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 14, 2008

Spains Economy Grinds To A Halt in Q2 2008

As suggested in the recent bank of Spain report, Spain's economy virtually gtound to a halt in the three months between April and June, with the economy growing quarter-on-quarter on a seasonally corrected basis by just 0.1%.

This was the slowest second quarter growth since the 1993 recession, and marks the latest stage in the steady downward march in the Spanish GDP growth rate. As negative growth in Q3 now seems all but assured it seems clear that at the latest, the Spanish recession will have started on 1 July 2008 - of course there is always the possibility that this preliminary figure will be subsequently revised downwards, and we may yet actually open our papers one fine morning to discover that the recession actually started on 1st April.

The 0.1 percent growth followed a 0.3 percent expansion in the first quarter, according to the National Statistics Institute last Thursday. From a year earlier the economy grew 1.8 percent, the slowest since 1996. We will now have to wait till August 27 to see the detailed breakdown of the data.

Inflation At 16 Year High

The National Statistics Office have also confirmed thius week that Spain's year-on-year inflation rate hit a 16-year-high of 5.3 percent in July.

However as the economy starts to contract, and oil prices fall back from their July peak (they were down today at $111 a barrel, or 24% off the July 11 record of $147) then this current high level of year on year inflation may well become a very short-lived phenomenon. It is important to note that on a month-on-month basis the July CPI dropped by 0.5 percent from June, pushed downwards mainly by a summer sales fall of 11.3 percent in clothing and footwear. With cheaper oil costs on the horizon, and housing costs about to fall significantly, as overcapacity extends across the economy it is quite possible that 1 year to 18 months from now falling rather than rising prices will be the principal tendency, and should this possibility be confirmed it will then present the ECB with a whole new set of monetary policy headaches.

More Money From The ECB To Help The Spanish Banks

The European Central Bank lent a record 49.4 billion euros ($73.6 billion) to Spain's banks in July, with lending to Spain rising from 47.1 billion euros in June and 18 billion euros a year ago, according to the most recent data from the Bank of Spain. Investors currently demand higher rewards to buy bonds backed by Spanish mortgages than for any other home loan bonds in Europe - with the spread for Spanish banks now being at 2.5 percentage points over interbank rates for AAA notes, according to data from UniCredit.

Government Measures

The Spanish government this week also announced further measures to combat the economic decline, eliminating Spain's wealth tax and approving 20 billion euros ($29 billion, around 2% of GDP) of financing for businesses and consumers.

The measures, which follows the 18 billion-euro ($27 billion) stimulus package approved in April, have the objective of reducing bureaucracy, increasing competition and speeding-up public works projects. The plan's objective is proclaimed to be returning economic growth to a 3 percent rate by 2010, an objective which may well be laudible but not very realistic, especially since the plan does nothing substantial to address the root causes of the current crisis, which is the structural financing problem in the banking sector, together with the consequent looming banruptcies in the construction sector.

Full of good intentions is possibly the best that could be said of the present plan, although even this tag might have to be withdrawn from the proposal to loosen environmental criteria to enable more rapid implementation of public works. Spain is currently suffering from too much construction, and not too little. Basically much of this money would be a lot better spent closing down builders who are now no longer going to be needed, and retraining their workforces for other activities. Basically Spain urgently need a national construction industry "downsizing" plan, and the current proposals seem to be living under the really naieve illusion that what we have is simply a slowdown in the construction sector, and that things will return to normal by 2010.

As part of the plan, the government will also make an additional 20 billion euros in financing available in 2009-2010 for small businesses and families trying to buy public housing.

Another question I am asking myself in the face of all these numbers is what the fiscal deficit implications of them all are. If the government are working with the kind of unrealistic forecasts as they seem to be, many of their calculations may be way out of line. We need to remember that as the economy slows, VAT receipts reduce and unemployment payments rise accordingly.

Now we have already learned that Spain had a first half fiscal deficit running at 1% of GDP annual rate between January and June 2008, and as I suggest each 20 billion euros being spent is another 2% or so of GDP, so we are very soon going to hit the EUs 3% deficit limit at this pace. And while I certainly wouldn't be going out of my way to complain about that given the gravity of the situation, getting up to the limit without doing anything useful to resolve the underlying structural issues seems rather foolish to me. Indeed this would seem to be an exact repetition of the sorts of errors the Japanese were making during the early 1990s when they were also in denial about the full extent of their crsis. And to close all this I will just drop in one more strange coincidence in all this. Spanish corporates currently are indebted up to the level of around 120% of GDP. Households are indebted up to another 80% or so of GDP, and the Spanish government has an accumulated debt (not counting not-covered future outsanding liabilities in the social security system) of around 50% of GDP. Add all this up and we get total national indebtedness as a % of GDP in Spain of 250% of GDP. And what was the level of total national indebtedness in Japan when the property bubble burst in 1992 - yes you got it, 250% of GDP.

And Japan's misjudgement has cost them very dear indeed, apart from the years and years of price deflation which have followed, government debt was (according to OECD data) only 68.6% of GDP in 1992. By 1998 it had risen to 114.3% of GDP (these were the years of maximum denial) and by 2006 it had risen to a whopping 179.6% of GDP (again OECD numbers): all that cement and concrete comes at a very high price at the end of the day, as does all the dithering and failing to face up to reality.


Anonymous said...

Dear Edward

In your previous post you pointed out that the main problem in spain is that the banking sector needs to refinance cedulas and will not find the funds in the market. Lately, we have seen banks like Banesto exchanging debt with Reyal Urbis for the amount of 400 millions euros. Other banks like Sabadell or Santander have done the same. I suppose they do not have much choice as they either exchange debt for real state, or they run the risk of having their debtors default on them, which would require them to provision the losses. But if this is the case, why did'nt Caja madrid provide 150 million to Martinsa Fadesa? The banks are basically bailing out the real state companies. But won't these actions penalize the banks when they will need to get financing in wholesale markets? Or are these bailouts peanuts compared to the financing the banks need? Eventually these amounts will start adding up, as there is very little housing sales, and real states companies will pile up more and more debt.
Maybe it is more politicaly correct for the banks to bail out the real states companies, then for the government to do so. If things get ugly for the banking system, it can be rescued by the government or by the ECB as this would pose a systemic risk.

Edward Hugh said...

Hello MDM,

Interesting points. First off I would say that none of us here have a road map, so we are all trying to work out what exactly is happening, and doing a lot of guessing, some of it accurate and some of it less so, and I am really no different from any one else here.

Of course what I would argue is that you need to see the two parts of this - the macro economic (or real economy) and the financial economy side - and my feeling is that why so many people are having so much difficulty reading all this is that there are very few people with skills which run across both parts. People are normally either good at one of the things or good at the other.

I freely admit to being much stronger on the macro (real) economy side, and am really having to bootstrap my way up on the banking and financial side, and this is especially hard since they are all so lacking in transparency that it is all a bit like a Cluedo intelligence test. But I am doing my best, since I think if you don't try to see both parts and how they interact, then you will get hopelessly lost.

I just did a post on the latest trade data, and although there are lots of things in the financial account I don't really fully understand, one thing is clear to me: a lot in Spain now depends on the future price of oil, and I guess this is what Solbes is talking about, and in this he is right. If oil rebounds next year, and Spain is unable to increase exports in any significant way - and just look what is going on now around the rest of the eurozone -then this will keep a constant downward pressure on headline GDP growth in Spain.

Right, well with all that due caveat-emptor stuff, here's my guess as to why they let Fernando Martina go. He was principally holding land - 29 million square metres of it, half of it in Spain, and half of it "unzoned" - ie no planning permission. Thus he was obviously thinking the milk cow would simply run and run off into infinity.

But selling (or trying to sell) existing and already built properties is one thing, and holding debt on companies that have land which is way not only overvalued (since land prices nearly always fall first in these kind of unwinds) but is waiting to be built on at some unspecified time in a distant future, is quite another.

But let's not rush too far to fast here. Spain is the most beautiful country of the "half-truth". For example the Bank of Spain will proudly proclaim that there are very few off-balance sheet SIVs which have done sub prime lending in Spain, and this is a meticulously true but absolutely worthless piece of information, since there are plenty of banks which have done what are effectively on-balance-sheet sub prime type lending via what Standard and Poor's calls traditional-type conduits, like Santander's Hipotecario 4 and plenty plenty more.

And again, Martinsa has not been declared completely bankrupt (under Spanish law), it is not in quiebra, but in administration. The difference is subtle, but important, since they are holding out the idea of a "refloat" at some hypothetical stage in the future, which I think is clearly ridiculous. Quiebra would mean closing the company and selling off the assets. But the difference is an important one for the banks, since if they were in quibra I think I am right in saying they would have to make full rpovisioning for their exposure in their reserves under Spanish law, while as long as they are in administration they only need to put a part as provision.

I don't know where people are getting this number from that is going the rounds for 18% of GDP in construction in Spain (see Ambrose Evans Pritchard), my guess is that it is in the 12 to 13 % range (and maybe the other part is financial services and real estate companies being added in). But if you think Spain needs to go from this level to around 6 or 7%, or even less (and I do), then one hell of a lot of these companies need to be closed down, and not "refloated".

All the Japanese mistakes are simply being made all over again here. I don't know why some of the people involved don't go and visit their public library and do some reading up on all this.

Now the point about all the above rigmorole is that the number you mention for Caja Madrid and Martinsa is surely way too low. Reuters were reporting at the time that both Caja Madrid and La Caixa were into Martin for one billion euros each, and Banco popular for another 400 million (total debts are, remember around 5 billion). So the issue wasn't simply the game they were playing with the 150 million and the Instituto Oficial de Credito. That was simply a sherade, since everyone must have known the ICO can't make such loans - possibly even a sherade that went all the way up to Zapatero if the press gossip is to be believed - and the 150 million was only for a staged interest payment which they couldn't even meet, not for capital. So basically the banks are happy with administration rather than quiebra since they don't have to make the same amount of provisioning in their reserves, and they are short of cash.

But when we come back to Reyal Urbis, they do have houses which are already built. They also have around 6 billions in debt it seems. Now you can sell the properties wholesale without too many problems at around 50% of its book value, so maybe this is why Banesto agreed to take 400 million in property, and then resell to only take a 200 million loss on it. You could look at it this way, as a recovery operation, I mean when Reyal Urbis actually fold they might have gotten the lot trapped. And we are obviously going to see more go starting from September. I dunno. What was it keynes said, when people owe you a little money they have the problem, and when they owe you a lot of money, then you have one. The Chinese have just found this out vis a vis the US I think.

Basically what I think, and you can see this in the policy package the government put together this week, is that it hasn't entered the mindset yet that the rate of property sales is going to fall to around half of what it was, with or without the crisis.

The Brits are gone with their own issues, and the government are now encouraging immigrants (who were very active buyers in the last two or three years) to go home, presumeably leaving the keys at the bank on the way to the airport, or maybe they could install small boxes for these in the main airports like they have in some hotels when there is no one on reception.

And Spain itself has had fertility at roughly half replacement rate for 20 years or so now, so don't look for too many young buyers in the 5 to 10 year window from now. The favourable demographic tailwinds are gone and the national vessel just enetered the doldrums. Houses, houses everywhere, but not a drop of water left to drink.

The point is, they are still trying to hang out till the market recovers. This won't happen, and then we will then see another wave of throwing the towel in. How long it will take us to get to that point very much depends on how quickly the real economy deteriorates, but it looks to be coming crashing down pretty quickly indeed at the moment.

So this has become like a stock market correction, with the Spanish banks in the role of mom and pop investors. They have seen the value of shares drop, but are going to avoid taking loses until the thing picks up again. Of course the thing doesn't pick up again, and they eventually get a dose of the cold sweats, in goes the towel, and down come the prices on everything, as well possibly as the roof.

OK, I have gone on far too long already, but you can see this is all very very complicated.

Just one last tiny quibble:

"In your previous post you pointed out that the main problem in spain is that the banking sector needs to refinance cedulas and will not find the funds in the market."

Well this is the big looming problem, but we haven't even got to this stage yet. In theory the rollovers start this autumn. But this will be "value added" to the crisis. ie it will be one more problem. The whole slowdown up to now has been due to their difficulty in raising new finance via new cedulas to keep the cart moving so the economy doesn't slow. Since new lending is now half what it was last August you can see they haven't been very successful, and hence the economic slowdown.

I mean, there is a solution here, but no one wants to talk about it. Mortgage conditions will have to be changed somehow to let the banks charge more from their existing clients, then they can refinance the cedulas with an extra risk premium. But of course this will help save the banks but be another huge macroeconomic problem for the whole economy.

When you look at all the bits and pieces of this absoluetly horrendous nightmare scenario, then it is little wonder that for the time being Spain's leaders and bankers prefer to live in the dreamworld of a renewal in the construction boom one or two years from now. The alternatives have become, quite simply, far too terrifying even to think about.

Anonymous said...

Dear Edward
Thanks for clarifying the diference between house portfolio versus land portfolio. I did not realize that one was more liquid then the other. I always thougth that land was a better investment as it does not detoriorate with time as much as a non-ocupied house. But you are rigth, It is easier to sell a house at a 50% discount than a land at a 50% discount.
Regarding Caja Madrid, I was aware they were in for 1 billion, I was wondering why they did not lend the 150 million when they knew that the ICO would not lend it, and would have to provision for 250 million(25% of the debt). But this would have been throwing good money after bad.
Regarding the immigrants and the buying of houses, I agree with you, on an anecdotical base, we have several immigrants in our company, they have bougth houses to their limits of afordability and they have all been requesting rises in their salary in order to be able to face the higher payments.
I also don't think the housing market will recover any time soon. This is why the banks are only buying time trying to refloat the "imobiliarias". The sales number we are seing rigth now includes a lot of preventas done in 2006-2007. But with the major real state company in administration (M-Fadesa) and the corresponding insecurity this has created for potential buyers, I think "preventas" will go to zero. Only available stock of houses will be selling.

Edward Hugh said...

Hi again MDM.

And thanks for the anecdotal details which just serve to confirm my general impression.

"I always thought that land was a better investment as it does not detoriorate with time as much as a non-ocupied house."

Well this would be, and has been, right. But it neglects the "peak population" effect. Namely, populations are about to stop growing, and will start to fall. So the demand for land is going to be much more discriminating in future.

Basically, again, the land issue is a repeat performance of what happened in Japan (where population is already falling).

So this will be the last boom Spain has like this one I think.

Downtown in the major cities will always be prime property, but we may well be seeing the end of "urban sprawl". The economics of decamping out of the centre of the city just changed too with the increase in energy costs, since heating, air conditioning and transport costs are all normally higher - especially given the lower density and greater surface area of these properties.

So land, I would say, is no longer the safe long term hedge (no pun intended) it used to be, unless, of course, you want to use it for agricultural purposes.

"Regarding Caja Madrid, I was aware they were in for 1 billion, I was wondering why they did not lend the 150 million when they knew that the ICO would not lend it, and would have to provision for 250 million(25% of the debt)."

Well this brings us right to the Non-performing loan issue which lies at the heart of all this. I mean somewhere here there must be criteria about the extent to which they can actually roll-over NPLs. Not paying staged interest payments should, I would think, enter into these. So to what extent do the Bank of Spain police this situation? I really don't know.

Also, to what extent do the ratings agencies have adequate access to the kind of data they need to make a really valid credit assessment. Caja de Madrid are under scrutiny right now for a possible downgrade from one of the agencies (S&P's I think but then I don't think La Caixa are, so you could ask the same question about them, but they are indirectly bailing out Colonial I think, and so it goes on). Everyone is playing hide and seek, now you see me, now you don't here.

Your real-politik assessment may be a valid one at some point along the line, i.e. that they think it is easier to go to Brussels with the begging basket for the banks than for the builders, but this is a very high risk game all round, since if things go wrong......

I still think the biggest downside risk in all of this lies with the immigrants and the overseas buyers. 5 million more people arrived to live and work in Spain between 2000 and 2007, if one two or three million of them leave over the next five years then the oft-announced imminent recovery can easily be steadily put off from here to eternity as far as I can see.