenants are asking more and more for payment facilities or reductions in monthly payments. Landlords often would rather come to an understanding with a good tenant than let them go and see the whole place boarded up for years.
3. Swap your mortgage loan to interest-only (“carencia”). Lenders are open to renegotiate the mortgage terms to avoid you defaulting on a loan. Don’t be afraid to pick the phone and speak to them. This can be arranged whilst the property is put up for sale or just to weather off the storm meanwhile. Spanish lenders will gran it for a year or two at most.
4. Extend mortgage repayments an additional number of years. The last thing Spanish lenders want now is for you to default on your mortgage loan. They are being very accommodating and open to renegotiating with borrowers the payment terms, extending them. The drawback is that on doing so the amount of interests you pay are rolled up. The drawback is that on the long run this means you will end up paying far more to gain some breathing room at present. It’s really an option only for those left with no other really. The Government is now allowing this change free of charge to struggling mortgage borrowers providing they are resident, and the property is their main home (permanent abode). Borrowers will not pay for Notary or Land Registry fees on following it.
5. Lifetime loan. Is a special type of home equity loan available only to senior residents. It allows owners to release equity from their homes converting it into cash by way of placing a charge against their property (which acts as collateral). The loan does not have to be repaid during the homeowner’s lifetime. More on this in our article: Lifetime loans explained – 8th August 2020.
6. Sell the property as a distressed asset (fire sale).If you have already run through the numbers, and you are convinced that you will no longer be able to service your mortgage, rather than defaulting and being repossessed, you should seriously consider selling the property as a distressed asset. The catch again is that the property should not be in negative equity. The more it is, the least likelihood there will be anyone interested in it as they in turn are regarding the purchase as an investment and the numbers need to stack up to make it worthwhile for them. More on this in our article: Buying distressed property in Spain – 8th August 2011
7. Apply for debt-consolidation.There are scores of financial companies offering this service. Basically, what they do is group together all your existing debts with different lenders (ranging from credit card debt to personal loans) and concentrate them all in the hands of only one lender who then extends the loan repayments in time. The immediate consequence this has is that your monthly repayments are sharply reduced making them far more affordable. However, the drawback once again is that, on extending the financial commitments over time, you will be paying far more interest on the long run.
8. Dissolution of joint property ownership. Falling on hard times may drive a wedge between couples, families and friends making cohabitation a challenging prospect. A DJPO allows joint owners to re-arrange their share on a property in a tax-efficient manner enabling the outgoing joint owner to transfer his share to an existing co-owner legally waiving the extreme Property Transfer Tax and paying in lieu only 1.5% Stamp Duty, or less. This procedure’s highlight is that it saves property buyers over 86% in property transfer tax. A DJPO is suitable in a divorce or separation, re-arranging inheritances, or re-arranging property holdings between family and friends. More details in our article: Dissolution of Joint Property Ownership in Spain – 8th of June 2020.
9. Dación en pago (handing back the keys). This option should only be considered as last resort when all other options are exhausted. This is handing the back the keys to a lender and signing a deed at the Notary whereby the lender commits not to chase you for the outstanding debt. In exchange, a lender fully discharges your mortgage liability. You will not be pursued abroad in your home country on the shortfall. Two things are required, the property must not have slipped into negative equity and your lender must not have instigated a repossession procedure. Should the property be in negative equity (you owe more than what the property is worth) a lender will be reluctant to agree to a “dación en pago de deuda” because the collateral will have no equity left. Please read our article: Dacion en pago explained – handing back the keys – 8th July 2020.
10. Filing for personal bankruptcy in Spain.This procedure is expensive albeit it allows those who can afford it to buy considerable time (years) with which to re-negotiate their financial commitments and even reduce the amount owed (up to 30%). A judicially-appointed administrator will be tasked to oversee and manage your day-to-day financial affairs in the interim. Meaning you lose control over all your assets needing to request permission to manage your affairs. I would only recommend this option in exceptional cases as it will turn you into a lifetime financial pariah. This is not an option for most people. More on this in our article: Personal Bankrutpcy in Spain: Second Opportunity Law – 8th September 2015.

In conclusion

Spanish young generations are the key to diversify our economy and avoid such repeat scenarios unfolding ever again. Our political class would do well to take cue from leading world super-powers, such as China and the US, and go out of their way to lay the foundations of a great higher education over the next 50 years. This would be achieved by heavily investing in devoted teachers, schools, academic institutions, and building modern facilities. By setting up lavish euro-billion endowments for top-performing universities in the image of reputed Ivy League institutions, enabling all types of tax incentives to attract capitalization, foster R&D, incentivize integrated business campus with budding small caps within universities (i.e. Malaga’s Technology Hub, which is a success story, having created thousands of highly qualified, well-paid jobs), by creating truly generous scholarships for bright students (not the paltry ones we have), so as to nurture a strong, modern, meritocratic secular education. This undertaking requires vision, commitment, and long term planning.

Real statesmen are selfless and do, at all times, what is best for their people regardless of the unpopularity or electoral cost. They commit themselves to a long-term vision and focus on what really matters for the country, with their hearts set in the nation's future prosperity. Career politicians, by contrast, make decisions on the hoof based on short-term opinion polls and are self-serving.

Politicians have no business in meddling and controlling companies, especially career politicians who have never worked in their life and have always lived (very) comfortably off the state. It is not politicians’ job to run companies and create jobs, the private sector does this, and does it very well. Career politicians should step back, limiting themselves to create the right tax & legal framework for private companies and entrepreneurs to step forward and thrive, through low taxation and the removal of red tape. They should ensure academic institutions are (very) well-funded, with devoted teachers being paid top dollar (not the meagre wages they have), with thousands of truly generous scholarships enabled for gifted or hard-working children from underprivileged backgrounds.

The young men and women who attain this top education, given half a chance, would earn their spurs creating companies, jobs, and a host of new industries that now seem but a distant dream to us. This in turn would attract investments and generate wealth on a large scale. There can be no strong economy without diversification, and the key to this is a well-educated youth. Every year Spanish politicians bubbly plough billions of euros of taxpayer’s money into shady ideologically-friendly NGOs lead by unqualified chums who wouldn’t be fit to run a hot dog stand. Spain spends an eye-watering 122bn euros every year on 'subsidies'. That's 25% of its annual budget.

Where does all this money go? Why is no one held accountable for this gross misuse of public funds?

There is no efficient allocation of resources. If this squandered money were instead be put to good practical use for society’s benefit, vastly improving our educational system over the long run, allowing children from humble disadvantaged social backgrounds to access well-funded, top-tier universities, things would look very differently indeed. As an example, the Complutense university in Madrid, which tutors 86,000 students is clearly underfunded with a pitiful budget of only 600 million euros a year! By contrast, Harvard university has an endowment of over 41 billion USD and hosts 22,000 privileged students. Yes, one is public, and the other private, but you get my drift. Spain woefully does not commit enough financial resources to higher education, only the bare minimum, and it shows. Embarrassingly, albeit unsurprisingly, Spain has no university ranking amongst the world’s top two hundred. This is unacceptable no matter how you look at it.

For a country that purportedly ranks as the 13^th most important economy in the world, by rapport to its GDP, this is a serious imbalance that needs to be addressed at a political level - by all parties - to ensure equality and meritocracy. This academic imbalance spills over into Spain’s imbalanced economy which in turn translates into over 30% unemployment rate. Meanwhile, our career politicians self-approved this year a lavish increase of their public stipends. God forbid they endure financial hardship in these trying times.

Perhaps our self-complacent career politicians should talk less and do more, taking example from real statesmen and more advanced economies, for the good of the people.

If you think education is expensive, try ignorance.

“An investment in knowledge pays the best interest.” – Benjamin Franklin

Benjamin Franklin (1706 – 1790). Founding Father of the United States of America. Exceptionally gifted statesman, scientist, inventor, accomplished diplomat, writer, humourist, printer, postmaster, and political theorist. Even politician in his spare time; nobody is perfect.

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Related articles

• Lifetime Loans or Reverse Mortgages in Spain Explained – 21st February 2011
• Spanish Mortgage Loans: Beware of Abusive Clauses – 8th January 2012
• Spanish Mortgage Loans: An Overview – 21st February 2012
• Mortgage Collar Clauses Revisited (‘Cláusulas Suelo’) – 8th December 2013
• Bank Repossessions in Spain – 21st February 2014
• Bad Debtor’s List (‘Fichero de Morosos’) – 8th April 2014
• Spanish Creditors Pursuing Debts Abroad – 8th May 2014
• Dación en Pago Explained or How to Hand Back the Keys – 8th December 2013
• Dissolution of Joint Property Ownership in Spain – 8th June 2020
• Dacion en pago explained – handing back the keys – 8th July 2020
• Lifetime loans explained – 8th August 2020
• 8 tips when money is tight in Spain – 8th September 2020

Article also published at Spanish Propert Insight: 10 money-saving tips if you have to tighten your belt in Spain

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

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