Spain Real Time Data Charts

Edward Hugh is only able to update this blog from time to time, but he does run a lively Twitter account with plenty of Spain related comment. He also maintains a collection of constantly updated Spain charts with short updates on a Storify dedicated page Spain's Economic Recovery - Glass Half Full or Glass Half Empty?

Thursday, August 21, 2008

Eurozone Recession On the Horizon?

Is the first zone wide recession in the short history of the eurozone about to be registered? Certainly the flash PMI estimates for August give the impression that it might. The Royal Bank of Scotland Group Plc's composite index came in at 48 after 47.8 reading in July. Any result under 50 indicates contraction. Unfortunately we only get flash estimate breakdowns for France and Germany, but it isn't that difficult to deduce from the composite number that Spain and Italy continue to contract - although given that the composite rebounded slightly, while both services and manufacturing slowed in Germany, and in France manufacturing contracted more sharply in July while the contraction eased a bit in services, then it may be that Spain and Italy weren't contracting quite so strongly in August as they were in July.


The German manufacturing index fell to 49.9 in August, its lowest level in three years, after slipping back index to 50.9 in July.

Helping to push down the manufacturing indicator was the export component, which fell to its lowest level since June 2003, according to the report from Markit Economics.

The services PMI reading was not much better, falling to 50.6 in August from 52.1 in June. As things stand German services are riding just shy of contraction if the flash reading is borne out in the final result.

In its report, Markit Economics noted that the business expectations sub-index for Germany had slipped to the lowest level since November 2002.


Activity in France's manufacturing sector contracted at the sharpest rate in over six years in August, with a contraction of 45.1 being registered, down on July's 47.1 and the lowest level since December 2001.

The service index came in at 48.5, above July's 47.5 but still only its second time in negative territory since mid-2003. New business logged by service firms shrank at its fastest pace since the data was first collected in May 1998.

"If you extrapolate these figures through to the third quarter you're probably looking at stagnation of GDP (gross domestic product)... This is not a harbinger of imminent upturn," said Chris Williamson at data compiler Markit Economics. "Nothing points to a fundamental turnaround... I think there's been a spillover effect from Italy, Spain and now Germany, and France has followed suit."
So Is It Recession, and Will We See Rate Cuts From the ECB

Gross domestic product fell 0.2 percent in the second quarter from the first, when it grew 0.7 percent, according to the data released ny Eurostat (the European Union's statistics offic) last week, and it now seems clear that this contraction may well pass over into the third quarter. In fact Germany's Economy Ministry said only yesterday that the economic outlook in Germany has worsened even beyond the second quarter, when gross domestic product shrank for the first time in four years.

European consumers are not getting much relief from falling oil prices either, since while oil prices have fallen 20 percent from a record $147.27 a barrel on July 11 the euro has dropped 7 percent ($1.4780 today) from its peak of $1.6038 hit on July 15, taking a lot of the edge off the drop. The fall in the euro will however make exporting outside the zone easier, the difficulty is that the demand for exports is slowing generally as the global economy slows.

The European Central Bank, which raised its benchmark rate by a quarter point to 4.25 percent in July, currently predicts growth will slow to about 1.8 percent this year from 2.7 percent in 2007, but today's PMI data would seem to confirm that the ECB's growth projections are no longer realistic and that the time to move over into rate cuts mode is fast approaching.


Observer said...

Talking about the ECB...

Bank borrowing from ECB is out of control

While he did not name the chief culprits, there are growing concerns about the scale of ECB borrowing by small Spanish lenders and 'cajas' with heavy exposed to the country's property crash. Dutch banks have also been hungry clients at the ECB window.

One ECB source told The Daily Telegraph that over-reliance on the ECB funds has become an increasingly bitter issue at the bank because the policy amounts to a covert bail-out of lenders in southern Europe.

"Nobody dares pinpoint the country involved because as soon as we do it will cause a market reaction and lead to a meltdown for the banks," said the source.

This "soft bail-out" is largely underwritten by German and North European taxpayers, though it is occurring in a surreptitious way. It has become a neuralgic issue for the increasingly tense politics of EMU.

Edward Hugh said...

Hi Again Observer,

OK. The knotty problem of the Spanish funding of the ECB rears its ugly head yet one more time. Personally my feeling is that this issue is being rather overblown at this point. Ambrose is scratching around in the right areas, but I think he doesn't fully understand the problem, and anyway he is mainly in the business of attacking the ECB - you will notice he isn't trying to offer anything in the way of solutions, he just seems happy to see the whole thing fold, and southern Europe (you know, "we the PIGS") get sent back to that hell from which, only yesterday it seems, we so arrogantly emerged.

The point is that Spanish bank borrowing at this point is not that high PROPRORTIONATELY. Total ECB funding of eurozone banks is running at around 480 billion, so the Spanish banks are still only up to about 11%, which is only slighly over their participation in ECB financing (the so called "key").

As all the authoritative commentators point out the Spanish banks are not standing out especially for their use of the ECB facility (although they have accelerated their recourse to this alarmingly since last August), and have mainly drawn according to the weight of their share in the eurozone itself. One explanation for this may be found in the most recent appearance of Bank of Spain governor, Miguel A. Fernandez Ordoñez, before the Economy and Taxation Commission of the Spanish Congress. There he stated (June 24, p9) that Spanish banks have increased their participation in eurosystem fundings, "without going far beyond the equivalent participation in the key of Bank of Spain in BCE´s capital".

The rule they have been trying to apply is not to go much beyond the key suscription of the BDE on the ECB capital (which is 7.55%).

My feeling is that this situation is being policed as best they can by the Bank of Spain, and they are trying to hold a line, although obviously things are now starting to get out of hand, as witnessed by the latest months increase - up to 49.4 billion euros in July, from 47.1 billion euros in June edges them up just that little bit higher, and this is what is causing all the fuss. Clearly things can't go on like this.

Not Wellink is clearly right when he says this "If we see banks becoming very dependent on central banks, then we must push them to tap other sources of funding," but the problem is that the market will now demand a lot more from the Spanish Banks for refunding the cedulas, and this would mean that something legally would have to change in Spain to enable the banks to charge ALL their customers significantly more than the small surcharge over euribor one year to be able to service the refinance. And this "small change" in the mortgage regulations is obviously something the Spanish government can't face up to politically.

And the point is not so much the quantity, as who is doing the borrowing. If it is, as the Daily Telegraph suggests - mainly small regional cajas, then this is even more serious. It is more serious since normally you would expect the Spanish banks to go in convoy, and the big ones help the little ones. But as we have been seeing on this blog, even rather large entities like Caja Madrid and Banco Popular are themselves now having problems, and thus the big fish no longer have the liquidity themselves to help the small ones. I would take it that this is the real problem, and that the money being sought at the ECB auctions is only the tip of the iceberg.

Basically the Spanish banking system has a problem just as large in its way as the FannyMae and FreddyMac one, since they have 300 billion euros or so in ceduas hipotecarias to refinance over the next 5 years (not counting all the other RMBS's which are knocking about, which have equal or greater value, even if the term on these may not be such a problem), starting with 40 billion or so this autumn.

But Spain has no Hank Paulson with his bazooka to come to the rescue. And as we can see in the US arming up the bazooka can simply make its use unavoidable, and this is obviously what the person who says this was getting at:

"Nobody dares pinpoint the country involved because as soon as we do it will cause a market reaction and lead to a meltdown for the banks," said the source."

But all of this is now more or less inevitable.

Incidentally, the ECB money isn't taxpayers money at this point. They are simply making loans from the resources they have via the reserves deposited with them through the eurozone banking system, and they have some money of their own via seinorage, I guess. And they are lending it, not giving it. The point at issue is simply that they are accepting what are really junk bond status cedulas as if they had investment grade, with the helpful support at this point of rating agencies like Moody's who at the same time deny this status to much more sustainable debt in places like India, Brazil and Peru.

And the same thing is happening with Italian sovereign bonds, incidentally.

So the question is: who is the Brussels equivalent of Hank Paulson, and just when is he or she going to arm up the bazooka, because the Spanish banking system - just like FannyMae and FreddyMac - is going to need a substantial recapitalisation, if not outright nationalisation, and the Spanish treasury does not have the resources for this alone.
And don't miss the fact that they can't guarantee bank deposits as happened in Germany and Japan, since under the terms of the cedulas if a bank fails these have to be paid out in full before any depositor receives a penny (that's why the interest they carry was so cheap, they are meant to be watertight, just as safe as the best sovereign debt).

Compared to all this that is to come (plus other little memoranda items here and ther like the 30 billion euro debt of Ferrovial) the 49 billion euros currently outstading at the ECB would seem to me to be a mere trifle.

Edward Hugh said...

And one more thing.

I think this is the heart of the problem Ambrose doesn't really understand:

"This "soft bail-out" is largely underwritten by German and North European taxpayers, though it is occurring in a surreptitious way."

He is confusing two issue here, the current account deficit, and the problem of who is later going to pay for all the broken plates.

Spain's CA deficit has been paid for basically up to now by savers in Germany, Holland and Finland (ie in those countries running CA surplues), but these savers - via their agents - now want to be paid more for the risk they are assuming, and this is at the heart of the present difficulty, since what Spain had to offer as a warranty to back the lending was property, and this property is in the process of a revaluation.

Indirectly this fininacing difficulty is showing up on the books of the ECB, since the banking system in these CA suplus countries is a net saver, and not a net borrower.

At the same time of course, due to their recent housing boom, some Dutch banks need ECB help, even though the country itself runs a large net CA surplus (6.5% GDP 2007). So the issue is a complicated one.

I don't think taxpayers money from other countries is arriving in any direct form to the Spanish banks at this point.

The theoretical issue is why some countries - Germany, Holland, Finland - have been running surpluses, while others - France, Ireland, Spain, Portugal, Greece - have been running deficits. (Of course the UK also has a CA deficit, but it is not in the eurozone, but this makes it hard to say that it is simply a "Latin" phenomenon).

EMU was posited on structural convergence taking place between countries. This is just not happening, and it is this absence of convergence, rather than the difficulties in applying a one size fits all monetary policy, that is really the big underlying issue.

There are various possible explanations why countries are not converging, but one of my strong feelings is that demographic assymetries have a lot to do with the situation.