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?

Tuesday, August 05, 2008

On Pedro Solbes

Although we could see this explosion coming, I don’t think even the biggest pessimists thought that the crisis would get this bad,” he writes. “But the blame can’t be pinned on the banks and property companies alone. Nor on the different governments that have been in power. At the end of the day we have all helped to created the bubble by paying exorbitant prices for flats and houses, using impossible mortgages, and ignoring our own resources. I remember friends and colleagues saying “property prices have never fallen”, taking it for granted that if they have never fallen in the past, they will never fall in future, and that “there is no safer investment than the real estate sector”. In fact, any time you hear comments like that about any type of investment, you can be sure that a bubble is in preparation.
Anonymous Comment in an El Pais readers forum on the property bubble

It isn't only Artemio Cruz (or if you like José Lluis Rodriguez Zapatero) who needs to get up and take a long hard look at himself in the mirror at the present time. Let each and every Spaniard who said "property prices will never fall" take a good look at themselves too, and before being too free and easy with their criticisms of others say to themselves "there but for the grace of god go I".

Ambrose Evans Pritchard (hello Ambrose, I'm a great fan of your dad's work) had a piece on Spain and on Pedro Solbes this morning. He closes the article as follows:

The vultures are starting to circle around the hapless Mr Solbes. Critics are calling for his head, accusing him of covering up the true scale of the downturn before the re-election of the Socialists in March. This seems unfair. Mr Solbes continued to dismiss warnings of a crisis as "enormously exaggerated" long afterwards. He appears to be genuinely astounded by what has occurred.
Now I think Ambrose, in his way, makes a very valid point here: I am sure that Pedro Solbes is absolutely astounded by what he is seeing in the way of data coming across his desk day-in and day-out at the moment. He could never in his wildest dreams have imagined what he finds in front of him, I think arguably no-one could. I seem to be playing Cassandra here, and while I always imagined we would see some sort of blow-out, it is the magnitude of what is happening that is truly unexpected, and indeed awe inspiring.

Even Ben Bernanke - to take just one example of a macroeconomist who I truly admire for his technical and theoretical skills (I would put him in my global top five) could not be said to have seen it coming, since in his speech - the euro at five - to mark the fifth anniversary of the introduction of the common currency, he simply limits himself to saying that the euro is a great monetary experiment - prudently he doesn't commit himself one way or the other about whether or not the experiment will work - but he certainly doesn't issue any kind of warning either, about the dangers of creating single country property bubbles via the "one size fits all monetary policy". Nor does he discuss what might be done in the event that such bubbles should develop.

Of course, what people are complaining about isn't so much the fact that Solbes couldn't forsee that there might be structural problems managing a common currency regime, but that his short term forecasts since last August haven't been all they might have been. But which national economics minister is getting it right at this point in time? And the point is that back in August 2007 I am sure that Pedro Solbes had no way of knowing that the looming credit crunch was going to give us all the worst set of financial headaches we have seen since 1929.

So what I am saying is that Pedro Solbes is only human, just like the rest of us he is a mere mortal. And he is a mortal who is evidently out of his depth with the problem which is confronting him, but then, I ask you, who isn't at this point. It is time for the fire brigade to go to work, the only problem is we don't have a fire department, because NO ONE saw the need, because NO ONE saw this coming, at least not clearly they didn't.

Now I am saying all this, and in a way writing this blog post, to defend Solbes name and reputation since I think there is a big danger in the way people in Spain are generally reacting to this problem at the present time. I think people here have a tendency to put far too much confidence in the knowledge and abilities of their leaders, and this becomes a problem when such confidence is misplaced, not because these leaders are bad people, but simply because they are, just like everyone else, only human.

I think there is far too great a tendency in Spain to think of politicians as dishonest ("son uns lladres", "no hi ha ni un pam de net") but astute (llestos), and they may be both or neither of these, since this is not my concern, but what they most certainly are not are macroeconomists, and thus they are in no real position to better appreciate the extent of what is happening than is the woman on the proverbial Madrid omnibus (you know, the one at the start of Almodovar's Carne Tremula, "malnacido, y sin padre). They are simply in shock, that is all.

But it is time to come out of shock, and put on our firemen's suits, or the whole house is simply going to burn down around us. We need a plan of action, we need the help of Brussels, and we need it now, and not after everyone comes back from holiday or whenever. If we don't do something soon many of those now idling away their days on the beach may not have a job to come back to when they return.

Now to touch on one or to of the other points which Ambrose raises:

The root cause of the bubble was the extremely lax monetary policy imported by Spain after it joined Europe's monetary union. Interest rates were slashed on EMU entry, and then fell to 2pc until late 2005 - far below Spain's inflation rate.
In other words the whole problem is a result of structural failings in the design of monetary union. This is a real problem, and it is one which needs more or less urgent responses, and not platitudes about Harrod-Samuelson-Balassa effects. These interest rates were "lax" in Spain, but not in Germany, and that is the problem.

Secondly we have the issue of the way in which the Spanish banks are now becoming the centre of global attention. The issue here is a recent report from Morgan Stanley (which I mentioned yesterday) and which Ambrose cites extensively:

"A momentous economic slowdown is now under way. We believe the deterioration in Spain is just in the beginning stages. The bulk of the pain will be suffered in 2009," said the report, by Eva Hernandez and Carlos Caceres. "The probability of a crisis scenario similar to the early 1990s is increasing. If the ERM (Exchange Rate Mechanism) scenario were to become reality the main concern would not be earnings, but capital....We estimate that a non-performing loan ratio of 10pc to 15pc for developers' loans would fully erase earnings in 2009 and would represent between 20pc to 30pc of the current tangible capital base of Banco Popular, Sabadell and Banesto," they said."

This attention is now here, and it is simply not going to go away (and indeed the latest example of such attention is the post "Construction Correction Driving Economy Down" on the Morgan Stanley Global Economic Forum). There is a further point in Ambrose's article which is worthy of comment:

The banks certainly dodged the US sub-prime debacle, thanks to restrictions by Bank of Spain on the use of off-books investment vehicles. Home equity withdrawals and "piggy back loans" are rare. Mortgages were mostly limited to 80pc of house prices, at least in theory.

This is not quite right. The only real sense in which Spain didn't have sub-Prime was in not making use of extensive off-balance-sheet SIVs. In theory this means that banks are inclined to be less risky in their lending, since if things go wrong their own balance sheets are directly affected - or as Morgan Stanley so nicely put it "the main concern becomes not earnings, but capital". So the main issue with the SIVs may well be that the leveraging induced causes everything to fold quickly like a pack of cards, whereas doing effectively the same thing on balance sheet may well prove to be virtually fatal, even if the unwind is a bit slower.

As I argue in my "No sub-Prime in Spain, but is Spain itself sub-Prime" post, bar the SIVs almost every other phenomenon associated with sub-Prime is here. Of course piggy backs and refi's were commonplace, even if the Spanish borrowed not to spend, but to do what they thought was saving, ie modernising and upgrading their home. And with LtV ratios of 110% commonplace for young people (who often didn't even have the savings for notarial fees and furniture - you know, the mil-euristes) there was not so much need for the piggy-back (since you were already up on the shoulders of a giant), but they were certainly there if ever you needed them. Basically, easy lending and over-leveraged households became commonplace here, and now the whole thing is unfolding, and if no one does anything to stop it the whole issue will steadily work its way back upstream to the bank balance sheets.

Which brings me back to Pedro Solbes.

As I say, I wouldn't want to falsely accuse him of attempting to mislead in the past. I have a good deal of respect for him, and for everything he tried to do, almost single handedly, to enforce the Stability and Growth Pact against the mighty forces of the French and German States when he was Economics Commissioner in Brussels. His successor isn't even fit to don the shoes he wore in this area. But that was then, and this is now. And statements like this (given in an interview to El Pais over the weekend) are much harder to forgive and forget:

"Spanish Economy Minister Pedro Solbes on Sunday said in a newspaper interview that he expected the European Central Bank to keep interest rates on hold..... If oil doesn't bring us any more surprises, if there are no other variables with a negative impact, we think there will be very low or flat growth in the coming quarters, but we are not thinking of a recession."

I'm sorry, this is inexcusable. It is clear that Spain is heading rapidly into recession, and the only real issue is how long and how deep it is going to be. So while Pedro Solbes can, for his past "omissions" reasonably take recourse in the defence that he has, like everyone else, simply been overwhelmed by events, this no longer applies to what is happening now, and I would recall here the old Greek adage from Sophocles' Antigone: "call no man happy until the day he dies". Pedro, don't undo a whole life's work for the sake of avoiding conflict and confusion in the short term. The Spanish people have the right to know the full extent of the drama which awaits them, and they have the right to know it now!


José Luis said...

I blame Pedro Solbes for his passivity ("It´s not going to be so bad ...")
You can see how other very important economist, as Olivier Blanchard and Martin Wolf, posed the real treats over spanish economy in March 2007 (
They announced the crude crisis that was near to come.
Why on earth Pedro Solbes, vice-president of the spanish government, couldn´t forecast anything?
Solbes and Zapatero are guilty of omission, not having corrected the spanish economy path from 2004, or at least, not having intended to do it.

Anonymous said...

I do not agree with you, when you say that no ONE saw this coming. I have been reading your blog since december 2007 and You predicted growth of 0,8% for 2008. (solbes has predicted 3,3% at the time)Also Roubini has been predicting recession for Spain and UK since october 2007. Just look at your PMI index from january to may, it has been going down, and Solbes in the month of may declared that spain was not closed to a crisis, just some "objective desacceleration". Either Solbes has been lying, and if this is not the case then it is even worse, it means he is not even qualified to diagnose the economy, let alone solve the problem now. Anyway, I do hope that the spanish government will react soon but I am not confident that they will. I thik solbes as you say is way out of his depth on this problem. Thanks for your blog, I enjoy very much your posts.

Edward Hugh said...


"I do not agree with you, when you say that no ONE saw this coming. I have been reading your blog since december 2007 and You predicted growth of 0,8% for 2008."

Well, OK, maybe I should stop being so modest :).

But I think what I am getting at is that no one saw the magnitude of this - I mean no one with a coherent analysis to back it up. There are always prophets of doom to be found.

I obviously knew that the housing boom was a bubble for quite some time before it burst, and I never imagined the unwinding would be easy.

Basically I hoped, I suppose that the huge volume of migrants who had arrived in Spain, and the UK holiday sector would put some sort of floor under things.

Now the British have their own problems and are unlikley to be back in force for a good number of years, while there is a grave danger that a significant number of migrants simply pack their bags and leave, in which case the massive overhang in surplus property and zoned land will drag the problem out for many years.

What I think I never foresaw, nor did anyone except maybe Roubini, was the way in which the sub-Prime thing would blossom into a massive global credit crunch - nor could I have guessed in advance that the two worst affected countries would be Kazakhstan and Spain.

But then before August 9th I didn't really know what a cedula was. I thought the word was some sort of Mexican slang for a carné.

But as soon as Paribas had the problem, and the wholesale money markets closed to the Spanish cedulas it was obvious to me - although not I think to Solbes or anyone else in the Ministry - what came next.

And I bloody soon found out what the cedulas were, and what a problem they were going to become.

Perhaps the most scandalous part of the present situation is that virtually no one in Spain knows what cedulas hipotecarias are, nor the importance they have. But soon they will be as much a household word as La Pantoja.

So from August to Xmas I don't think they understood the essential point that this is a financially driven credit crunch - and not a simple housing slowdown, and the only one we have had that is really comparable to this one in its global reach was 1929.

I have studied the great depression to some extent theoretically, as of course has Bernanke (the post 1929 debt deflation was his academic speciality), and my feeling is that they have been putting too much emphasis on outright stopping the bank failures and not enough on the corrosive impact of the change in the lending conditions themselves. But this is an old debate which goes all the way back to the 1930s and normally tends to separate the US view of the roots of the great depression from the UK one.

Anyway, we are were we are and now we have to accept it.

What I am saying about Solbes (and Almunia has been just as bad if not worse with the forecasts up in Brussels) is that they have simply tried to treat this as a normal recession, and thus have tried their hardest not to let confidence deflate, that I think is what all the optimistic forecasts were about.

But consumer confidence has now collapsed, and we are now off into something which is going to be more of a "long night" than a simple recession, and I really think it is Solbes's reponsibility to bringing the Spanish people into the realm of reality. I mean we can argue whether it is going to be 3 years, or 5 years, or whatever, but things are definitely going to get worse, and a lot worse, before they get any better.

The big priority is to stop Spanish banks going bust, since if one has to close its doors, I don't know how you are going to prevent queues developing at all the rest, since if we ever get to that point people are certainly not going to believe a word that any of the politicians tell them, and in a crisis situation this is very, very dangerous.

Anonymous said...

Dear Mr. Hugh,

First of all, thank you very much for this very good blog you keep growing and making better day after day.

I appreciate a lot that you used catalan language words to describe your real life feelings:

This means that you really love the people around you and the city you are living in.

But for me, Basque as I am, it means that you are very objective and natural reading your environment, a very difficult task for an spanish in Catalunya.

Going to the core, the very day I read a post by you about Spain in I bookmarked it, after giving congratulations to you for a very clear and good post about Spain Economy. Later came some other good comments.

Today, I'm with previous commenter. Quite a lot of people saw it coming, and they spoke, but almost nobody was listening to them.

Several comments:

— Firstly, I think that the first one speaking clearly about a bubble was Dean Baker, and not Nouriel Roubini.

I couldn't give a proof of that, right now, but here goes a snack from Calculated Risk (the best website on housing in USA, by far) from July, 2005:

Calculated Risk: Dr. Baker: Housing Bubble Fact Sheet

So, the housing bubble was very well known before Spanish elections and all that!

— Secondly, before starting to talk about magnitudes, let's talk about the anglo-saxon financial engineering developed in the cities of London and New York by our usual bright people in i-banks:

It was Gillian Tett, from The Financial Times the one who explained the letter-soup of derivatives to the media (and economists like Brad Setser or Nouriel Roubini were very grateful to her). This was about 2006 end.

The first one speaking about the massive credit mess of sub-prime loans was Tanta, from Calculated Risk, who later got a lot of fame with the “We All Are Sub-Prime” post. End of 2006…?

The fact that you didn't know what Cédulas were, at that time, is quite telling (Mortgages Backed Securities, in Spanish version).

— Thirdly, Spanish banks are out of US sub-prime MBS for two reasons: one, the Bank of Spain asked them a lot of collateral (to avoid it), and second, the most important, the bubble in Spain was so big that the banks inverted the equation delivering cédulas to foreign investors.

Later on, this became a soft version of sub-prime MBS of anglo-saxon financial engineering, as you well described in older posts.

Different banks and Cajas used different maturities of Cédulas. But as far as I know, they weren't pooled and chopped in tranches Wall Street style.

— Forthly, it's nice you are quoting Bloomberg about Kutxa (nice to know that singaporeans are buying Kutxa's cédulas), but who is in the middle? Bill Gross from Pimco?

That's anglo-saxon bond engineering at work. It's to suppose that there is a contract between Pimco and Kutxa, don't you think so? Let's say that Pimco sells to singaporeans, MBS from Kutxa. Ordinary business!

— Sixtly, in Spain we are used to Pantojas and Rocas in the same way that in USA you change your wife sooner than your car.

The main problem comes from that. The US of A advertisement corporations are so strong in here, that youn teenagers are thinking of having a big breast before they met any boy. They know much more about italian cloth designers that about Spanish geography. TV in motion, you know?

But the media speak about Nadal, Ibarretxe, or Eto'o (nobody asks about his dentist!).

That's the sign of our times! Times they are a changing faster than Bob Dylan concerts (a real shit lately).

— Speaking about Solbes, I have to say that you are totally right. Gonzalez's first Economy Minister Solchaga was a total disaster for all industry in Spain (he was the kind of minister that thought that Spain lived from turism; So he did what Franco used to do, put the peseta very high in Summer to get the benefit of tourism). This destroyed the whole industry and exporting capacity of Spain. When Solbes cam, he put the peseta down 13% at the beginning and 12% again eight months later. And then, Spain started to export again some few things.

At that time, we in the Basque Country, had signed the “Concierto Económico” with Spanish government, end we started to spend lots of tax money in infrastructure and renewing the industrial complex that had been totally destroyed by Solchaga and the Oil recession.

So, Solbes put the whole country in a position to try to expand out and sell in foreign countries, and other interesting reforms.

Then, Rodrigo Rato came using Solbes policies, but privatizing Telefonica, Endesa etc., etc. Anglo-Saxon economics at work, under Aznar.

To finish, Spanish people came to a relatively new freedom state after Franco, 30 years ago. This was like coming from Middle Ages to a very Modern Age in few years. The new rich and the pelotazo culture took deep roots at the time and we came from 17% interest rate to 2% in less that 10 years.

Put it all together and you have a perfect mix for a bubble.

Anyway, dear Edward, as I have spent some time commenting your post an comment, I'd like to hear from you some comment about british economy (51% of GDP in the city of London) and US of A economy.

I don't understand why are you worried about the bust in Spain and not in England…

Inside Spain the problems are very different from one area to the other, maybe not so clear than in USA, but even Apple or Google or Microsoft are doing fine, California is a total disaster, not to to talk about Florida or Las Vegas.

Do you think that Spain banks (cajamadrid, sabadell etc apart), will suffer more that HSBC, Barclays or Royal Bank of Scotland?

I know that british people have the best banks of the world… But is that enough?

Don't you think that the financial world will suffer a severe deflation in next couple of years, real state apart?

What are doing in UK out of financial engineering and toxic waste credit?

In Spain and in UK, jingle mail is not allowed. So, we'll have very hard times, but worst that USA?

Do you think that the Eurozone will break, as Pritchard thinks, or the British economy will suffer more from the bank crisis?

I have the feeling that most financial institutions are insolvent in Europe and the USA, but mostly in anglo-saxon economies.

But in Europe, we still make things to sell, financial services apart.

I think will have lots of time to thing about the magnitude of the crisis and recession, or maybe depression.

Thank you very much for this blog and keep up.


Edward Hugh said...

Hi Again José Luis,

I can see that my point of view is not popular even among my most faithful readers :).

"You can see how other very important economist, as Olivier Blanchard and Martin Wolf, posed the real treats over spanish economy in March 2007 ("

Look, I think there are various points involved here. I think most people who could think knew there would have to be a correction. The question was always going to be the size of the correction.

Jaime Caruana formerly governor of the Bank of Spain and now employee of the IMF said three years ago that properties were overvalued (then) by some 30%, but he didn't think to do anything to insist that TINSA applied realistic value and that mortages were only to be 80% of those values, he simply limited himself to saying that - since you have the DNI system here in Spain, and since people are all linked-in through salary "domicilio" in their bank accounts, and since young Spanish people don't emigrate - then the banks were sound, since the default risk was minimal (even if the young people in question might have to go back and live with their parents, and spend the rest of their lives paying off the debt).

So I think there are many "culpables" here. No one really has clean hands, not in the PP, or the PSOE, or CiU, or even in Coalición Canaria.

But as I say, expecting a correction is one thing, and what we got is another. It is the force of the blast that is so shocking. Look at the June industrial output I just posted about. Down 9% y-o-y. Now where did you ever see that recently?

What I think no one really anticipated was what happened in Paribas on August 9th 2007, or the impact it would we didn't see the credit crunch.

I also think that no one really saw how developing economies were going to take off with the money that started to pour out of the OECD countries after last August. I mean hardly a day passes at present without some investor or other somewhere on the planet asking me if I can point him or her to those economies which are likely to get the greatest growth over the next decade, since obviously they are not going to be OECD ones. I have made a list of my favourites, and you can find them on my Brazil blog if you are interested.

And of course it is this sudden growth spurt in some very numerous countries population wise which is shooting up the demand for food and oil, and this is behind the big energy squeeze which comes with the credit crunch. And again I think few saw this coming, at least in its complexity.

And then who was talking about cedulas hipotecaries (and toxic garbage ,to use Roubini's evocative expression)? Not Martin Wolfe, and not Olivier Blanchard I'm afraid. Nor me. We were all sitting back and listening to them talk away about how the revolution in financial products was going to make mortgages permanently cheaper. Now we know differently, and we are back for some time to come with some "old school" lending practices.
I only read today that Morgan Stanley have decided to cut their credit lines in the US to those who have "revolving" equity withdrawal accounts, since they are no longer sure who has equity and who doesn't.

Basically I think I am virtually alone (Paribas come the nearest I feel) in tying-in the cedulas to the CA deficit as being at the heart of this matter now. That is why I am about the only person (correct me if I am wrong) who is saying we need very large quantities of money - 300 to 500 billion euros (or 30-50% of annual) GDP from the exchequer in Brussels now, or this is only going to get worse, and much worse, in such a way as it could put the whole integrity of the eurozone at risk. I don't think many are talking about the problem being on this scale yet, but unforunately it is.

So we need something to adress this big time, and all the rest are details. Spain now has less money every month as the money goes out to pay the oil, and as people can no longer afford to borrow more money from inetnational investors even if they wanted to, and even if anyone would lend them. And anyway, all that borrowed money has to be paid back in the end - or defaulted on.

And remember GDP went up year after year as 700,000 immigrants came in and started working annually. So if these immigrants now leave in anything like the same numbers and at the same rate, then the reel will simply unwind in the other direction. That alone would give 2% negative GDP growth a year over the next 5 years.

Again, who is really talking about this?

Of course I am, but then modesty prevents me from ramming that point home too hard. What we lack here at the moment is conceptual thinking on the grand scale. You won't fix this with parches, or tiritas, or pegotes, and certainly not by mounting a tinglado.

Pedro Solbes is not one of the great visionary economists of the 21st century, he is simply a government minister, and all I am suggesting is that we treat him as such. Human, all too human.

Edward Hugh said...

Hi Koteli,

Lots of points in your very interesting comment. I will get back bit by bit, but this thing caught my eye:

"Different banks and Cajas used different maturities of Cédulas. But as far as I know, they weren't pooled and chopped in tranches Wall Street style."

I think we all know so little about this, but I have the impression, despite what they say, that much of the debt is in manageable tranches. Otherwise what exactly are the ratings agencies going through right now.

Reuters reported this on 23 July:

Moody's Investors Service put about 16.9 billion euros ($26.6 billion) of Spanish residential mortgage-backed securities under review for possible downgrades after adjusting for rising default rates and slowing house price growth. The rating agency said on Wednesday it was reviewing 68 tranches of 13 deals after updating its model.

No as I understand it and you understand it, the cedulas are supposed to be backed by the entire mortgage pool, and not packaged up into discrete tranches, so what the hell are these.

And what the hell are Santander's Hipotecario 3 and Hipotecario 4 bonds, since according to Bloomberg in May:

Mortgage-backed bonds sold by Banco Santander SA, Spain's largest lender, tapped their cash reserves as homeowner defaults rose, Fitch Ratings said. Bond issuers Santander Hipotecario 3 and Hipotecario 4 had a combined 13 million euros ($20.4 million) of mortgage defaults in January and April that ate into reserves set aside to protect bondholders.

Both transactions are incurring losses earlier than expected and both have tapped their reserve funds,'' according to the Fitch report affirming the ratings on 3.75 billion euros of the debt. The rating firm lowered the outlook on 154 million euros of junior notes to negative from stable, citing the drop in reserves. Junior notes absorb losses first.

Delinquencies on Spanish mortgages have soared as the highest European Central Bank rates in six years are crimping the spending power of homeowners. Delinquencies of more than 90 days for Hipotecario 3 are 1.64 percent of loans in the pool, while arrears of Hipotecario 4 are 1.34 percent, according to Fitch.

I mean these entities are not issuing cedulas, but what appear to be conventional RMBS's, and these entities issuing the bonds smell extraordinarily like some kind of SIV to me.

This file from Celine Choulet of PNB Paribas is extraordinarily interesting, and well worth the read.

Among other interesting points she makes the following one:

Although they are not directly exposed to the American subprime crisis and have not encountered liquidity problems for the time being, the Spanish credit institutions are among the first to be affected by the sudden drying up of securitizations in Europe. On the one hand, the reversal of the asset securitization market and the interruptions in interbank transactions on covered bonds are forcing them to seek refinancing on the interbank loan market, which is expensive.

On the other hand, Spanish securitization vehicles, victims of the paralysis of certain capital market segments and that may hold American subprime-related securities, could withdraw money from the back-up lines put at their disposal by the banks. This might then induce a forced reintermediation, the Spanish banks being constrained to absorb the losses from conduits that they are sponsoring off balance sheet.

Basically Hipotecarios 3 and 4, would seem to be conduits of the type Choulet describes, but how widespread are these entities, and has anyone done an analysis of them. Does anyone know?

She also says this:

At the end of 2006, total funding to mortgage market reached 201.3 billion euros, of which 88.3 billion in covered bonds (representing 43.9% of the total of mortgage securities market) and 113.0 billion in mortgage-backed securities (56.1%)

Which means that in 2006 more was raised via MBS's than via cedulas. Now I had always assumed that these MBS's were simply attached to mortgages in the loan book, but now it seems "conduits" have been created. So just what percentage of the 56.1% of lending in 2006 was done via conduits, wouldn't that be an interesting question to get an answer to.

As I keep emphasising I am but a mere macroeconomist, and all this is a learning exercise for me. I am simply trying to do my best to work my way through the undergrowth.

Edward Hugh said...

Well, I think I am steadily answering my own question here. I found this on a Standard and Poor's document entitled " Structured Investment Vehicle Ratings Are Weathering The Current Market Disruptions" - this was back on 15 August 2007, and they evidently weren't weathering it:

Traditional asset-backed Commercial Paper (ABCP) conduits are often viewed as those that are supported by liquidity facilities, where the ratings are linked to the liquidity provider's rating because the investor relies on the liquidity provider to pay in the event of a market disruption.

But in Spain we seem to have two types of ABCP conduits, the cedulas - which are backed by the ehtire pool of morgtgages of the issuing bank - and those like Hiptercario 3, which seem to be only backed by distict tranches. Hnece the constant and uncreasing investigation of "asset quality" - and hence the great desire on the part of the banks that house prices aren't seen to fall.

The latest attempt in this dircetion would seem to have been reported on in El Pais yesterday. Near bankrupt developers are reported to have teamed up with several leading banks - Santander, BBVA, La Caixa, Caja Madrid, Popular and Banest - to offer discounted properties with mortgage financing. Now what does "discounted properties" mean??

The developers involved promise to sell their properties for a maximum price of between 2,000 and 3,200 Euros per square metre, depending upon the district. According to this formula, a 100 m2 flat in the capital will not cost more than 320,000 Euros. According to the regional government - oh no Esperança Aguirre strikes again, and this time without a helicopter - this represents a discount of 20% from "current market prices".

But what the hell does current market prices mean here?? If you can't sell something and then you drop your price 20% and you can, isn't that the actual current going market price, and the rest is pure - dare I say it - "galematias".

What happens is that if the official prices are dropped to the actual market prices then those people from Moody's, Fitch and S&Ps etc are going to be burning even more midnight oil going through even more batches of commercial paper to see who will be the next for a downgrade, which means they will have to put in even more money (which they already don't have) and so we go on and on in this stupid merry-go-round until someone important finally goes bust, and then there will be all hell to pay.

That is why I am absolutely convinced that all these stupid pieces of paper need to be taken out of circulation cuanto antes, and since Spain doesn't have the money to do it alone, we need help from the EU. And I was working on only 300 billion (the cedulas), but we also need an assessment of just what proportion of the conduit based ABCP is in danger of becoming yet more "toxic garbage".

I use this expression not because the stock of Spanish housing is worthless - clearly it isn't - but at this point no one knows what it is worth, and hence potentially no one in their right mind really wants to hold this paper, even 50% of the face value might be expensive at this point, and especially if some banks get desperate, so someone needs to buy them all up - like Paulson and Bernanke have done in the US - and lock them all away in a safety deposit box until all this is well and truly over.

To give an example of what is involved here, I quote from a cedulas promotion document issued by S&Ps in connection with an issue by Cédulas Grupo Banco Popular 2, Fondo de Titulización de Activos. This is basically a conduit created by Banco Popular to guarantee the cedulas which are issued - one each - by the seven banks in the BP group: Banco de Andalucía S.A., Banco de Castilla S.A., Banco de Crédito Balear S.A., Banco de Galicia S.A., Banco de Vasconia S.A., Banco Popular Hipotecario S.A., Banco Popular-e com

Now as S&P say:

"A preliminary credit rating has been assigned to the "bonos de titulización" (notes) to be issued by Cédulas Grupo Banco Popular 2, Fondo de Titulización de Activos. The notes are backed by a portfolio of seven "cédulas hipotecarias" (mortgage bonds or CHs). The rating on the notes reflects the quality of the underlying collateral: seven CHs, each backed by the mortgage loan books of each of the seven Spanish financial entities, all part of the Banco Popular group."

basically they did it like this to "mobilise" the mortgage books of the smaller cajas, at the same time as guaranteeing them with the credit rating of the mother bank. This is sort of moving in convoy. The problem comes if the flagship takes a hit:

The transaction is supported by the short-term rating of 'A-1+' on Banco Popular Español until this rating is lowered. In this case, a liquidity line will be provided to
cover any delays of interest payments on the cédulas. Liquidity will be sized to cover any shortfalls owing to defaults of the cédula issuers.

So this is really how you get meltdown, since if BP loses its investment grade rating at some point (perfectly possible), it can be sent of into a liquidity shortage driven spiral from which there is no realistic way out. Especially if the real Spanish economy continies to contract.

Miguel Sanchez said...

" YOU COULDN'T MAKE THIS STUFF UP" is the expression I'm searching for Edward.

I'm sure I read somewhere that the Banco E had said they had not allowed SIVs into the spanish banking system, that was one of the reasons the spanish banking system is so secure . I believed that and so did many of my friends.

HOWEVER--- If there are some sneaky SIVs lurking about, then the game is up-- would you not agree.? Where there is some there will be more and they will add up to a whole hill of beans.

It might end up that the whole system needs flushing out and this country will need some very strong leadership to do that and guide us out of this mess.

But- we don't have that strong a leadership , even in the wings waiting to accept the monumental task of this magnitude.

I and many of my companeros agree with your solution to kick start this country financially, get a system of legality in place ( Not easy ) and a diversified industrial base, ( It took South Korea 20 years to get their semiconductor industry up and running even with a lot of help from Japan and the US, the example is - It takes time.)

The one thing I am aware of is that, for me this is ECONOMICS 101. What a Thesis one could write-- Spain, The Rise and Fall 1990- 2009.

I take no pleasure in witnessing this awful state of affairs unfolding before our very eyes but in 20 years time, history might recall that due to the mis-management of the economy of the late 90's early 2000's Spain became a much more able, better trained and prosperous society with a much more diversified work force and better trained and educated management.

Thank you for this opportunity to vent some of my fears,

With very best wishes

Edward Hugh said...

Hello again Koteli,

Some more points.

"I appreciate a lot that you used catalan language words to describe your real life feelings:"

This is quite important to me actually. It is strange how I notice that over the 18 years I have been here now, the sentimental side of my persona tends to think and communicate more and more in Catalan. Also, I want to make "hincapie" (nice Spanish word this) that I am here to stay, this is my country now - right or wrong - and that is why this August, when "things" will surely happen, I am sitting here, sweating it out, at my post in Barcelona (of course, as an economist itis all also fascinating me). There will be plenty of time for holidays when the deal is a "done one", one way or the other.

"Anyway, dear Edward, as I have spent some time commenting your post an comment, I'd like to hear from you some comment about british economy (51% of GDP in the city of London) and US of A economy. I don't understand why are you worried about the bust in Spain and not in England…"

Well basically I don't comment on either of these economies since I don't feel I know enough about them. I mean where they are at this point in time precisely. Also, and following on from what I said above, Catalonia (and Spain) are now my countries, and my emotional ties are more here than in my former country.

Also, they both tend to get a lot of exposure already, and I seem to specialise in "minority cases". Ther is a logic though to why I do what I do. I have been struggling with one issue since the late 1990s - why Japan has been stuck in price deflation of one sort or another for the best part of 16 years now. This seems to me personally to be the most intriguing (and possibly the most important) of recent macro economic phenomena.

Essentially I have come to the conclusion that Japan's problem is largely associated with population ageing, and hence I think it is even more important to understand it if we are to see clearly what may come next in Spain, since if we lose a big chunk of the immigrant Spain itself will rapidly become the oldest society on the planet (UN population division median forecast, 2002)

In order to explain what I am driving at here, perhaps an extract from a comment I just put up on the industrial output post would be in order.

Now MDM asked me:

"It will be interesting to see if countries like portugal and spain can now pay the price to remain in the euro, or if euro policies will have to be changed."

and I replied:

Look. I would say that the situation which is brewing in the eurozone is potentially much more serious than you are imagining.

I think we could divide the EU into 4 groups here:

1) Southern Europe
2) Eastern Europe
3) Germany and Austria
4) The rest

Now basically we are about to see quite big problems in 1,2 and 3.

I wouldn't say group 4 are without issues - Ireland and the UK are clearly about to get a very bumpy ride on the housing front, and Swedish Banks can take quite a hit in the Baltics and Ukraine, and Denmark has its own housing issue etc, but in terms of the hospital they are all in normal wards, and not in intensive care.

Now, it may surprise you to see Germany pencilled in for a bed in the emergency wing, but this is just it, this is just the problem that (one more time) few see coming.

Basically Germany has negligently let itself get far to old in population terms. Germany has (like Italy and Japan) a population median age of around 43, which makes these three countries the oldest societies on the planet (ever), and their ages are rising reasonably rapidly.

Now, and this is the part many don't seem to get, this ageing has important macro economic consequences following Franco Modigliani's theory of life cycle savings and consumption (for which he got a nobel).

Basically, as you move through the age groups svaing and borrowing patterns change, and this explains why, in the case of the three abovementioned societies, we haven't seen any sort of real property boom since the mid 1990s (they all have had "blow outs" at one point or another, yet during this whole recent boom their house prices have remained strangely flat).

So countries like Germany and Japan who have not - like France and Sweden have - paid attention to their long term sustainability in terms of fertility now face important structural problems, since they cannot depend on internal demand, but need export growth to be able to pay their mounting pension and health service bills.

At this point enter Spain and Italy. The German economy is now heading rapidly into recession, since the slowdown in exports to Southern Europe which started last summer has set in motion a whole chain reaction - the Czech Republic, which is highly interlocked with Germany is slowing fast, and industrial output in Hungary was negative year on year in June for the first time in I don't know how long - which is gradually causing the well oiled German export machine to seize up.

All of this is even being noticed in China (although obviously Spain is only one very small part of the whole picture here) where the manufacturing PMI was negative in July, again for the first time since this survey existed. So Germany can't expect to compensate by more sales to China (which is in any event largely a Japan show) at this point.

So the German economy hobbles on one leg (the export one) and is hence inherently unstable. For more details on all this please follow my posts on RGE Europe EconMonitor. Austria is a similar case except they are into business services out in the East rather than manufacturing.

Now if we move on to Southern Europe, it is very important to realise that this is not homogeneous. There is basically Spain/Greece and Italy/Portugal. Only the firstv two had recent housing booms which are now about to unwind. The other two need to live from exports, but since they have a competitiveness problem they can't, so they get very little headline GDP growth. Spain and Greece are in the middle of a credit crunch driven correction.

I only have a superficial impression about Greece at this point, but it does seem to be heading down fast. I will try to do a study for RGE in the coming weeks. On Portugal I have a study in preparation.

Then there is the East. This is becoming a big mess. Again we seem to be able to divide the countries into two:

1) The Baltics, Bularia, Romania, Slovakia and Poland
2) Hungary, Slovenia, the Czech Republic

The first group all seem to be on some sort of "boom-bust" path. And part of the explanation is that they have been caught up in the slipstream of (compulsory) eurozone membership. In this case - apart from the fact that some of them have been pegging to the euro - the key seems to be the excessively high credit rating they have been given based on the perceived existence of an effective guarantee from Brussels and Frankfurt.

Now, the point I am raising is: what happens if we get the (entirely possible I think) nightmare scenario that all of these go wrong at once. Well, I won't speculate at this point, but the risk is there, and this is one of the reasons I would be trying to stop the Spanish debacle in its tracks, and doing it now.

Edward Hugh said...



Never a truer word was spoken, even in jest.

"HOWEVER--- If there are some sneaky SIVs lurking about, then the game is up-- would you not agree.? "

I'm afraid so. Even if the SIVs which there are may be of what S&Ps call the traditional type, ie they are conduits with direct liquidity connections with the mother bank.

This document - Standard & Poor's Recent SIV And
ABCP Rating Actions
- which is from September 2007 may help clarify some points for those who are interested.

S&P's use the term "structured CP issuers", and break these down into four categories:

· Structured investment vehicles (SIVs),
· SIV lites,
· Extendible asset-backed commercial paper (ABCP) conduits with no or partial third-party liquidity support, and
· ABCP conduits and extendible ABCP conduits with full third-party liquidity support (sometimes called "traditional" ABCP conduits).

My impression at this point is still that what we have in Spain are largely what S&P's call traditional ABCPs, although I daresay someone will come up with some SIV Lite knocking about here and there.

No S&P's say this about the traditional ABCPs:

Traditional ABCP is generally considered to be ABCP that is 100% backed by liquidity provided by third parties, including extendible ABCP backed by committed liquidity facilities. In these types of programs, the conduit administrator can draw on the committed liquidity facilities to repay maturing ABCP or extendible ABCP in the event the conduit can't issue new ABCP..Approximately 90% of the global ABCP issued as of Aug. 31, 2007, is traditional ABCP backed by committed liquidity facilities in an amount sufficient to cover the related outstanding ABCP. Since traditional ABCP conduits don't rely on collateral liquidation to repay maturing ABCP, none of the recent rating actions has affected ABCP issued by traditional conduits.

Note the point about being unable to issue additional CP. This is the current position of most of the Spanish conduits, so they are virtually entirely dependent on liquidity injections from their "parents".

The following question S&P's raise also seems to me to be an interesting one:

How is the CP from other structured CP issuers protected from ratings volatility due to market value declines in U.S. residential mortgage assets?

Ratings on the CP of other structured CP issuers haven't been adversely affected because they have one or more of the following characteristics:

· Adequate overcollateralization to cover the declines in the market value of assets,
· Mitigation of the market value exposure through additional credit support or liquidity support,
· Availability of market value swaps to cover asset value declines,
· Third-party liquidity for maturing CP provided by rated financial institutions or cash flow collections on the
financed assets, and
· Non-reliance on asset sales to pay maturing CP.

The last one of these is going to be particularly interesting to watch as the liquidity crisis in the Spanish banks deepens, and the cedulas become due for rollover.