"No One Saw It Coming" - José Luis Zapatero

"Nadie podía saber lo que se nos venía encima". El presidente del Gobierno, José Luis Rodríguez Zapatero, pronunció esta frase hace escasos días durante una entrevista televisiva. ¿Nadie?
El Economista

"No one could have known what was in store for us", according to the President of the Spanish Government, José Luis Rodríguez Zapatero, speaking in a Spanish TV interview a few days back. No one?

Oh, so no one saw the Spanish crisis coming? Can he really believe that? Is this man really serious, or is he but an idle Jester. Or could it be that, like Homer's hero before the Cyclops, my name in fact is no-one.

Beyond The Rosy-Fingered Dawn

"I gave him more of the glowing wine when I had spoken, and he gulped it down,
Three times I brought it, and three times he washed it down.
Then as the wine went round and round the Cyclop's brain
I gave him the kindly answer he was seeking.
You asked, Cyclops, for my well-known name and I will tell you
Then give me my guest friend gift as you have foresworn
For my name is No-one: no-one is the name they have called me:
my mother, my father, and all the rest of my war weary friends."

Hot Labour Anyone? - 26 January 2006

My partner's parents have an Ecuadorian women looking after her mother who has Alzheimer. This woman went home to Ecuador for xmas, and now she has come back she has decided she needs a document of salary (or nomina in Spanish). She needs this since talking to other female migrants (she has btw residence papers) she has decided that she would like to go to the bank and borrow 10,000 euros. She needs this money, since she wants to rent a flat in her own name so she can offer accommodation to new immigrants coming - on a sub-let basis - and thus make money from the boom herself (here in Barcelona there is now a new weekly paper for Latin American migrants which they hand out in the metro - it's called appropriately enough Latino - and last week's front page item was about a small flat in the very centre of Barcelona with 25 Ecuadorian women living in it. So there is certainly scope for business.

The point of all this is that the arrival of so many immigrants so quickly has pushed the rent on flats out of the roof: it is more expensive - in monthly payments - to rent a flat than it is to buy one, and that surely is a sign that something is badly amiss. The other point of this little homily is that ideas traval fast. In the age of mobile phone connectivityyou can quickly have viral entrepreneurship, and of course, rapidly built pyramid chains.

So what might happen when the 'boom' ends. Well in the case of our Ecuadorian woman, with a flat which she can't rent if no immigrants come, and with a rent liability she herself cannot meet, and with an outstanding loan to the bank of 10,000 euros she cannot pay, possibly the most intelligent thing she could do would be to get on a plane and go home. The owner of the flat would have a different problem set: they have an empty flat with no tenant in sight, not for kilometres and kilometres and kilometres. And of cousre the bank wants to know about next months mortgage payments, since the majority of these flats which are up for rent are being bought by someone who doesn't need it 'as an investment'.


Now lets think about the building contractors problem set. Well people in this occupation normally live on credit, and normally pay salaries and other costs out of money borrowed from the bank till the building in question is sold. The bank accepts the situation as long as it has good reason to assume that the building eventually will get sold. But this is just it, when the boom breaks for some significant period of time the flats won't get sold, at least not in anything like the quantities they were (Spain's last boom ended in Olympic year 1992, and the property market didn't recover till 1995). Now when the bank sees that their customer isn't going to be able to sell, what does it do? It cuts the line of credit, that's what it does.

What this means is that one fine Friday the boss has no money to pay his workers. So he goes to the site and tells them this, sorry lads, off you go, and no money for now, I'm afraid. That's if he has the 'face' to do this. Some of them of course simply launch themselves from the 13th floor of the unfinished building.

Now imagine what is actually going to happen the day the bubble bursts. This process can happen in building sites all across Spain, and in a very rapid period of time. The Spanish workers will be more or less Ok, but the migrants? Again it's hard to put numbers, but I reckon we could at some point see a million migrant workers, on the streets with no work, and no reasonable prospect of employment, with their home governments possibly pressurising the Spanish one to organise flights and fly them home.

And just when might this nighmare end game to Europe's best known fairy story come to pass? No one has any idea. Since the thing which is driving the boom is the ridiculously low interest rates which are currently on offer from the ECB (in Spanish, not German terms) and since there is little likelihood of any substantial rise in these any reasonably foreseeable future the show looks like it will continue to run, until, of course, the day it doesn't that is.

Or.....

Spain's Looming Economic and Financial Crisis - 16 March 2008

I didn't quite have the story right at this point, but still, I was getting there:

Perhaps the first thing to get absolutely clear in our minds from the outset is that the economic correction which is currently taking place in Spain is very unusual one in terms of what we have become accustomed to in developed economies in modern times, since the transmission mechanism for Spain's current difficulties does not run in simple one-way-street fashion from problems which have their source in the real economy (a correction in house prices for example, or a downsizeing of the construction industry, although both of these undoubtedly form part of the picture), nor does it run from an attempt by a central bank to "burst" some sort of perceived asset bubble or other (Trichet and the ECB's tightening of interest rates), rather the mechanism operates via a direct blow-out in the cylinder-head-gasket of the global financial system, a blow-out which has produced an immediate and direct change in global credit and lending conditions, and in the level of risk appetite which prevails in the securitised mortgages/covered bonds sector of the wholesale money markets (leading to a situation where these markets are now effectively closed to Spanish banks) , and it is this change in financial and credit conditions which is now making its impact felt on the real economy in Spain, with the actual and present danger that these negative consequences for the real economy may then in their turn feed back into the financial sector, in the process creating some kind of ongoing lose-lose dynamic.

As I say, such a phenomenon is certainly unusual in a modern European context, although some may wish to point to parallels with what happened in Japan in the early 1990s, and the subsequent "lost decade". I wouldn't go so far at this point as to suggest that Spain is facing a lost decade, although the situation is very very serious (as I hope to show in the charts that follow), and at the very least Spain now faces several "lost years" and a massive macroeconomic structural adjustment.

Or.......

Has Artemio Cruz Suddenly Reappeared in Spain? - June 28 2008

The Mexican writer Carlos Fuentes once wrote a novel entitled "The Death of Artemio Cruz". The novel begins with an elderly Artemio who suddenly finds himself awake and lying on his deathbed, gripped by repeated spasms of excruciating pain, and terrified even to open his eyes for fear of what it is he might get to see if he does. After years of debauchery and loose living (shade's of Oscar Wilde's Dorian Gray here) the thing which seems to frighten him the most is the possibility he might get to take a look at himself in a mirror.Of course, there are comparisons and comparisons here. Spain's economy is far from moribund, nor is it in its death throes. But Spaniards are suffering, and the process of adjustment is painful, and the attitude of the country's leader - José Luis Rodriguez Zapatero - does somewhat resemble the case of Artemio Cruz in that he appears, at least from the outside, to be totally obsessed with looking at anything that isn't an actual reflection of the actual state of the Spanish economy.And of course it's easy to criticise here, since the problems Zapatero is reluctant to look too closely at are serious ones, and worse still, it isn't at all clear that anyone really knows what to do about them at this point.

Or.........................

What Is The Risk Of A Serious Melt-Down In The Spanish Economy? - July 18 2008

Now the recession in Spain is, I think, more or less most certainly already served. The Spanish press were talking earlier in the week about a quarter on quarter contraction of 0.3% in Q2, and it is hard to see any acceleration of the economy in Q3. Pedro Solbes, when questioned explicitly by Punto Radio on the possibility that whole year growth for 2008 could turn negative replied diplomatically "It's not my feeling at the moment", which means basically that it might well turn out to be the case.

If this expectation if fulfilled then Paribas may have to revise their latest forecast slightly (see above link) since - in what is really an excellent general analysis - they pencil-in the recession to start in Q3 2008 and then move on to anticipate a contraction in the Spanish economy of 0.75% in 2009 (although as they freely admit all the risks here are skewed to the downside). My own personal call at this point is that the recession may well have started in Q2 (we will soon know) and that the contraction in whole year 2009 will be over 1 percentage point. Further than that I am not willing to go at this stage, since it all depends, and in particular it depends on whether or not we get a nasty "event" or series of events which send the economy hurtling out of the "hard landing" bracket and into the "melt down" one. It is because I strongly believe we be should doing everything we possibly can to avoid that eventuality that (and not continue to languish under our blankets with a heavy dose of the Artemio Cruz syndrome) that I am writing this post now.

Before continuing, however, I should point out that even the Paribas idea of negative growth in 2009 is still very nonconsensual, despite the widespread pessimism which currently surrounds the Spanish economy. The consensus economic survey for June gives a median 2009 growth forecast of 1.5%. The lowest forecast in the survey is 0.4% but most are grouped in the range 1.0-1.8%. Maybe the consensus will catch up with the curve in due course.

Of course, I wasn't the only one to see it coming, not by a long stretch I wasn't, but then as Alberto Saiz says, in this quote which will have to be for my Spanish reading audience, people tend to hear what they want to hear, and simply that.

El director general de HSM España, Alberto Saiz, opina que "la gente al final oye lo que quiere oír. Era muy difícil predecir el efecto psicosis de esta crisis y además hay que diferenciar entre los gurús que hablan de temas de gestión y organización y los analistas financieros. A éstos últimos, si estaban relacionados con algún tipo de inversión, sí que deben pedírseles explicaciones", aclara. Saiz apunta además la actitud de la que ahora hacen alarde algunos inversores. "Muchos dicen que nadie les avisó, pero el problema es que muchos de ellos no quisieron oír lo que se decía. Es muy fácil hacer leña del árbol caído", asegura.