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Tuesday, February 24, 2009

Unemployment Rises, Construction and Manufacturing Fall, And Everything Continues As Per Usual In Spain

Spanish unemployment shot up again in February to 3.48 million in February, whilst consumer confidence took another knock amidst fears Spain's jobless would now hit 4 million as early this summer, and maybe 4.5 million, or nearly 20% of the workforce. Right, this the latest in my monthly reports on Spain, but before I go further, a quick joke. How do you know when there is an economic crisis in a country? When everyone around you in the metro is busy reading the economics page in the newspaper.



The latest unemployment data released yestreday (Tuesday) show that the number of unemployment benefit claimants rose by 154,058 in February, down from last months increase of 198,838, but still nearly four times the 40,000 increase in Germany which has almost twice the population, and where the economy is apparently contracting at an even more rapid rate. Could we conclude that one stimulus package is working rather better than the other?





This month's jump in the jobless number took the Spanish total to its highest since records began in 1996.

According to Eurostat, Spain's harmonised unemployment rate rose to 14.8% in January, and has obviously passed the 15% level in February. This is the highest rate anywhere in the EU, and makes it hard to makes sense of all those rapid response comments which shot from the hip against Central Bank Governor Fernandez Ordoñez's suggestion that Spain needs urgent labour market reform. Frankly such an Ostrich mentality makes Spain look simply ridiculous, and will make it very hard to ask for the much needed aid in fighting the crisis from the rest of the European Union.



Employment, measured in terms of full-time equivalent job posts, decreased 3.1% in the fourth quarter of 2008, that is, 2.2 points below that from the previous quarter. This result indicated a decrease of almost 602 thousand net full-time job posts in a year. As with the previous quarter, the services branches were the only branches that, on an aggregated level, generated an increase of employment in the economy (almost 140 thousand).





The data is simply piling pressure on more pressure for Prime Minister Zapatero to come out of his bunker and begin to urgently look for economic substitutes to the credit-fuelled construction and consumer spending boom which drove Spain's recent 15 year growth "miracle". It is clear that the measures introduced to date simply aren't working, nor were they ever goping to.

We are seeing stimulus measure after stimulus measure, but all these projects seem to be doing is retaining labour in the construction sector (labour which needs to be shed) while the factories close, and the service sector steadily shrinks.


Construction Slumps in January

Construction output in the 27 EU countries was down in December by 6.7% when compared with December 2007. The building sector was the hardest hit, with a 7.7% year-on-year fall, while civil engineering activity was only down by 1.3%. Of those countries reporting data, the biggest fall, as had been the case in the previous month, was in Spain, were activity was down by 23.7% year-on-year. Spain was followed by Sweden (-19.6%), Portugal (-6.2%), France (-5.2%) and Bulgaria (-5.2).

Contsruction activity has now been falling in Spain since the start of 2007.




On a quarterly basis we can see that the rate of decrease is increasing, from 4.6% in Q3 to 8.0% in Q4 2008. Also construction activity is now begining to fall back as a percentage of GDP. although the rate of decline is still comparatively slow, since GDP itself is falling. As we cab see from the chart below, simply to return to normality we need to get back to around 5% or 6% of GDP, but given the large housing surplus that now exists in Spain it would not be surprising if activity fell to significantly belwo this level, and remained there for a number of years.



Home sales also dropped at an accelerated rate in Q4 2008 according to Spain's College of Registrars. Some 113,274 homes were bought and sold in the fourth quarter, down 13.5 percent from 130,884 in the third. The drop was sharper than the 8.6 percent fall between the second and third quarters. For 2008 as a whole, sales (561,420 of them) were down 28.8 percent from 2007. The average value of Spanish mortgages declined for a fourth consecutive quarter, falling 1.84 percent year on year to 136,148 euros.


Spain's Manufacturing Continues To Contract

Spanish manufacturing conditions continued to deteriorate in February at levels similar to those seen in January, though they are now significantly off December's record low. The Markit Purchasing Managers Index rose in February to 31.8 from 31.5 a month earlier, both readings significantly off December's record low of 28.5.

"Although the headline PMI ticked up again in February, operating conditions remained extremely tough. It is still too early to start talking of a recovery in the Spanish manufacturing sector," said Markit economist Andrew Harker.


Over half of those surveyed reported lower orders in February due to falling demand and noted particularly sharp declines in demand from abroad, especially Europe. Both output and input prices slipped to record lows as the economic environment deteriorated, with raw material prices easing and producers cutting prices to stimulate demand.

"The series record falls in both input prices and output charges signal that deflationary pressures are set to intensify, with consumer price deflation possible in the near future," said Harker.





Perhaps the long and steady decline in Spain's industrial sector is clearest in the output index chart (below).




Services Sector Continues To Contract and Sheds Employment

Spanish service sector activity fell steeply in February, prompting the deepest jobs cuts on record and deepening pessimism over how long the country's recession will last, PMI survey data showed. The pace of decline among firms fell to 31.7, way below the 50 level where growth starts, compared with 31.8 in January and a series low 28.2 in November, according to the Markit Economics Purchasing Managers' Index published on Wednesday.




Mortgages Down

Spanish mortgage lending fell rapidly again in January, with loans to housebuyers running at almost half the level of January 2007, according to Bank of Spain data.4.24 billion euros were lent in new mortgages during the month, the lowest level of mortgage lending since the financial crisis began, and a drop of 49 percent from January 2008. The figure revealed a marked decline in borrowing by Spanish families, following a 42.7 percent drop in December. Over 2008 as a whole, the value of mortgage loans to families fell by 40 percent. The Bank of Spain also reported this week that the volume of consumer credit fell 36 percent year-on-year to 2.45 billion euros in January. In fact lending to households fell 4.3 billion euros between November and December (see chart below) only the second time that this has happened in the course of this crisis.









Trade Deficit Falls

Spain's trade deficit fell 29.5 percent in December to 6.93 billion euros but the main factor responsible was the very strong fall in imports, which were down by 16.5 percent from December 2007, while exports fell by 7.4 percent, according to the Spanish Industry Ministry.



The steep fall in Spain's trade deficit has reduced negative contribution to gross domestic product coming from external trade, and this means that GDP, which fell by 1 percent in quarterly terms in the fourth quarter of 2008, is not contracting as fast as indicators of domestic demand, such as retail sales, would imply. A big contribution to the smaller deficit came from lower oil prices, which helped to reduce energy imports by 19 percent. Capital goods imports fell sharply (by 18 percent), while imports of manufactured consumer goods, on the other hand, were up by 7.5 percent. This is not good news, since it indicates the fundamental lack of competitiveness of Spanish industry, for a recovery to occur the relation would have to be the other one, with capital goods rising, and manufactured imports falling.

Spain's trade deficit fell by 4.9 percent in 2008 (to 99.1 billion euros), the first annual fall since 2002. Exports rose by 3.7 percent and imports increased by 0.6 percent.

Spain's trade deficit is the main contributor to Spain's current account deficit which was still running at about 10 percent of GDP over the year as a whole. This deficit has been funded by credit from abroad, a factor which is heavily responsible for the the large accumulation of private sector debt which now weighs so heavily on the Spanish economy.

In fact the December current account deficit came in at 6.37 billion euros in December, down from a deficit of 8.54 billion euros in November, and down from the 9.06 billion euro deficit recorded in December 2007, according to the Bank of Spain last week.




While The Fiscal Deficit Grows

Spain recently reported a higher-than-anticipated deficit of 3.8 percent of GDP for 2008, but the government committed itself to bringing the shortfall back close to the European ceiling of 3 percent by 2011. Spain's Economy Ministry had forecast a deficit equal to 3.4 percent of gross domestic product (GDP) in 2008 following a record 2.2 percent surplus in 2007 that was the second largest in the euro zone. The government currently expected the deficit to peak at 5.8 percent of GDP this year, but most observes consider this a highly optimistic forecast, especially since the economy is almost certainly going to contract more than the current government estimate of a 1.6 percent contraction (on which the budget is based).

The European Commission also remains unconvinced, and has initiated an excess deficit procedure, as indicated below:
Spain is undergoing a sharp contraction of economic activity as a result of the global economic and financial crisis and a severe correction in the housing sector, both taking their toll on public finances and on employment. Since the first half of 2008, the Spanish authorities have also adopted various discretionary measures to stimulate economic activity, in line with the EU Recovery Plan, including tax cuts and investment projects, amounting to 2¼% of GDP in 2009, as well as a series of structural reforms.

In 2008, for the first time in several years, Spain is estimated by the Commission and in its Stability Programme sent mid January to have recorded a budget deficit estimated at 3.4% of GDP. The programme puts the figure this year at -5.8% before a gradual fall to below 4% in 2011. However, the favourable macroeconomic assumptions may imply a lower contribution of economic growth to fiscal consolidation than envisaged and the adjustment path is not fully backed up with concrete measures, except for the discontinuation of the 2009 stimulus package. In this context, a careful assessment of the budgetary impact of discretionary measures will be crucial to ensure the improvement of the medium-term budgetary position, as well as of the long-term sustainability of public finances.

Public debt, which had been reduced to 36.2% of GDP in 2007, is expected to grow to above 50% in 2010.

Based on this evaluation, the Commission proposes three policy invitations for Spain, which focus on: (i) Implement the measures in line with the EERP as planned, while avoiding a further deterioration of public finances in 2009, and carry out with determination the planned structural adjustment in 2010 and beyond, backing it up with measures, and strengthening the pace of budgetary consolidation if cyclical conditions are better than projected, (ii)

In view of the ongoing fiscal deterioration and of the projected impact of ageing on government expenditure, iImprove the long-term sustainability of public finances by implementing the adopted measures aimed at curbing the increase in age-related expenditure; (iii) Ensure that fiscal consolidation measures are also geared towards enhancing the quality of the public finances as planned in the light of the needed adjustment of the economy to address existing imbalances.

In parallel with its assessment of the programme, the Commission is adopting a report under Article 104.3 of the Treaty – on the basis of the breach of the 3% of GDP reference value in 2008. While the deficit remained close to the 3% reference value, the deficit cannot be said to be the result of a severe economic downturn as GDP growth was still positive (over 1%). The excess over the 3% is also not temporary as, according to the programme, it will remain above that level until 2011.

Consumer Confidence Slides

Meanwhile, Spain's Instituto de Crédito Oficial (ICO) reported this week that consumer confidence declined in February after showing some slight recent improvement. The ICO consumer sentiment indicator dropped to 48.6 in February from 50.1 in January and 76.8 recorded in February 2008. The decline in the headline index was mainly due to a fall in the sub index for current economic conditions, which dropped to 26.3 in February from 29.1 in January. The index is now starting to hover dangerously near the July's historic low.


As can be seen from the chart for the sub-components, the only factor holding the whole index up at the moment is the expectations component, when that shoe falls the index could well see another sharp drop.



The consequence of all the rising unemployment and declining confidence is obvious, retail sales have entered a long and sustained decline.




Goldman Downgrades Spanish Banks


Goldman downgraded Spain's second-largest bank BBVA this week, changing the rating to "neutral" from "buy."

"The valuation levels of the domestic banks do not appropriately reflect the
credit risk embedded in these businesses and we remain cautious on these,"
Goldman said in a note to clients.
Goldman cut its price targets on several Spanish banks, saying that the capacity to withstand credit losses would be a key differentiator among the banks. Goldman said they considered Banco Santander and BBVA to be the best in this respect, while Banco De Sabadell, Banco Popular Espanol and Banco Pastor all seemed weaker.

Goldman also said credit quality looked significantly weaker for most Spanish banks, particularly Sabadell, Popular and Pastor, in terms of non-performing-asset rates and coverage, while BBVA and Bankinter were less affected. Goldman said it continued to prefer BBVA over Santander, particularly in view of Santander's UK exposure.

Finally to close with the news my fellow passengers were all so busy reading this morning on their way to work, Spain's second largest bank BBVA have forecast that the Spanish economy will shrink by 2.8 percent in 2009 and 0.3 percent in 2010, and that unemployment will rise to 19.7 percent. That is still below my expectation for a 5 percent contraction, but it is significantly below the government forecast of a 1.6 percent contraction this year and 1.2 percent growth (can anyone seriously believe this?) and 15.7 percent unemployment in 2010.

Friday, February 20, 2009

Europe's Economic Contraction Intensifies In February

Hopes that Europe's battered economies might be about to turn themselves around took another sharp knock today (Friday), as the preliminary flash reading on the purchasing manager survey signaled that activity in both the manufacturing and the services sectors are contracting at a new record pace in February.

The preliminary Markit euro-zone manufacturing purchasing managers index, or PMI, fell to a record low of 33.6 in February from 34.4 in January, while the services PMI also fell to a record low, dropping to 38.9 from 42.2 in January. As a consequence the euro-zone composite PMI reading dropped to its own record low of 36.2 from 38.3 in January. Any reading below 50 on these indexes indicates month on month contraction.




Barring some spectacular (and entirely improbable) turnaround in March it now seems likely that the Q1 GDP contraction will be worse than the Q4 2008 one. If we consider that the eurozone contracted by 0.2% in Q3 2008, and by 1.5% in Q4, then, in my humble opinion, the data we are seeing for this quarter are entirely consistent with a 2% quarterly contraction (or an annualised 8% rate of contraction). Not quite Japan territory yet, but not far behind. And for those who simply don't believe the PMIs can tell you so much, here is Markit's own chart, showing the strong underlying relationship between movements in GDP and the *flash* composite PMI. Pretty impressive I would say.




Germany's Contraction Intensifies


The German service PMI came in at at 41.6, showing the fifth consecutive month of contraction. This was a sharp drop from last months 45.2 reading, and means that the recession is now feeding through from manufacturing to services. The difficult conditions have lead service business owners to hold to the grimmest outlook in the last decade, that is since the index was started. More ominously, the recent data points to a strong reduction in the employment level.



On the other hand February saw the tiniest of upticks in the manufacturing sector, since the PMI came in at 32.2, from January's 32 , the best that can be said here is that the rate of contraction may have stabilised.



France Holds Up Slightly Better Than Most



In France, the manufacturing sector (see chart below) gave up on most of January's rebound, and the PMI fell to 35.4 from 37.9 in January, while services (see chart above) slipped to a record low of 40.1 from 42.6 in January. Nonetheless France is visibly performing rather better than Germany, and when all this is over we will have plenty of time to hold the debate as to why that has been.


Wednesday, February 18, 2009

The EU Bonds Story Rumbles On

Wolfgan Munchau was complaining only last weekend about the extraordinary narrow-mindedness of Europe's economic and political leadership in the face of the current financial and economic crisis, from Ireland in the West to Hungary in the East, and from Greece in the South to Sweden in the North. But more than narrow mindedness what we are faced with is innocence and inability to react, and frankly I am not sure which is worst. I say "innocence" because it is by now abundantly clear that they simply haven't yet grasped the severity of the problems we face (in countries like Spain, or even Germany itself, let alone in the East), and I say inability to react, since they are always and forever moving too little and too late. The initial response to the banking crisis last October was one example (where we saw a landshift-style volte face in the space of only one week) and the way we are now confronting the need to live up to the promises then made about guaranteeing the banking sector, and in particular the "systemic" banks, would be another.

The complete confusion which seems to reign over at the ECB about whether or not the Eurozone can operate some sort of US/Japanese style quantitative easing would be a third.

Only today we are faced with yet another example of how our leaders are meticulously dangling their toes in the icy water where a more seasoned mariner would simply see the need to dive straight in and rescue the drowning man.

It is reported this morning that Germany and France are now contemplating the possibility of bailing-out entire nations, rather than simply individual banks, as European government budget commitments steadily mount-up while their sovereign debt ratings start to buckle under the weight of a growing and deepening European recession.

As reported in my post yesterday (here) German Finance Minister Peer Steinbrueck became the first senior European politician to broach the topic earlier this week, when he stated that some of the 16 euro area nations are now “getting into difficulties” and may need help, citing Ireland as an example. French officials are also reportedly concerned about how the current "stand alone" sovereign debt situation is leading to widening spreads on Austrian, Irish, Greek and Spanish debt as the cost of insuring against default rises to records. What we have before us is not simply a case of seeing "fiscal irresponsibility" punished, it is a mechanism whereby the eurozone can be peeled apart, and where those states who enter a negative economic growth-bank bailout-fiscal deficit dynamic which means the cost of financing their debt (and thus their bank bailouts) rises so prohibitively that it virtually excludes the possibility of giving further fiscal stimulus to their sinking economies, and does so in such a way that a self reinforcing (and self fulfilling) process may be produced, a process which only leads in one direction and to one conclusion: that of sovereign default.

The problem is that it is not just one or two quarters of negative growth we are talking about here, we are talking of deep depressions, and ones during which deep structural damage can be inflicted on the economies of those states who are hardest hit.

“When push comes to shove Germany, France, the larger players will bail out those smaller peripheral players,” said Alex Allen, chief investment officer of Eddington Capital Management. “You can’t let one part of the system fail because it leads to failure of the whole system.”


European deficits have evidently surged enormously this year as governments are faced with the need to provide funding for the heavily strained banking system and provide some kind of stimulus to their rapidly contracting economies. EU member states have already committed more than 1.2 trillion euros in an attempt to save the banking systems from collapse, and it is evident that a second and possibly larger wave of bailouts may now be imminent.

In particular many of us our now concerned that the eurozone bond market could potentially face a crisis similar to that unleashed by the collapse of Lehman Brothers in September 2008. As ECB board member Lorenzo Bini Smaghi put it earlier this month there’s a “risk that the mistrust that there is today in financial markets” is “transformed into mistrust in states.”

“I would be very reluctant to say: ‘O.K., let Ireland or Greece default, the market will sort it out, punish them for their irresponsibility of the past,’” said Thomas Mayer, co-head of global economics at Deutsche Bank AG in London. “They tried it with Lehman and realized that was not a good idea.”


The Spreads Widen



The gap between the interest rates Greece, Austria and Spain must pay investors to borrow for 10 years and the rate charged Germany yesterday rose to the widest since before they adopted the euro. Credit-default swaps on Ireland rose to a record on Feb. 16, climbing to 378.4 points. Greek credit-default swaps, 270 points on Feb. 16, show a 4.5 percent chance that the country will default in the next 12 months, according to ING Bank NV.

Are Bailout's Possible Under Maastricht?

The simple answer to the above question is most emphatically yes, under article 119 of the Treaty. As follows:

Where a Member State is in difficulties or is seriously threatened with difficulties as regards its balance of payments either as a result of an overall disequilibrium in its balance of payments, or as a result of the type of currency at its disposal, and where such difficulties are liable in particular to jeopardise the functioning of the common market or the progressive implementation of the common commercial policy, the Commission shall immediately investigate the position of the State in question and the action which, making use of all the means at its disposal, that State has taken or may take in accordance with the provisions of this Treaty.


Which in plain English basically means, through you go with your proverbial coach and horses. Indeed they may well have already been driven through, last November, in the case of Hungary.

“The European Commission stands ready to provide a loan of €6.5 billion to Hungary,” the EU executive said in a statement on Wednesday (29 October), adding that “the concrete modalities will shortly be finalised in cooperation with the Hungarian authorities”. Under the plans, the Commission will borrow money from the markets using EU-denominated bonds and then lend it to Hungary, without drawing from the EU budget. The facility is established under Article 119 of the Treaty.It is the first time that Brussels has used the instrument to help an EU country (see background). The facility foresees an overall ceiling of €12 billion of outstanding loans. This funding is limited to EU countries which are not part of the euro zone.


The €12 billion ceiling currently provisioned for in the bond facility has not so far been reached, but it has long been evident that other Eastern EU countries would need to draw from the facility for financial help. Thus it is hardly surprising to learn that French President Nicolas Sarkozy had already proposed raising the ceiling to €20 billion at an EU summit on 7 November.

"I will propose on 7 November that the European Union itself, which has 12 billion available to support a certain number of liquidities and to support a certain number of states, should go up to at least 20 billion (euros) to increase our capacity to respond to the crisis," Sarkozy said, according to Reuters.


As one EU official told journalists at the time "the Commission could also change the regulation and lift the ceiling". Or, in other words, when needs must, it will.


A Little History

The principle of borrowing money from financial markets on behalf of the European Community has previously been applied to grant aid to extra-EU countries, in particular before the 2004 enlargement. Kosovo, Moldova and Georgia are all currently receiving financial help through EU loans raised on the market. In January 1993, Italy, a member of the European Community (the EU's forerunner), was granted an eight billion ECU loan to support its strained balance of payments. Since then, no member state has received financial help through this instrument.

The idea of borrowing money via the issue of EU bonds was first launched by former Commission President Jacques Delors via his 1993 plan for growth, competitiveness and employment. Delors initially wanted EU bonds to fund the European budget. But the majority of member states opposed the idea, fearing it would ultimately increase their expenditure on the Community budget.

Borrowed money has been used by the EU to fund projects in several cases, although the amounts involved have been small. For instance, a 'New Community Instrumentexternal ' was used in the late 70s and early 80s to help regions affected by earthquakes in Italy and Greece. Italy has recently proposed using European bonds to fund key EU projects, but the idea garnered little support



The gateway for the coach and horses is also being prepared on another front, as the Financial Times reports this morning. In this case we are talking about the European Investment Bank, which, according to the FT, is set to lend the European car industry 7 billion euros in the first half 2009 to support the manufacturing of environmentally clean vehicles. This is already a substantial increase on the approximately 2 billion euros a year the bank extended to the industry before the crisis, and there may be more, much more, to come. Pathways are being prepared, even as the wheels on the coach are oiled and the horses' mains groomed.
Philippe Maystadt, the bank’s president for the past decade, revealed the €7bn figure to the Financial Times, as he explained the EIB’s plans to shoulder a bigger financing burden in crisis-hit Europe. Member states have already asked the EIB to increase its annual lending programme by €15bn ($19.2bn, £13.3bn) to €63bn for this year and next in an effort to revive the economy.


So Why The Criticism?

So why, if there behind the scenes so many preparations are now being made did I start this post by saying that more than narrow mindedness, what I felt we were faced with is innocence and an inability to react? Well basically, because I think that Europe's leaders are still in general denial on the scope of this problem. We are not talking simply of little cases, like Greece and Ireland, we are talking about potentially much harder chestnuts to crack, like Spain, and Italy, the UK, and even Germany itself. Remember Germany's economic is now contracting at an almost astonishing pace, and German bonds are getting harder to sell all the time.



The full extent of the problems in the German banking system, as defaults mount in Spain and Eastern Europe, is yet to be measured. Only today German Chancellor Angela Merkel’s Cabinet approved a draft bill allowing the state to seize control of property lender Hypo Real Estate Holding AG, paving the way for the first German bank nationalization since the 1930s. And the volume of assets thought to be likely to need to be bought by any bad bank (or banks) created is very large. Hypo's loans alone are thought to total almost 260 billion euros, and numbers in the 400 to 600 billion euro range are being mentioned. So the fear here is not that a German sovereign default is looming, but that German debt may no longer maintain "benchmark" status, and thus the rate of interest the German government may have to pay to maintain its debt may rise, again impeding efforts to help maintain the economy afloat, and almost inevitably biting into the country's already strained health and pension systems.

Finance Minister Peer Steinbrueck was quoted by the Frankfurt Allgemeine Sonntagszeitung weekly newspaper as saying he could "not imagine (the establishment of a "bad bank") economically or above all politically". A bad bank would need to be financed with 150 billion to 200 billion euros of taxpayer funds, he said. "How am I supposed to present that to parliament? People would say we are crazy." Steinbrueck said no one could predict whether the rescue fund would need to be expanded given mounting losses at banks, but noted it still had room to distribute more money.


And one last example for today, of how the one half (the Commission) doesn't know what the other half (the Nation State leaders) is up to. Joaquin Almunia (who is so often "really out to lunch" on economic issues, he is, as they say "challenged" by the complexity of macro economics, see for example this post here) has warned that Brussels could take action soon against EU member states which let their budget deficits rise above the 3% threshold (see P O'Neill post here).

The EU's executive arm plans Wednesday to examine the budgetary circumstances of several countries, including France, Germany, Greece, Ireland, Malta, the Netherlands and Spain, to see whether action is needed. Most of them, notably France, Greece and Spain, have already forecast that their deficits will blow out beyond three percent of gross domestic product (GDP) -- the limit set out in the EU's Stability and Growth Pact.

France, which has called for the EU limit to be eased as governments grapple with the worst economic downturn in decades, has said it expects its deficit to be 3.2 percent GDP in 2008 and 4.4 percent in 2009. Ireland's deficit is expected to blow out to 5.5 percent in 2008, and then 6.5 percent in 2009, with Dublin hoping to bring things back into line in 2011. Spanish authorities expect a deficit of 5.8 percent this year. Germany, Europe's biggest economy, has forecast three percent this year but believes the figure could grow to more than four percent in 2010. Greece, for its part, foresees a deficit of 3.7 percent in 2009. The Netherlands is due to publish its latest figures Tuesday and might just scrape through.


Given the difficult, and unforseen, pressure we are all up against, this is, quite frankly ridiculous. Not that rising fiscal deficits, and rising debt to GDP ratios, are something we should be casual about, but I think what we need is a certain loosening of the rules in the short term, to be followed by a much stricter tightening as we move forward. And do you know the mechanism I would use to discipline the reluctant states when it comes to paying off the accounts run up during the emergency? Why yes, you've got it, the availability of those much-easier-to-finance EU backed bonds.

You see while the first argument in favour of EU bonds may be an entirely pragmatic one, namely that it doesn't make sense for subsidiary components of EU Inc. to be paying more to borrow their money when the credit guarantee of the parent entity can get it for them far cheaper, the longer term argument in favour is that it may well enable the EU Commission to become something it has long dreamed of becoming - an internal credit rating agency for EU national debt. Basically in the mid term the EU bonds system can only work if it is backed by a very strong Lisbon type reform pact for those countries who apply to make use of the facility. This is what now needs to be worked on. And how do we know that that there won't be yet another round of backsliding on all this? Well we don't, this is the risk we just have to take, but sometimes you do need to simply cross your fingers and jump, since the burning building behind you looks none to attractive either, but what we do know is that since there will now be a mechanism whereby the bad behaviour of the few really can penalise the many financially, then there really will be some meaningful incentive to generate a pact, this time, that really has teeth to stop that penalisation taking place.

Tuesday, February 17, 2009

Tinsa House Price Index (Update)

In my last post on Santander's Banif, I meantion the following:


House prices in Spain fell January on January by around 10% and may fall by a further 20 percent this year according to a report last week from Tasaciones Inmobiliarias SA (TINSA), the country’s biggest property valuer.
In fact here I was referring to an earlier post, where I quote Tinsa's managing director Luis Leirado as follows.
House prices in Spain could drop 20 percent this year after falling 10.8 percent in January year-on-year, as sellers compete in a saturated property market, surveyors Tinsa said on Tuesday. "(Housing) stock is going to continue to stack up because the number of homes being finished is larger than the number of homes which are successfully sold," Tinsa's managing director Luis Leirado told a news conference. The average price per square metre was 2,044 euros ($2,649) in January, down from 2,273 euros the same month a year ago. "The price is falling between 1.2 and 1.4 percent a month," Leirado said. "If we continue at this rate, we could find ourselves with a fall of 20 percent (by the end of the year)."


Now an observant reader (Sylar) picks me up (and rightly so) for being rather sloppy:


There has been some confusion as to what can be inferred from the latest Tinsa index. Prices are not falling between 1.2 and 1.4 per month; the average price per square metre was 2084 in December and 2044 in January; that's a fall of 1.9 per cent. What I think Leirado meant was that the year-on-year fall was 8.8 per cent in december, and 10.1 in january (an increae of 1.3); if the year-on year fall kept increasing at that rate, it would top 20% by end of the 2009 (more specifically, it would range from 21.1 to 25.5%).You can find all TINSA reports here.


So I went to look at the Tinsa reports and here is what I found. As you can see in the chart below, Spanish house prices peaked around the end of 2007, since which time they have been falling.


But what is really, really interesting to see, if we look at the next chart, is how Spanish property prices were flying along in the 15% to 17% range for many quarters, and then suddenly the rate of increase turned south (approximately at the end of 2006 - surprise surprise, just after the ECB started really applying the pressure on interest rates), and since that time the line is more or less straight (ie the slope is fairly constant) and the deceration has been remarkably uniform. If this line continues in this way - and I can see no earthly reason why it won't - then prices will be decreasing at a rate between 20 and 25% a year when we hit next December, and the year on year rate of decline may well continue to accelerate into 2010. But basically it is early days to start thinking about that at this point.


So at last I have found a data set which looks to me like it is the real thing (even though there will of course be variance between one part of a city and another, and one class of property and another), and which we can now use as a kind of early indicator on the evolution of the property market. What we can say right now is that the first sign of a bottoming out in the property slump (not, note, in the general economic contraction) when we start to see that line levelling off.

But going back to the earlier post about Santander, what must now be starting to frighten the hell out of all those people managing those swelling bank property portfolios is that the prices of their assets will be falling at a 20% plus rate next December, and that they may even enter 2010 falling at an ever faster rate.




Bankers As Estate Agents

Actually, Spanish property buff has a good piece on how near some of the banks are getting to provoking "fire sales", which will surely only drive prices down even faster.

According to an article over the weekend in the Spanish daily ‘El Pais’, Spanish banks have lent a combined 300 billion to developers, and 600 billion to private mortgage borrowers. As the recession bites, defaults rates have quadrupled to 3.29%, back to where they were in May 1997, compared to just 0.83% in December 2007. As loans turn sour, banks are having to take back properties.

To deal with the situation, Spain’s banks are having to get back into the property sales game.

Santander, Spain’s largest bank, has set up Altamira Santander Real Estate to try and liquidate a property portfolio of 2.7 billion Euros. Hefty discounts will be used to shift the stock, which will be promoted online and in catalogues distributed in Santander’s branches. The bank’s 20,000 staff will get first bite at the apple.

Banesto will use its property arm Promodomus to try and shift a growing property portfolio of valued at 1 billion Euros.

El Pais reports that CAM Bank, Banco Sabadell, Unicaja, Caixa Galicia, Caixa Catalunya, Cajasur, Banco Popular, and Ibercaja all have similar initiatives underway. Caja Madrid, Caja España, Caja Navarra and Caja Canarias are also selling properties resulting from repossessions.

Amongst the most aggressive is CAM Bank, which has set up CAM Real Estate Opportunities (Oportunidades Inmobiliarias CAM) to dump quickly more than 450 properties with discounts reported to be around 20% and 100% financing.

Monday, February 16, 2009

Santander's Banif Fund Suspends Payments

"I would now expect several eurozone countries with weak banking sectors to get into serious difficulties as the crisis continues. There is a risk of cascading sovereign defaults. If this was limited to countries of the size of Ireland or Greece, one could solve this problem through a bail-out. But solvency risk is not a problem confined to small countries. The banking sectors in Italy, Spain and Germany are increasingly vulnerable."
Wolfgang Munchau, Financial Times, 15 February 2009.
German Finance Minister Peer Steinbrueck said on Monday euro zone countries would have to pull together if one of them faced a "serious situation," adding that Ireland was in a "difficult situation."
Investors are increasingly concerned that Ireland may default on its national debt as the government pledges more money to help troubled banks, the Sunday Times said. Credit-default swaps on Ireland’s government bonds reached record levels last week as debt investors rate the nation as Europe’s most-troubled economy, the paper said. Ireland has pledged financial help for lenders that would be more than double its annual economic output and the loans held by its banks are more than 11 times the size of its economy, the report said. Credit-default swaps on the five-year sovereign debt of Ireland, which is rated AAA by Fitch Ratings, jumped 49 basis points on Feb. 13 to a record 377, according to CMA Datavision prices. That’s 18 basis points more than the cost to protect the debt of Costa Rica, which Fitch rates BB, or 11 grades lower than AAA, from default.
Bloomberg, 16 February 2009


Well push is, I think, now getting much much nearer to shove time, and we now wait restlessly to know what EU leaders are going to offer in the way of a second round of bank bailouts at the end of this month. As I argue in this post, and as Munchau also suggests, more than sweet words will be needed to honour the commitment made on October 12 2008 in Paris that no "systemic" EU bank would be allowed to fail, as a minimum we need a comprehensive mechanism financed by the issuing of EU bonds.

The most recent and most obvious example of the push coming to shove situation is the announcement by Spain's Banco Santander, yesterday (Monday), that its Banif property fund, the largest of its type in Spain, could not meet the avalanche of redemption requests it had been receiving, and consequently had asked the stock market regulator for permission to suspend payments for up to 2 years.

According to the bank's own statement clients (of whom there are a total of around 50,000) holding 80 percent of the investments, or 2.62 billion euros, had asked to redeem their holdings while what is the eurzone's biggest bank had had to admit that the Banif Inmobiliario Fund FII lacked the cash to facilitate this, and that they, Banco Santander were not going to inject the liquidity necessary to enable the fund so to do.

This decision stands in sharp contrast with the earlier action of Spain's second-biggest bank BBVA who, when faced with a similarly massive demand from clients to redeem their investments at the end of last year, opted to buy 95.6 percent of their 1.57 billion euro fund, which is the second biggest in the Spanish market.

Banif has 67 percent of its assets invested in housing, 18 percent in offices, and 14 percent in commercial property, according to the fund's fourth quarter report. These properties are distribuited around Spain, with heavy concentrations in Madrid, the Balearic Islands and the north-west. Offices and commercial premises are mainly centred in Madrid and Barcelona. The fund's assets lost around 15 per cent of their value between the third and fourth quarters as values were adjusted to reflect price declines. Property sales are in constant decline in Spain - according to figures released yesterday, total sales December home sales were 26 per cent down over December 2007. House prices in Spain fell January on January by around 10% and may fall by a further 20 percent this year according to a report last week fromTasaciones Inmobiliarias SA (TINSA), the country’s biggest property valuer.

Banif, which is described in its prospectus as “low risk,” produced a yield of 1.37 percent last year, down from 5.87 percent in 2007, according to the fourth-quarter report, while assets under management fell 4.2 percent in January, according to data published by Inverco, the Spanish asset management association.

Analysts are evidently alarmed by this development and are warning of the immediate danger that this news could spark a a massive demand for redemption from investors in other Spanish real estate funds. There are currently nine such funds in Spain, with assets totalling around 7.25 billion euros under their management.

"I've never seen a case like it," said one fund manager at Madrid brokerage Renta 4, who asked not to be named. "It could trigger a snow ball effect; that's one of the consequences when you start to hear that the biggest (fund) is doing badly".

Santander's property division propose to use 10 percent of the fund's assets - valued at 3.41 billion euros at end-December - to pay investors partial redemptions, saying that if the necessary capital could not be raised through asset sales, it would inject cash itself. The statement also said that should the fund not be in a position to fulfil repayment requests within two years it would wind itself up. Clearly this news was not exactly enthusiastically greeted by the Spanish Bolsa, and Santander stock closed 4 percent lower at 5.49 euros after a sharper sell off in the last 30 minutes of trade. This compares with a 3 percent fall in the DJ European banking index.

“What’s happened is another symptom of deep structural problems facing the Spanish real estate industry, which will take years to resolve,” said Juan Jose Figares, chief analyst at Link Securities in Madrid.



Bad Debts Rising At Santander

Spanish banks, including savings banks and co-operatives, saw bad loans rise by 5.2 percent in December to 59.16 billion euros ($75.49 billion) from 56.12 billion euros in November, Bank of Spain data showed yesterday. The non-performing loans (NPL) ratio for all institutions was 3.3 percent at end-December, compared with 3.13 percent in November, with rates among savings banks the highest, at 3.79 percent, up from 3.63 percent the previous month. The bad debt ratio for commercial banks rose to 2.81 percent from 2.61 percent.

In the case of Santander such loans more than doubled to 14.2 billion euros in 2008 as a recessions in Spain and in the U.K. lead to rising defaults by borrowers. Loan arrears as a percentage of total lending totaled 2.04 percent at the end of December, up from 0.95 percent a year earlier and 1.63 percent in September. The bank added 3.6 billion euros in bad loans in the fourth quarter. The bank stated during the presentation of its full year results that NPLs in the Spanish banking system could rise up to 8 percent in 2009 as the country heads in to its worst recession in 50 years.

Full-year profit fell 2 percent to 8.88 billion euros as the bank booked 350 million euros in costs tied to compensating customers hit by the alleged Madoff fraud.

“The U.K. is a terrible place for a bank to be and Spain is also looking more and more dreadful,” said Lecubarri, who manages about $250 million, in a telephone interview ahead of results. “What’s key for investors is judging how this will keep affecting asset quality.”

Santander has said it will pay 1.38 billion euros to clients hit by losses from investments with Madoff, making it the first bank to offer a settlement in the affair. The bank’s Optimal Investment Services hedge fund unit, based in Geneva, had 2.3 billion euros with Madoff.

Metrovacesa To Be Handed Over To Creditors

Metrovacesa, which is Spain's biggest property firm, will be handed over to its creditors on February 20, slightly later than its main shareholder originally planned, in return for the banks cancelling debt. The Sanahuja family, which has an 81 percent stake in Metrovacesa, have said in a stock market announcement said it will hand over 54.75 percent of the office, mall and housing developer to six creditor banks next Tuesday.

"The arrival of some documentation has been delayed and the entry of the banks is delayed until next Tuesday. The company will also publish (full year) results) on Tuesday," a spokesman for the family said.

The Sanahuja family accumulated between 4 and 5 billion euros in debt through their acquisitions, but got into difficulties when the market turned and banks restricted further lending. As a result of the "handover" BBVA, Santander, Sabadell, Banco Popular, Banesto and Caja Madrid will each take 9 percent of the company. The Spanish banks are thus constantly expanding their property portfolio as the non performing loans pile up.


And The Credit Crunch Continues

German Chancellor Angela Merkel and French President Nicolas Sarkozy called on European Union states on Monday to focus efforts on ensuring credit lines were restored to the battered European economy. "The restoration of the supply of credit must be our top priority," they wrote in a letter to the Czech EU Presidency, a copy of which was obtained by Reuters. "We must renew our commitment to a return to sustainable public finances," they added in the letter, which also called for a special summit on the economic crisis later in February.

According to the latest report from Markit economics Spanish manufacturers are being hit the hardest by credit squeeze as the financial crisis deepens and factories swoon into closure. Markit found that more than one in five manufacturing companies in Spain feel the deterioration in credit conditions is hurting their business, while 46 percent reported that credit availability had worsened from three months earlier.

In an attempt to address the problem and provide credit direct to the customer, the Spanish government have now approved a 4.17 billion-euro plan to aid the car industry. The plan involves an injection of 800 million euros this year to improve productivity and 1.2 billion euros which will be made available for consumers to finance new-car purchases. The plan also includes loans for companies and permits manufacturers to delay paying social security taxes. The At the start of the recession the Spanish car industry represented around 6 percent of Spain’s economy and employed more than 350,000 people. Spanish January car sales were down 42 percent from a year earlier, according to the trade group ANFAC.

Action At The EU Level Urgently Needed

I will close this post as I opened it, with a quote from Wolfgang Munchau. Wolfgang suggests that the action which is needed is not going to happen. It could well be he is right, although I personally at this point have not abandoned all hope. But we should be in no doubt, the price of inaction at this point will be high, as high as that which Wolfgang suggests. The EU banking system is in danger, and it is danger not just in Southern European "PIG-like" economies. It is in danger in Germany, it is in danger in the UK. We need a collective response, and we need it now!

The right course would be to solve the underlying problem – to shift at least some of the stimulus spending to EU or eurozone level and, ideally, drop those toxic national schemes altogether and to adopt a joint strategy for the financial sector, at least for the 45 cross-border European banks. But this is not going to happen. It did not happen in October, and it is not going to happen now. As a result of the extraordinary narrow-mindedness of Europe’s political leadership, expect serious damage to the single market in general and the single market for financial services in particular. As for the eurozone, I always argued in the past that a break-up is in effect impossible. I am no longer so sure.




Update

Reuters have a very useful piece of background which gives us a bit of insight into current thinking. Comparisons are being made with what happened after Spain's last recesssion, since banks bougtht up large chunks of the of the property industry during the 1993-95 recession before making up to seven times their original investment by selling them on in the 1997-2007 property bubble. However there are serious question marks over whether a model like this will work this time round, since property prices may simply take a substantial fall, and then prices may well stay low, as happened in Japan after 1992. Certainly current conditions look nothing like Spain in 1994, and the banks' current haste to buy property, rather than allow failing businesses to go bust, is artificially lowering NPL rates now, only to delay future loan losses, losses that will hit sooner or later (my guess is 2011) as it finally sinks in that this is not a normal recession and that there will not be a normal recovery. Santander, for example, bought 2.6 billion euros of property last year at 10 percent under the (official) market rate. The bank argues that had it not swapped that debt for property, loans on 13 percent of those assets would have defaulted.

Spanish banks are returning to property ownership to avoid loading more bad loans on to their balance sheets but the strategy is risky and unlikely to be as profitable as their real estate buying spree 15 years ago. Spain's eight biggest banks last year formed or resurrected property wings that have bought up 7.8 billion euros ($9.9 billion) worth of property from struggling home-owners and developers.

The main threat to Spanish banks has come not from the toxic U.S. mortgage debt that has poisoned U.S. and British institutions, but a rapidly deepening recession propelling their bad loan rate to an expected 7 percent this year and 9 percent in 2010 from 2.8 percent last October, according to the Bank of Spain. Mindful of the need to keep bad loans to a minimum, bankers are doing everything to stop another major developer filing for administration as Spain's biggest house builder Martinsa Fadesa

Not only will creditors likely take years to recover debts from Martinsa but the default also ramped up non-performing loan (NPL) rates as they provisioned 25 percent of the loan, or 250 million euros in the case of No.2 savings bank Caja Madrid. "By buying real estate assets the banks stop loans becoming bad loans. In so doing, the client's debt with the bank is canceled and they avoid not only increasing bad loans, but they also avoid having to make more provisions," said Nuria Alvarez, an analyst at Madrid brokerage Renta 4.

Sunday, February 15, 2009

The Only Thing We Have to Fear Is Fear Itself

Our greatest primary task is to put people to work. This is no unsolvable problem if we face it wisely and courageously. It can be accomplished in part by direct recruiting by the Government itself, treating the task as we would treat the emergency of a war, but at the same time, through this employment, accomplishing greatly needed projects to stimulate and reorganize the use of our natural resources.......

Finally, in our progress toward a resumption of work we require two safeguards against a return of the evils of the old order; there must be a strict supervision of all banking and credits and investments; there must be an end to speculation with other people’s money, and there must be provision for an adequate but sound currency.
No, this is not Barack Obama speaking, nor is it (evidently) José Luis Rodriguez Zapatero. It is Franklin Roosevelt (FDR to his friends), speaking in his First Inaugural Address on assuming the Presidency of the United States of America in 1933. Ominous, isn't it, the resemblence between what he said then and what is being said now? You can read or (better) listen to the speech here.

Of course, with the benefit of hindsight it is easy to pick holes in some of what he did, as Harold L. Cole and Lee E. Ohanian do here.

Ohanian and Cole ask us: "Why wasn't the Depression followed by a vigorous recovery, like every other cycle", and I think the answer, as we are seeing to our consternation now, is because the Great Depression was about more than a simple cyclical crisis. It was a complex problem, and required complex and bold responses, just as our present problems do now.

Certainly the details of the New Deal policy may well have been far from perfect, and could well fall short of what we are able to come up with today, but it would be simply ahistorical to judge the efforts of then by gazing through the looking glass of the tools we have to hand now. We will not, or at least we should not, simply repeat previous mistakes, we should not be the prisoners of our own history.

At the same time I cannot help feeling there is more than a spoonful of ideological contorsion in the Cole and Ohanian view (which everyone should read for themselves, since the underlying issues are important), and in particular these seem to come to the fore when they fast forward to our present travails and how to deal with them:

President Barack Obama and Congress have a great opportunity to produce reforms that do return Americans to work, and that provide a foundation for sustained long-run economic growth and the opportunity for all Americans to succeed. These reforms should include very specific plans that update banking regulations and address a manufacturing sector in which several large industries -- including autos and steel -- are no longer internationally competitive. Tax reform that broadens rather than narrows the tax base and that increases incentives to work, save and invest is also needed. We must also confront an educational system that fails many of its constituents. A large fiscal stimulus plan that doesn't directly address the specific impediments that our economy faces is unlikely to achieve either the country's short-term or long-term goals.


Especially the last sentence "a large fiscal stimulus plan that doesn't directly address....." would seem to get us to the heart of the matter. Reforms with very specific plans to update banking regulations or which confront an educational system that fails many of its constituents are surely badly needed, but they were as badly needed ten years ago as they are now. Investment in human capital and the stimulation of new technologies will definitely all be needed in any national recovery plans, but all of these will surely only work in the longer term, while what we badly need now are policies which will have immediate effect over the next twelve months. In the short term what we we need are very precise and specific forms of intervention, geered to our short term needs, to getting credit moving, to getting the US and Spain back to work, to restoring confidence among our populations, and to avoid the imminent danger of falling into ongoing price deflation. As I say have been saying in some of the comments sections lately, the most immediate first step in putting out a forest fire is not to start saving up for a new fire engine.

My argument here is addressed not to the United States, but rather towards the imminent danger of economic catastrophe in Spain, and towards those who shoulder some of the responsibility for trying to see that it does not happen. This year we will see between 4.5 and 5 million unemployed in Spain. Next year these numbers could rise to 6, or even 7 million. After two years standard unemployment insurance coverage runs out (in the best of cases) for Spanish workers, and there is no systematic system of social security in place as there is in the UK, France, or Germany. So if the worst gets to the worst, just how will these people live? How will they eat, let alone how will they pay their "oh so precious" mortgages. Here in Spain we need, desperately need, using Roosevelt's words, political leaders who realise that now is "preeminently the time to speak the truth, the whole truth, frankly and boldly", and we need them now. Otherwise we in Spain could drift off towards a climate where the only thing which is left is fear, the kind of fear which is itself nameless and unreasoning, an "unjustified terror which paralyzes needed efforts to convert retreat into advance".

Friday, February 13, 2009

Spain Finally, Finally Makes That Recession To Beat All Recessions "Official"

Spain, Europe's fifth-biggest economy, entered recession in the fourth quarter for the first time in 15 years official data from the National Statistics Office showed this week. Gross domestic product contracted by 1.0 percent during the last three months of 2008 over the level of the previous quarter and was down by 0.7 percent from the fourth quarter 12 months earlier. The statistics office also reported that the economy shrank by a revised 0.3 percent in the third quarter from the previous quarter. Really there is nothing especially new here when compared with the earlier Bank of Spain report.



Some Views

Morgan Stanley forecasts that the "sizeable" infrastructure spending announced by the government will become noticeable only at the end of 2009 with a "muted recovery" likely the following year.

Capital Economics is a bit more pessimistic. It predicts that it might not be until 2011 before the Spanish economy stages any meaningful recovery.

And Edward Hugh (that's me) predicts that there is no recovery in sight, only a very painful correction in the current account deficit and downsizing on the construction sector as prices fall some 20% or so relative to the eurozone average, so that exports can take over as the growth driver (deleveraging and recovery in household balance sheets to be the tonic regulating internal demand from now to 2015). 2011 will be the hardest year as it becomes increasingly difficult for the government to borrow money externally and the deficit has to be capped, while a second credit crunch will take hold internally, as the walking dead builders and property developers finally find it impossible to keep rolling over their non-performing loans.

And if you think I am being to strong, just remember, apart from pumping in money to keep the property sector alive till 2011, no one (neither the PP nor the PSOE) is planning to embark on anything in the way of deep structural reform to transform the economy if the responses to Bank of Spain Governor Miguel Fernandez Ordoñez's proposals (earlier this week) are anything to go by. Not even worth talking about, just no, no and no! So I guess we all now know what to expect.

Tuesday, February 10, 2009

New Spanish House Prices Estimate From Tinsa

This is much more like it:

House prices in Spain could drop 20 percent this year after falling 10.8 percent in January year-on-year, as sellers compete in a saturated property market, surveyors Tinsa said on Tuesday. "(Housing) stock is going to continue to stack up because the number of homes being finished is larger than the number of homes which are successfully sold," Tinsa's managing director Luis Leirado told a news conference. The average price per square metre was 2,044 euros ($2,649) in January, down from 2,273 euros the same month a year ago. "The price is falling between 1.2 and 1.4 percent a month," Leirado said. "If we continue at this rate, we could find ourselves with a fall of 20 percent (by the end of the year)." At the end of 2008, the number of unsold homes stood at almost a million and could rise to 1.15 million by the end of this year, Leirado said. Spanish banks are also trying to sell homes they have acquired from property companies in exchange for debt, or homes repossessed as the economic slowdown has driven unemployment to about 14 percent.


Now pencil in another 20% fall in 2010 (and no rebound) and the house price adjustment part of the current correction could be about done in my opinion. Get you calculators out and start doing the numbers!

New Bankruptcy Law In the Offing

A new bankruptcy law is in the works:

Spain is to unveil a new law to speed up the administration process for ailing companies and to protect debt-repayment deals struck between banks and firms filing for creditor protection, Expansion reported on Tuesday. The reform of Spain's bankruptcy law would give greater certainty to banks which until now could find refinancing deals signed with companies suspended or overturned by the courts, said the paper, without citing its sources.

The financial daily said Spanish Prime Minister Jose Luis Rodriguez Zapatero could announce the law to parliament on Tuesday. Last month, consultants PriceWaterhouseCoopers said the number of Spanish firms filing for bankruptcy protection almost tripled last year as builders and real estate developers went bust at record pace.It said 2,864 firms filed for administration last year, 1,849 more than in 2007, and warned that if the high rate of filings of the final quarter of 2008 continued this year it could collapse the commercial courts.


Cuts In Government Spending

"Non essential" government spending is being cut. This is a topic we will now here more and more about, as the government starts to run short of sources of funding:

The Spanish government, which has launched a major fiscal stimulus plan, will cut other non-financial spending in other areas by 1.5 billion euros ($1.94 billion) this year in order to limit the budget deficit, Prime Minister Jose Luis Rodriguez Zapatero said on Tuesday. "This cut comes on top of the spending restraint in the budget," Zapatero told parliament. The government expects the budget deficit to reach about 6 percent of gross domestic product this year, from a surplus of about 2 percent of GDP in 2007.


Santander Cuts Loans Staff

Since there isn't going to be so much consumer lending in Spain in the future, it is pretty logical that the banks start cutting loans staff.

Spain's largest bank, Santander,is proposing cutting 300 jobs at its Spanish personal loan unit, about a third of the staff, a spokesman said on Monday, confirming a report in the daily Cinco Dias. The spokesman said he could not confirm whether management was due to meet with unions on Monday to discuss the cuts, as Cinco Dias reported.

The losses could be made through early retirement, voluntary redundancies or moving workers to other areas of the bank's business, Cinco Dias said. Santander Consumer Finance benefited from Spain's decade-long economic boom in which consumers gobbled up loans to buy cars and furniture and refurbish new homes. However, consumer financing is now a less lucrative business amid tighter international credit markets and the onset of Spain's sharp economic slowdown, which has created unemployment of about 14 percent.



Martinsa Lost A Lot More Money Than Initially Admitted

This could obviously be a sign of what may be going on elsewhere.

Spanish property company Martinsa Fadesa said on Monday it had made a 2.25 billion euro ($2.9 billion) loss in the nine months to September, not 230 million as it originally stated in November. Martinsa's revised profit and loss statement showed the firm had written off 2.37 billion euros. "In July a valuation of assets was not done, and the change in results happened after receiving the valuation," a spokesman for the company said. Martinsa was put into administration last summer in Spain's biggest ever insolvency case.



Telefonica "Booking" It's Loans For 2011

Telefonica's executives seem to share my opinion: 2011 may well be a hard year for credit (or even see a second credit crunch) as the Spanish government finds sources of refinancing for the debt it is now running up harder and harder to come by, and the corporate refinancing deals that have been made so far come up for refinancing. They are thus doing a kind of refinance "forward", paying a lot more interest now in order to reserve a loan for 2011 (so much for the idea that people think this will be a short-lived affair).

The 45 percent decline in syndicated loans in Europe is leading companies to pay higher fees to lock in bank loans years before their current agreements expire. Telefonica SA, Europe’s second-largest phone company, is offering a seven-fold increase in interest to banks now so it can access a 4 billion-euro revolving credit in 2011.

Telefonica, Europe’s second-largest phone company after Deutsche Telekom AG, is offering lenders interest of about 150 basis points more than the euro interbank offered rate to extend 4 billion euros of a 6 billion-euro revolving credit, two people with knowledge of the transaction said. That compares with a spread of about 20 basis points on the existing facility. A basis point is 0.01 percentage point.

Borrowers are arranging financing ahead of time on concern banks will hoard cash after $1.1 trillion of losses and writedowns froze credit markets last year. Syndicated loans to European companies declined to $927.3 billion last year from $1.7 trillion in 2007, according to data compiled by Bloomberg. Borrowing this year totals $6.4 billion.

In a forward start facility, a borrower proposes banks agree to provide a new credit line when its outstanding loan matures. They typically offer a one-time payment, higher fees and increased interest rates, or a combination. Banks that agree get paid the higher interest rate on both the current and new loan; those that don’t keep receiving the old rate.

Saturday, February 07, 2009

Italy Needs EU Bonds And It Needs Them Now!

You see, this isn’t a brainstorming session — it’s a collision of fundamentally incompatible world views.
Paul Krugman

As a wise man recently said, failure to act effectively risks turning this slump into a catastrophe. Yet there’s a sense, watching the process so far, of low energy. What’s going on?
Paul Krugman
First, focus all attention on reversing the collapse in demand now, rather than on the global architecture. Second, employ overwhelming force. The time for “shock and awe” in economic policymaking is now.
Martin Wolf

OK, I think no regular reader of this blog could seriously suggest I have much sympathy for the sort of views you normally find being propagated by Italy's Finance Minister Guilio Tremonti, but when he starts to send out the kind of red warning light danger signals that he has been doing over recent days, then I think we should all be taking note, and when the republic is in danger, then its all hands to the pumps, regardless of who is sounding the alert. This is not a brainstorming session, it is a real flesh and blood crisis.

Perhaps few of you will have noticed it, but our erstwhile logician has been getting extremely nervous in recent days, and most notably chose his visit to Davos to indicate that he personally would look extraordinarily favourably on any move to inititiate the creation of EU bonds (for a brief explanation of why these are important, see Wolfgang Munchau's argument in favour of such bonds here. (Or the longer version here)

Italy's Finance Minister Giulio Tremonti has said he favoured the issuance of government debt by the European Union. "Now my feeling -- I am speaking of a political issue not an economic issue -- is ... now we need a union bond," Tremonti said at the World Economic Forum in Davos. Countries in the euro zone currently issue sovereign debt in their own name, rather than regionally. Bond traders concerned about the mounting public debt of Italy, Greece and Ireland have pushed down the value of their government bonds, sparking speculation they might be driven out of the euro zone.


Now why would he be arguing this? Well the state of Italy's own banking sector would be one part of the explanation, and the fact that the Italian government is in no position to mount a rescue operation on its own given the size of its existing debt to GDP commitment, would be another. In particular, and as I have been arguing, Unicredit - and its Eastern Europe exposure - is a huge worry.

Indeed the situation is now so delicate, that according to this Reuters report last week, Unicredit really doesn't know which government to turn to. The Italian one perhaps, or the Polish one, or "it could consider doing it in Austria".

Italian bank UniCredit is considering requesting state support in Italy and Poland, a source close to the bank told Reuters on Thursday. "The bank does not exclude possible state support in Italy and Poland," the source said on condition of anonymity. In an extract of an interview to be published in Germany's Handelsblatt newspaper on Friday, UniCredit Chief Executive Alessandro Profumo said the bank could consider "state support as insurance against unpredictable events." If the bank does seek state aid, it could consider doing it in Austria, for example, he added.


UniCredit SpA is considering asking for government capital amid the credit crunch, Chief Executive Officer Alessandro Profumo said. “State support as insurance for unforeseeable events” is conceivable, Profumo told Handelsblatt newspaper in an interview at the World Economic Forum in Davos, Switzerland. A UniCredit official confirmed the comments to Bloomberg. Italy’s top bankers met with central bank Governor Mario Draghi last week to discuss the financial crisis, which has caused bankruptcies and government bailouts across the world, while stocks have plunged and credit markets have seized up. UniCredit and some of its rivals have tumbled in Milan since the start of 2008 amid concern about the strength of their finances.
Bloomberg 29 January 2009


The announcement that Unicredit was seeking state aid came on the same day that the bank admitted that investors had placed orders for only 0.5 percent of the shares they were offering in a rights issue. The bank received orders for a mere 14.3 million euros of stock out of a total of 3 billion euros, and the plan was to sell leftover stock in the form of convertible bonds, but even this hit a snag, as

The shares were offered at 3.083 euros apiece, or over twice what they were trading for in Milan at the time (around 1.408 euros). Shareholders, including Allianz SE and the Central Bank of Libya, are among those who agreed to buy the convertible bonds, according to the bank offer document. Shares of UniCredit have dropped 54 percent since October, when the rights offering was announced, amid concern the capital raising won’t be sufficient. But even the bonds issue is running into trouble, since Il Sole 24 Ore reported that Unicredit may raise only 2.5 billion euros rather than the full 3 billion euros because because investor Fondazione CariVerona, which holds a 5 percent stake in the bank, reportedly hasn’t received approval from the government to buy the securities, however, the reason they have not received approval may well be that they have not yet applied since the Italian Treasury, in what is a rather unusual step, said on Thursday announced that they had yet to receive a request from CariVerona to sign up for the bond issue. All this suggests, of course, that Tremonti's warning about an imminent bailout could be a piece of brinksmanship, designed to presssure CariVerona to stop playing "positioning" games and come up with the money, but irrespective of whether or not this is the case, some sort of rescue operation for Unicredit surely cannot be far away at this point.

And the fact that Bulgaria's Finance Minister Plamen Oresharski was running around last week assuring everyone that Bulgaria's banks have not asked for state rescue aid so far, and that the government is not worried about the banking system's health for now, is hardly helping to calm already troubled nerves. About 80 percent of the 29 commercial banks operating in Bulgaria are foreign-owned, with the biggest lenders being run by Italy's UniCredit, Hungary's OTP Bank, Greece's National Bank of Greece and Austria's Raiffeisen.

And only today Tremonti has warned that the announcement of more EU bank bailouts is imminent, and maybe as early as this weekend.

European governments may have to bail out more banks as soon as “this weekend,” Italian Finance Minister Giulio Tremonti said today. “So far in Europe there have been more than 30 bank bailouts and I can’t rule out that there will be more this week- end,” Tremonti said, speaking at a press conference after today’s Cabinet meeting in Rome.


So how should we address this danger, imminent or otherwise? At this point in time I have four proposals:

a) The creation of EU bonds
b) The introduction of quantitative easing by the ECB (quantitative easing is the monetary policy which is currently being applied in both the US and Japan, and probably soon in the UK too).
c) Letting those members of the East who want to join the eurozone immediately do so.
d) A new "pact" - one which would be much, much stronger than the old Stability and Growth Pact - to be signed by all countries who enter the EU bond system, a pact which gives direct fiscal remedies to Brussels in the event of non-compliance together with a substantial dose of effective control over the economies of individual countries - since nothing, Mr Sr. Tremonti, ever comes completely for free.

Obviously all of this is quite radical, and indeed fraught with danger, but these are hardly normal times. In all of this (d) is obviously the most important part, as any protection given to EU member economies by the Union must be credible and serious. So no country could or should be forced in, but it should also be pointed out to those who chose sovereignty and remaining on the fringes to participation that they would run an enormous risk. Since almost all EU economies seem vulnerable at this point, anyone staying outside could rapidly see themselves exposed to the risk of forced default, since lack of protection is simply an invitation to attack. Letting ourselves get picked off one by one is not an appetising prospect (Latvia, Hungary, Greece, Austria, Italy, Spain, Ireland, the UK, Romania, Bulgaria.........).

Clearly those who wish to remain "dissenters" should have the liberty to do so, but they should bear well in mind that should they do so they could very easily end up in a group - possibly lead by Diego Armando Maradona - together with Yulia Timoshenko (Ukraine), Cristina Fernadez (Argentina), Rafael Correa (Ecuador) and (possibly) whoever is the new prime minister in Iceland, bankrupt, and without the aid of international financial support to help deal with their mess.

Perhaps readers may think I am being rather shrill here, and perhaps at this point Tremonti (for whom I have no afinity, elective or otherwise, see linked post above) is only playing brinksmanship, but if he isn't, and Unicredit is about to need bailing out, then push does quickly come to shove, since the EU leaders agreed on October 12 in Paris to bail out systemic banks, and Unicredit is a systemic bank. So will will need to know how they plan to stand by their commitment, and if they don't, well then everyone of us stands exposed, since credibility rapidly falls towards zero.

Maybe this is a false alarm situation, and Unicredit will not need bailing out this weekend, or the next one, but one day it will, and one day Spain's huge non performing loan and household debt default problem is going to need sorting out. So I think this is a line in the sand situation, and we are much nearer to having to make up our minds which side of the line we are on than many seem think.

To paraphrase Paul Krugman again, in flirting with the idea of whether the first to default should be Greece, or Hungary, we truly are flirting with disaster.

Friday, February 06, 2009

Dual Currency Plans Being Examined In Japan

Well don't any of you ever accuse me of being behind the curve on this blog. The Financial Times is now running a story about how some "whacky politicians" (sorry, members of the the ruling Liberal Democratic party) in Japan are dusting down plans for the government to introduce its own private currency to rival the country's official one (aka the Yen) issued by the Bank of Japan. To understand what this post is about, and see its relevance to potential events in the eurozone (and in particular in Spain, given the presence of Argentina-style politicians like Miguel Sebastian in the government), see this post here. Of course, maybe they have just been carrying out an extremely literal reading of Gauti Eggertsson's "How to Fight Deflation in a Liquidity Trap: Committing to Being Irresponsible" right down to the small print.

The big difference between Japan and either Spain or the US is, of course, that Japan is a huge current account surplus country, and thus does not rely on external agents to soak up all its debt. But then again, at the time of going to press, Taro Aso is a much more convincing desperate madman at the steering wheel than Barack Obama is.

Aso's popularity continued to slide as he faces criticism -- even by some lawmakers within the LDP -- for his handling of the recession in the world's second-largest economy.The Mainichi Shimbun said support for Aso's government slipped two points from December to 19 percent, making him the second-least popular premier since the newspaper first conducted such polls in 1949.


A plan to print some Y50,000bn ($546bn) worth of a new currency to fund pump-priming projects has been drawn up by influential politicians in Japan in a sign of desperation in the ruling Liberal Democratic party over the country’s failing economy. To be released on Friday, the proposals to issue government notes come amid rising frustration among politicians with the independent Bank of Japan. It has been reluctant to bow to pressure to run the yen printing presses faster to stimulate the economy.

The politicians include Yoshihide Suga, deputy chairman of the LDP’s election strategy council and a close aide to prime minister Taro Aso, and want the government to issue its own notes to fund projects. The group wants Y30,000bn of the new money to fund programmes supporting new industries and infrastructure projects, including doubling the size of Tokyo’s Haneda airport. The remaining Y20,000bn would be earmarked for government purchases of stocks and real estate.

“We are facing hyper-deflation, so we need a policy to create hyper-inflation. We have to do something to undermine the central bank and government’s credibility or else we won’t be able to halt the yen’s rise. So, while we know this is drastic medicine, we will do it,” said Koutaro Tamura, an upper house Diet member who will chair the new group.


Naturally, the proposals are causing all sorts of controversy in Japan. Prime Minister Taro Aso said on Monday evening that "We are not at all at the stage of considering such an idea", while Chief Cabinet Secretary Takeo Kawamura warned that if the government prints money, it could lead to inflation and weaken the yen against other major currencies. BOJ Gov. Masaaki Shirakawa was also pretty critical of the proposal, saying it could "cause great damage" to the central bank's balance sheet and monetary policy as well as market confidence in the yen.

"The plan would require very careful consideration because it could result in jumps in Japan's long-term interest rates, with market participants losing trust in the government's commitment to repaying its debts," Shirakawa said.


Well basically weakening the yen, and raising market participants inflation expectations (or their fear that government will irresponsibly monetise its debt) is just what the Eggerston proposal is all about, so these two would hardly seem to be objections to the idea, and while it is unlikely that the plan will get very far in the short term (rather than prodding the BoJ into more aggresive action), Japan's crisis is very severe, and getting worse by the day, so clearly they are going to need to do something.