Two Charts That Show Why The Crisis in Spain Is Going To Get Much Worse

It's been a bad couple of days for Spain and, if the trends shown in these charts are any indication, it's about to get much worse.

Continuing a four-day dip, the Spanish stock market fell Tuesday by 1.64 percent, taking a further toll on a country that has seen sovereign debt downgrades and awful data on nationwide loan-loss ratios come out over the past few days. The selloff erased any hope investors had earlier that positive political developments over the weekend could lead to a rally. Jose Luis Cárpatos, an analyst for Madrid-based Serenity Markets, declared it "a black day in the markets of the kind we hadn't seen in some time."

A downgrade of several Iberian municipalities and regions, which prompted the regional government of Madrid to cancel a bond issue, was seen as the main culprit behind Tuesday's gloom. The cost of insuring Spain's national debt rose and the euro fell on the carnage.

Some of the negative sentiment, analysts noted, came as investors digested a report from the Spanish central bank out last week, which noted the loan-loss ratio on bank-held mortgages was at historical highs, suggesting the "worst-case scenario" predicted by bank analysts a few weeks ago was just around the corner.

Less discussed than the central bank's report or the debt downgrade, however, was a government statistical release from Monday which showed the rate of new mortgage origination in the country was plummeting.

Analysts at giant Bilbao-based Banco Bilbao Vizcaya Argentaria, the second-largest financier in Spain, said the report, which showed the number of new mortgages at multi-decade lows, meant "the mortgage market remains stuck around historical minimums, giving place to higher volatility in the rate of mortgage originations."

The BBVA report actually tried to put a brave face on the numbers, noting there was still a possibility a tax law change that goes into effect in 2013 could jump-start the mortgage market before year's end. But even more worrying than the data showing the dip in new mortgages is the chart showing the average amount being taken out by customers who are transacting a new home loan with the bank.

For those unfamiliar with Spanish, the BBVA analysts helpfully explain the chart shows the average amount lent in each new mortgage "oscillating around 100,000 euro, as has been the case over the past six months."

Language fluency aside, there appears to be a disconnect between the state of the Spanish housing market, where more people than ever are defaulting and the number of people taking out mortgages is at historical lows, and the average amount people who are buying homes are borrowing, which is stuck at the magical €100,000 floor.

This is a breakdown of basic economics, and it's very, very bad.

Part of the reason this is happening is the fact Spanish law does not allow homeowners, as is the case in the United States, to simply declare bankruptcy and walk away from an "underwater" mortgage, where the price of the home backing the loan has fallen below the balance of the mortgage. In Spain, housing debt obligations, even onerous ones assumed during the peak of a housing bubble, are for life. The result is that people who might otherwise be desperate to sell a home at any price, allowing the housing market to hit bottom and begin its recovery, are stuck asking for a minimum price. Right now that price is €100,000.

But that is unlikely to hold. As the chart shows, even after the intensification of the recession in Spain in 2010, new mortgage sums seemed to have found a floor around €110,000. Then they precipitously dropped to current levels in late 2011.

Each step-like drop in that chart, meant to make mortgage sizes catch up with the reality of demand, will mean sudden, massive shocks to the markets as the final reckoning with the worst-case scenario is delayed another day.

And we have many, many steps to go.