"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.

Everything But The Sky Falls In On Spain - Producer Prices, Industrial Output, Retail Sales, Credit Ratings All Down

Well, these are not easy times for those who are economically active in Spain, and doubly not-so when many of those with money to spend over the holiday season decide to take advantage of the cheap pound and go and spend it over in the UK. As we will see below, retail sales inside Spain are now steadily falling by the month, and there is no reversal to this trend anywhere in sight.

But first off, lets start with the news of the moment, Spain's falling industrial output.

Spain's Composite PMI Registers Another Record Contraction In December

Now, as I noted in my last post, according to the JPMorgan Global Manufacturing PMI report for December the weakest manufacturing performance was registered by Japan, whose output and new orders indexes fell to levels which were unprecedented in the history of any of the national manufacturing surveys included in the global manufacturing PMI. But at the end of the day this must have been a pretty close call, since while the composite reading for Japan was only 30.8, for Spain it was 28.5. Thus, on aggregate, Spain's manufacturing sector was still leading the global charge down. Of course, if we are only talking about industry the situation in Japan is more critical, since the economy there in general is more dependent on manufacturing industry than the Spanish one is. The thing is - we will know on Monday - the services reading for Spain in December may not be much better.






Thus Spain's manufacturing sector shrank at a record pace for the fourth month running in December, according to the Markit Purchasing Managers Index. The indicator fell to 28.5 from a previous low of 29.4 in November and marked the lowest level for any country in the near 11-year history of the survey. Around 43 percent of Spanish manufacturers in the PMI survey said they cut jobs in December to compensate for falling production, marking the highest level of layoffs in the series history and taking the employment indicator to a world series low of 29.4. Jobs have now been cut in the Spanish manufacturing sector for 16 consecutive months.

"The truly horrendous PMI data for December mean that Spanish manufacturing heads into the new year with little reason for optimism - 2009 is all set to be a very difficult year," said Markit economist Andrew Harker.

December PMI data also showed the second steepest contraction on record for both new domestic and foreign orders, with cancellations from the United Kingdom, France and Germany


Retail Sales Continue To Fall In November

Spanish retail sales (at constant prices) were down by 9.6% year on year in November, according to data from the national statistics office.




This was the twelfth consecutive month of year on year declines, and retail sales hit a seasonally adjusted monthly high in November 2007 (see chart below), since which time they have continued to fall, and will continue to fall for some considerable time to come. Quite frankly I have no idea at all about when they will get back to those "heady" levels of late 2007, certainly not in 2009, and most probably not in 2010. And after that we will see.



Producer Prices Fall Back Dramatically

Spain's factory gate prices fell sharply between October and November - by 2.6% month on month, bringing the annual rate of producer price inflation down from 5.9% in October to 2.9% in November.




Now falls like this are certainly not "normal", and are an indication of massive underlying structural forces. Let us remember what JP Morgan said in their December report:

"The Global Manufacturing Input Prices Index posted 31.3, its lowest ever reading. The rate of deflation was especially marked in the US, were purchase prices fell to the greatest extent since June 1949. Rates of decrease in costs hit series records in the Eurozone, Russia, Switzerland, the Czech Republic and Denmark."

So basically, if the PMI readout is anything to go by we could well hit negative year on year prices in December, and if not then certainly in January. As can be seen in the index chart below, prices have already been falling since July. All of this is quite important since producer prices give us an early indicator of the likely path of consumer prices in the coming months, which means, I think, that the deflation threat in Spain is a very serious one indeed.

Another Wave Of Credit Downgrades In The Works

Hardly surprisingly in this environment, Spanish financial organisations are now seeing quite frequent downgrades in their credit ratings. The latest here - as Jaime Pozuelo-Monfort reminds us on RGE Europe Monitor - Caja Mediterraneo (CAM) and Bancaja who have been downgraded by Standard and Poor’s from A- to BBB+ with negative outlook. At this point CAM and Bancaja still maintain their investment grade status, which is held for ratings of BBB- and above. Prior to the Standard & Poor’s downgrade, CAM and Bancaja were also downgraded by Moody’s (who use a different classification system) in August 2008 from A2 to A1.

Standard & Poor's rebajó hoy la calificación crediticia a largo plazo de Caja de Ahorros del Mediterráneo (CAM) y Caja de Ahorros de Valencia, Castellón y Alicante (Bancaja) a 'BBB+' desde 'A-', y seguidamente procedió a retirar todos sus ratings a petición de ambas entidades, informó hoy S&P. La agencia de calificación, que afirmó el rating a corto plazo 'A-2' para las dos cajas valencianas, indicó que la perspectiva de la calificación era 'negativa' en ambos casos. En el caso de la CAM, Standard & Poor's justificó su decisión en las expectativas de "un significativo debilitamiento" en el perfil financiero de la caja en los próximos trimestres debido a una mayor vulnerabilidad que sus rivales a la desaceleración económica. Respecto a Bancaja, indicó que su calificación refleja su previsión de un significativo debilitamiento del perfil financiero de la entidad en los próximos trimestres, "en el contexto de un cada vez más difícil entorno económico". Además, S&P señaló que la perspectiva negativa refleja la posibilidad de un nuevo descenso del rating si percibe que el perfil financiero de Bancaja del perfil financiero "se va a deteriorar más allá de sus actuales expectativas".

Bancaja is Spain’s third largest savings bank, with total assets of EUR 102.1 billion as of end-March 2008 and a market share of 8.26% in Spain’s financial system. CAM had total assets of EUR 69.8 billion as of end-March 2008 and a market share of 5.65%. Bancaja also have the misfortune to be bankers to crisis ridden Valencia football club, who are rumoured to be prepared to sell their international "crack" striker David Vila if the offer is good enough, after Bancaja denied them further credit (watch out for the football casualties to this crisis I think).

This little extract from Europa Press, which explains how Banco Pastor have decided to "dispense with the services of" Standard and Poor's is also interesting for those of you who can read Spanish, as is their explanation for why they have done it (which, naturally, has nothing whatsoever to do with their October downgrade from A to A-) , which is basically that since the wholesale money markets are closed to Spanish banks then they can live without getting rated anyway. What's more, they say, the guarantee they are sure to receive from the Spanish Treasury for their forthcoming issues (watch out Spanish taxpayers) makes the ratings agencies unecessary. Amazing! I couldn't have believed it if it hadn't actually happened.

Banco Pastor decidió hoy rescindir el contrato que tenía con la agencia de calificación crediticia Standard & Poor's, informaron a Europa Press en fuentes de la entidad. El banco presidido por José María Arias adoptó está decisión debido a las actuales circunstancias del mercado, ya que los mercados financieros siguen cerrados, con lo que no hay apenas posibilidad de colocar deuda. Además, el aval del Tesoro es quien refrenda las próximas emisiones, por lo que la entidad considera que no es necesario la calificación de las agencias de rating. Banco Pastor, que no tiene vencimientos hasta 2010, mantiene una holgada posición de liquidez con un ratio de cobertura del crédito de los depósitos del 68%. La entidad gallega, que mantendrá su contrato con la agencia Moody's, tenía actualmente un rating de 'A-' de Standard & Poor's, tras ser rebajado el pasado mes de octubre por la agencia desde 'A'. A finales del pasado mes de noviembre, las cajas valencianas Caja de Ahorros del Mediterráneo (CAM) y Caja de Ahorros de Valencia, Castellón y Alicante (Bancaja) también solicitaron su baja del servicio de Standard & Poor's.

The article also informs us that the Caja de Ahorros del Mediterráneo (CAM) and Caja de Ahorros de Valencia, Castellón y Alicante (Bancaja) also asked to end their contracts with S&P's following their respective downgrades. Petlulence will get you nowhere my child!

Property Prices Down Too

Spanish Property Buff Mark Stucklin reports that even on the rather questionable official House Price Index, published by the National Institute of Statistics (INE) average Spanish property prices fell by 3% over 12 months to the end of the third quarter. Mark comments that:

The index, which has only been published for 2 quarters, needs to be treated with scepticism, as its figures are simply not credible in the current market. In reality, prices are sharply down, though nobody knows by exactly how much. And as I have pointed out here before, new build prices in the official statistics do not reflect the prices developers are offering today to make sales. With a glut of around 1 million new properties, and developers falling like flies, industry sources report that new build prices are falling fast.

He also informs us here that Catalonia is suffering more than other parts of Spain. Taking data from reports published by webportal Idealista.com, he explains that sales have fallen by around half, new housing starts are down by 80%, and prices are falling significantly. In Barcelona city, prices are down 8.6% over 12 months, pushing resale prices back to where they were in 2005. Prices are falling more in Barcelona than in Madrid, Valencia or Seville.

According to the latest data from idealista.com, a leading Spanish property portal, nominal prices in Barcelona capital have fallen 10.6% in the last 2 years, which translates into a fall of 16% in real terms (after adjusting for inflation). A typical flat of 70m2 is now 30,000 Euros cheaper than it was 12 months ago.

Over 12 months the asking prices tracked by idealista.com have fallen by 14.7% in Sants-Montjuïc, 12.9% in Sant Andreu, 12.7% in Horta-Guinardó, and 11.7% in the Ciutat Vella, Barcelona’s famous old town Gothic Quarter. Coastal resorts around Barcelona popular with second home buyers are also in trouble. Asking prices have fallen by 15% in Malgrat, Pineda y Premià de Mar, 13.3% in Roses (Costa Brava), and 13.5% in Segur de Calafell (Costa Dorada).

And finally, for this batch, Mark also draws attention to the way in which Spanish banks are increasingly turning themselves into property companies.

Spanish banks are turning into some of the biggest real estate companies in Spain, just as they did during the last property crash of the late 80s and early 90s. To a greater or lesser extent, banks are running some of Spain’s biggest listed developers, companies like Colonial and Metrovacesa, who were forced to throw themselves at their bankers’ feet when they couldn’t cope with their billions of Euros of debt.

It’s not just the big developers with billions of Euros of debt that the banks are having to take over to prevent their loan default rates from going through the roof. All around Spain many small regional banks and savings banks have been quietly taking over small local developers for the same reason. Having taken over developers or their assets in return for cancelling debts, many banks and savings banks, known as cajas, now find they own a wide variety of real estate assets from land and flats under construction to finished developments and business parks.

As Mark also points out the banks seem to be taking some consolation from the fact that on both previous occasions this move turned out to be extremely profitable to the banks as boom followed slump, and prices rebounded. But what if this time it is different. What if this time - following the trail blazed by Japan in 1992, and Germany in 1995 - prices come down and stay down; for decades.

Oh yes, but don't worry, not everything in Spain is going down. Unemployment, for example, is surely going up, and strongly so, as we will more than likely find out on Monday. So, in true Goethean spirit, ready yourselves, since onwards and upwards they will undoubtedly lead us.

December's JPMorgan Global PMI Shows Just How Far The Infection Has Spread

Well, here's the chart I think everyone really needs to see (below). The JPMorgan Global Manufacturing PMI hit 33.2 in December, a series record. More to the point you can get a comparison between what is happening now and the 2001 "recession lite" with only a swift glance, and, of course, the 2009 long recession is only just getting started.



Now let's stick it alongside the one Paul Krugman put up last week of the US Great Depression:



Arguably, what we can see here is that the current collapse in industrial activity is starting to get near the US historic one in terms of proportions, but we still aren't quite there yet. What we could note that JP Morgan in their monthly report suggest that the present rates of output are equivalent to an annual fall of between 12% and 15%. Really to compare with the fall in the US we need to get up into the 20% region, but remember the global index is based on an average for 26 countries, and some of these are much worse than others (Japan, Spain, possibly Russia) and will already be around the 20% annual contraction rate in December. The point is also that the situation is still deteriorating, so hang on a bit, since it is not at all excluded that we will hit a 20% annualised contraction rate for the whole aggregate 26 sometime during the first quarter.

"The second half of 2008 has been dreadful for global manufacturing and the sector enters the new year mired in its deepest recession for decades. Manufacturing will therefore continue to weigh on world GDP figures, with December PMI data consistent with a drop in global IP of around 12%-15% saar as indexes for output, new orders and employment slumped to record lows."

"The weakest performance was registered by Japan, whose output and new orders indexes fell to levels unprecedented in the histories of any of the national manufacturing surveys included in the global manufacturing PMI."

"Employment fell for the fifth successive month in December, and to the greatest extent in survey history. All of the national manufacturing sectors recorded a drop in staffing levels, most at series-record rates including all of the Eurozone nations, China and the UK. The sharpest falls in employment were signalled for Denmark, Spain, the US, Russia and the UK."

And watch out for the deflation backslap:

"The Global Manufacturing Input Prices Index posted 31.3, its lowest ever reading. The rate of deflation was especially marked in the US, were purchase prices fell to the greatest extent since June 1949. Rates of decrease in costs hit series records in the Eurozone, Russia, Switzerland, the Czech Republic and Denmark."

And for those of you who are still sceptical that any of this has any validity, here's a PMI/GDP comparison chart for Japan - GDP rates to the left, diffusion index PMI readings to the right (click over image if you can't view too well). Not perfect, but not a bad guide I would say, if you like your football live, that is.



So never mind the depth, what about the duration? Well that is where I think that all of this will differ from what happened back then. As you can see in the US Great Depression Chart the 20% annual decrease went on for several years. At the present time I think there is no reason to assume that this will happen, ie that we will keep getting massive year on year contractions (in some cases maybe, Latvia perhaps?????), but activity does look set to fall to quite a low level, and there is no strong reason at present for believing it will simply bounce back up again. More than likely we will simply trawl the bottom, at least for some months, and who knows, maybe a couple of years.

Well that's it for the big picture stuff, but I have actually been pretty hard at it all day down at the individual country level, so there is plenty more detail to come. In forthcoming posts. Incidentally, despite the fact I wander off my main patch here from time to time, I do try to keep this blog pretty much focused on what is happening in Spain. Those who want to find more material on the so called "second great depression" debate may like to keep a watchful eye on my postings over at A Fistful of Euros, most notably this one, and my latest one on China.