Spain's Unemployment Continues Its Sharp Upward Surge

The number of unemployed in Spain was up again in March - by "only" 123,543. I say "only" since it is evidently less than the 154,508 increase registered in February, or the 198,538 registered in January. And indeed many of the newspaper stories have been full of arguments from Employment Minister Maravillas Rojo (would that she could work "Maravillas") about how Spain registered the weakest unemployment gain in six months in March (when compared to the previous month). However, as those who look into the economic analysis side of this a bit more (and who don't believe in either wonders or "miracles) point out, taking seasonal factors into account the monthly 3.55% rise in March shows a more or less steady trend, and no special sign of improvement, despite the large stimulus programme. Last March, for example, unemployment fell by 0.62%.

So when we come to look at the year on year situation (which more or less eliminates the seasonal variation) we find that the year on year rate of increase of 56.69% was the highest so far, and if we look at the chart we will see there is no sign of a softening in the curve.

So the overall jobless total rose to 3,605,402 the highest since 1996, and the 3.5 percent or 123,543 March increase was the highest number since 1996 when the current method of calculation was introduced, according to the ministry statement. This was the 12th straight monthly increase and the sixth consecutive montly rise of more than 100,000 registered unemployed in Spain.

Which brings us to the forecast. Basically we could now take two scenarios, a moderate and a worse case one. On the moderate scenario, total unemployment will now hit 4.5 million by December, and 6 million by December 2010. On the worst case scenario we will already be at 5 million by christmas, and be pushing 7 million by the end of 2010. It all depends.

In terms of unemployment rate, the latest quarterly estimate we have from the national statistics agency (INE) was 13.9 percent for the fourth quarter of 2008. However according to European Union statistics agency Eurostat, Spain's unemployment rate rose to 15.5 percent in February, the highest level in the whole 27-nation bloc. (The EU average was 7.9 percent). Spain's unemployment rate has now risen each quarter since it dipped to 7.95 percent in the second quarter of 2007, its lowest level since 1978. The government currently expects unemployment to rise to 15.9 percent by the end of the year, but this is obviously hopelessly unrealistic, since we are nearly at that level now, and even the European Commission, which is normally fairly conservative with downside estimates, is more pessimistic, since it forecasts Spain's jobless rate continuing to rise in Spain to 16.1 percent in 2010 and 18.7 percent in 2011.


My own forcasts would be on the moderate forecast around 20% by the end of 2009 and 25% by end 2010, and on the worst case scenario possibly 22% by the end of this year, and 27% to 30% by the end of 2010. These latter numbers look horrific, and seem hard to believe, but we are currently set on a path (especially now with the "breakages" in the banking system - today there is growing and informed specultion here in Catalonia that Caixa Penedes, and Caixa Catalunya may be the next to go) where it is hard to see how we won't get to that horrible place if no one does anything. And since at this moment the entire European leadership seems to be in denial that there is any special problem in Spain nothing looks likely to be done. (Jean Claude Trichet simply said what he had to to the Spanish journalist who questioned him on the Spanish banking system in yesterdays press conference - "I have every confidence in the strength of the Spanish banking system). Even that G20 meeting that is hitting the headlines seems to have had little to offer for countries like Spain, there were plenty of ideas about how to avoid falling into another bubble situation in - say - 2020, but virtually none about how to drag us out of the one we are currently stuck in.




Consumer Confidence Rebounds Slightly


Due you believe in the "earthquake" theory of probability? You know, the one which goes that if you didn't have an earthquake yesterday, and you didn't have an earthquake today, then the probability of having one today must be higher, right? Well something like this seems to be the theory of probability that Spanish consumers inherently believe in.

Why? Because Spanish consumer confidence rose again this month, to 53.7 points, up from 48.6 points in February, The Confidence Index which is provided by Spain's Official Credit Institute (ICO ) was at 73.1 in March last year, hit a record low of 46.3 in July as oil prices soared and European Central Bank interest rates hit 4.25 percent, and has since oscillated around the 50 point level amid easing commodity prices and following ECB decisions to sharply reduce interets rates.





But if we look at the breakdown in the individual components, we will see that the current conditions, employment and state of the country readings have long been trawling the bottom. The only component which gas really not hit lows (yet) is the expectations one. The Spanish are ever optimistic (until they get really pessimistic that is) and this component has been rising in recent months, even as conditions have continued to deteriorate. Which is why I say they must believe something like the "earthquake" theory of probability, the more days that pass with things getting worse must mean that tomorrow they are likely to get better, right?

Industrial Contraction Continues Unabated

The JPMorgan Global Manufacturing PMI – which provides a single figure snapshot of operating conditions across the planet – was out earlier this week and posted 37.2 in March. Although substantially below the no-change mark of 50.0, the PMI was up for the third month in row and at its highest level since last October. The vast majority of the national manufacturing PMIs rose in March, including the US, Russia, Japan, China, most Eurozone nations and the UK.

This is however the most sustained period of contraction in the series history, and it still remains very unclear where we go from here. In general the drop in output reflects weak demand, with new orders declining for the twelfth month in a row. The trouble is, it is not at all clear where the rebound in demand that is needed for a recovery is actually going to come from.

The Markit Eurozone Final Manufacturing PMI for March rose from February's all-time low, up to 33.9 from 33.5. Thus the PMI signalled a marginal easing in the rate of decline from the previous month's record pace. Output showed the weakest decline for five months, and a smaller fall than the Flash estimate, although the rate of decline remained well above that seen prior to last October. With the exception of Italy, Austria and Greece, rates of contraction eased in each of the eight countries surveyed.

The Netherlands saw the smallest (though still steep) drop in production, while Spain saw the sharpest decline for the eleventh straight month. By product, investment goods producers reported the steepest fall in production for the third successive month, closely followed by intermediate goods producers. Consumer goods firms meanwhile reported the weakest rate of decline for the seventh consecutive month. Stocks of both raw materials and finished goods fell at record rates, as companies focused on lowering their operating capacity and controlling costs. The reduction in unsold goods stock was especially steep in Ireland, Germany and France.


Spain

The pace of decline in Spanish manufacturing slowed in March but remained at the steepest contraction rate of any eurozone country. The PMI rose in March to 32.9 from 31.8 in February and thus further off from December's record low of 28.5. All the survey's main indicators remain far below the 50 level that divides growth from contraction. Output and new orders continued to contract sharply in March but at slower rates than recorded in the last six months, with panellists blaming falling demand as the principal cause as clients cut back on spending.

"The March PMI data suggests that the pace of decline in the Spanish manufacturing sector has slowed," said economist Andrew Harker at Markit Economics, adding that new orders and output indices are well above record lows posted late last year.

But Harker was at pains to stress that the March figures should not be interpreted as any sort of sign of a turnaround in the Spanish economy. Unemployment in the sector continued to rise in line with falling output requirements as joblessness in the wider Spanish economy stood at 15 percent, the highest rate in the European Union. More than 34 percent of those surveyed by Markit said they had noted reduced employment levels at the end of the first quarter. Staffing levels have shrunken continuously since September 2007, according to the survey.

Slumping demand also hit input and output costs, which both dropped to series lows in March. Input costs fell as firms negotiated better prices from suppliers, while output prices fell as these savings were passed on to customers and as scarce business fuelled greater pricing competition.

Spain's preliminary harmonised inflation fell to -0.1 percent in March, according to government data on Monday, the first negative result for over 45 years as the deepening recession weighed on price gains.

And So It Begins, The Bank Of Spain "Intervenes" In A Spanish Savings Bank

Well , we didn't have to wait too long. Only last Friday I wrote the following:

Two Spanish regional savings banks have already reached a preliminary merger deal - Unicaja, based in Spain’s southern Andalucia region, and the smaller Caja Castilla La Mancha (CCM), located in the central-southern province of the same name - following talks which were carefully brokered by the Bank of Spain. Clearly this merger willl need to be followed by a capital injection from Spain’s Deposit Guarantee Fund to help them clean up the “troubled assets” which will naturally be found in the combined accounts of the new bank which emerges.

Today we learn that the merger is off. It is off for the simple reason that Caja Castilla La Mancha is about to cease to be an independent, autonomous entity. It has been "intervened" by the Bank of Spain. This is the first, it will not, of course, be the last.
According to Noticias Cuatro:

The governing council of the Bank of Spain has taken the decision to intervene in the operation of the Caja after carrying out an analysis of its financial position, thus taking as read that the negotiations which might have lead to its merger with the Andalucian 'Unicaja' have not been able to reach a successful conclusion.

The "intevention in Caja Castilla La Mancha will mean in the first place that the Bank of Spain will now manage the Caja directly via the management commission it is about to establish. Sources at the central bank have given an assurance that all the banks clients' savings are guaranteed. The Bank of Spain will now negotiate with the government urgent measures to guarantee the liquidity of the Caja, and its normal functioning.

In the second place, the Bank of Spain will be responsible for making an immediate detailed evaluation of all the Caja's assets and liabilities. In addition the central bank intervention implies the immediate replacement of the entire previous bank Administrative Council.

The last time the Bank of Spain intervened in a Spanish bank was in 1993, when the central bank too over control of Banesto. The necessary decisions will be taken in the next few hours since all other potential solutions have been discarded, including the assimilation of the Caja with Caja Madrid.

The Spanish newspaper El Pais reports that the Spanish cabinet (the Consejo de Ministros) are holding an extraordinary meeting at 18:00 this afternoon to discuss a proposed Decree Law to inject capital into the bank.

According to Finanzas.com, the "hole" in Caja Castilla La Mancha could be something in the order of 3 billion euros. This money could be paid from the bank funded Deposit Guarantee Fund (FGD), however, and as I said on Friday:

the (FGD) insurance fund holds only 7.2 billion euros in bank contributions, and since this is orders of magnitude less than the size of the problem it is obvious the government will end up having to putting money into the recapitalisation process, and especially into the Savings Bank sector, since the Spanish press has been reporting that 20 of Spain's 45 savings banks are now considering mergers. And it is obviously only a matter of time before one of the mid-sized Spanish banks like Popular, Sabadell or Banesto joins the consolidation process.

The Spanish government said following this afternoon's meeting that it will provide up to 9 billion euros to Caja Castilla-La Mancha to shore-up the bank's finances and protect depositors. Pedro Solbes in the press conference was at pains to stress that the 9 billion was an "upper estimate" that would not be needed, and stated that the final quantity anticipated would be between 2 billion and 3 billion, which sort of confirms the estimate offered by Finanzas.com "sources" earlier in the day. The funding is provided via the Bank of Spain and guaranteed by the Spanish Treasury. Solbes also explained that "if at the end of the day the bank is declared insolvent (quebranto)" that is, if there is not sufficient money in the bank to cover all liabilities (deposits and debts) the Royal Decree will stipulate how the outstanding obligations will be divided between the Treasury and the FGD.

Two Graphs That Tell It All On Spain

First, the one year Euribor reference rate, which has been falling since the ECB started lowering interest rates in the autumn of last year.



And secondly the chart showing the average rate of interest charged by Spanish banks on new mortgages, which as we can see, has been rising steadily since December 2007.



The average interest rate charged by Spanish banks for new mortgages in January 2009 was 5.64%, meaning that the average cost of a new mortgage had gone up by 10.2% over January 2008 (when the rate was 5.1%), and by 1.1% when compared with December 2008. Meanwhile the Euribor reference rate looks set to close this month at all time record lows of 1.91%. In January - the last month for which we have data on mortgage lending - the Euribor rate was 2.27%.

The reasons lying behind this upward movement in Spanish mortgages are twofold. On the one hand the Spanish banks are having increasing difficulty raising finance due to their perceived risk level, and on the other they themselves have have been forced to raise the risk premium they charge to clients due to the rising levels of non performing mortgages they have on their books.

Basically what this means is that the ECB policy isn't working in Spain, and that despite the massive quantities of liquidity provided, the monetary conditions continue to tighten, and doubly so give that the real value of the rates charged (ie the inflation adjusted value) keeps rising automatically as inflation falls.


Mortgage lending in Spain more than halved in January while the number of homes started in the fourth quarter dropped an annualy 62 percent. The 51.7 percent year on year fall in mortgage lending for urban dwellings was the steepest in 12 straight months of decline.



House sales fell in January by 38.6 percent, figures published earlier this month showed, and Housing Ministry data showed the foundations of only 40,737 homes were laid in the fourth quarter - 62 percent fewer than in the fourth quarter of 2007, and 27 percent down on the preceding quarter. During 2008 as a whole, Spanish builders started 360,044 homes - a 41.5 percent fall on 2008. On the other hand 633,228 homes were completed last year, reflecting the optimist which prevailed in 2006/07 when the buildings were started at the height of the boom in 2006-07.




Spain has a supply overhang estimated at almost any number you like over 1 million unsold homes (the minimum estimate, and no one really knows), or more than three times the number of new households created each year in Spain.

The number of mortgages offered has crashed as banks restrict credit given forecasts non-performing loans will reach around 9 percent next year, while unemployment is now likely to rise above 4.5 million by years end, up from the current 3.5 million.

As I indicated in this post yesterday, we are moving from a situation where people the banks were afraid to lend, to one where people become increasingly afraid to borrow (since they don’t know when they will lose their jobs, or even their homes), with Spain's citizens becoming more and more reluctant to take on additional debt due to fears they could be caught in the next round of job losses.

As a result January mortgage lending falling to 6.47 billion euros, while the rate of new bank lending to households dropped to 3.9% year on year.





Spanish debt defaults leapt 197 percent in 2008, with construction and property firms accounting for 4 of every 10 failures. The number of firms and individuals that filed for administration rose to 2,902, the highest level on record, according to Spain's National Statistics Institute. Also bad loans at Spanish banks rose by 15.3 percent in January, the sharpest monthly increase since property developer Martinsa Fadesa filed for administration in July. Bad loans rose more than 9 billion euros to 68.18 billion in January compared with an average monthly rise in the last six months of around 5 billion euros.

The non-performing loans (NPL) ratio for all institutions was at 3.8 percent in January, up from 3.3 percent in December, with rates among savings banks the highest at 4.45 percent compared with 3.79 percent a month earlier. Commercial banks had an NPL ratio of 3.17 percent, up from 2.81 percent. In fact Spain's financial institutions have seen NPLs more than quadruple in the last 12 months from 16.23 billion euros in January 2008.

Spain's savings banks, responsible for about half the country's loans and the most exposed to the property market downturn, could see NPLs rise to 9 percent by 2010, according to the saving banks association.

What To Do With The Bad Banks?

As a result of all this an embarassing and very public row (unusual in Spain) has broken out over what to do with the broken banks.

The Spanish Economy Minister Pedro Solbes has said the government is prepared to recapitalise healthy banks but suggested that those with serious solvency problems should seek a merger rather than look for state aid.

"In cases where banks have acted correctly in relation to solvency and the health of their accounts...logically they could receive support," Solbes said in a speech to an economic conference in Madrid. "Banks that are unable to remain solvent and clean up their accounts should cease to be players in the financial system so they don't generate distortions in the public sector."

What Solbes has in mind is that the troubled banks should turn to Spain's privately-funded Deposit Guarantee Fund (FGD) should they need capital injections to make tie-ups viable. However, the insurance fund holds only 7.2 billion euros in bank contributions, and since this is orders of magnitude less than the size of the problem it is obvious the government will end up having to putting money into the recapitalisation process, and especially into the Savings Bank sector, since the Spanish press has been reporting that 20 of Spain's 45 savings banks are now considering mergers. And it is obviously only a matter of time before one of the mid-sized Spanish banks like Popular, Sabadell or Banesto joins the consolidation process.

Clearly many of those most directly involved in the banking industry are laothe to accept the Solbes formula, since wuite simply they cannot afford it. And this was made pretty clear by Francisco Gonzalez, chairman of Spain's second largest bank BBVA, when he pointed out last week that nationalisation of the bad banks was the only realistic way forward.

"When a bank shows signs of extreme weakness the authorities should take control of it, which implies removing the directors and reducing or eliminating share capital in the institution," Gonzalez said at a conference in Madrid.Governments should then appoint a new team to separate toxic assets from healthy ones and quarantine them in publicly controlled funds, the chairman said, advocating a level of state intervention not yet seen in Spain. "Then the bank would be privatised again through a transparent sale to private companies," he said, without making specific reference to Spanish banks.

Two Spanish regional savings banks have already reached a preliminary merger deal - Unicaja, based in Spain's southern Andalucia region, and the smaller Caja Castilla La Mancha (CCM), located in the central-southern province of the same name - following talks which were carefully brokered by the Bank of Spain. Clearly this merger willl need to be followed by a capital injection from Spain's Deposit Guarantee Fund to help them clean up the "troubled assets" which will naturally be found in the combined accounts of the new bank which emerges. Many other such regional caja "weddings" are obviously soon to follow. But the big question is, where will all the financing come from? It is pretty clear that the problem which is building up is bigger than Spain can handle alone, and finance (not loans) from the European Union will be needed, with centrally backed EU Bonds being the most likely mechanism with which to fund the injection.

Update Sunday: No Caja Castilla-La Mancha/Unicaja Merger

Finanzas.com had this piece which I am publishing direct in Spanish while I sort out what is happening a bit more. This is obviously the first, but it certainly won't be the last.

There is going to be no merger between these two banks, since the Bank of Spain has decided to "intervene" in the running of Caja Castilla-La Mancha, due to its "delicate financial situation". Below is a link from

No habrá fusión con Unicaja. El Banco de España va a intervenir Caja Castilla-La Mancha (CCM) debido a su delicada situación fiancniera y su desfase patrimonial, estimado en unos 3.000 millones de euros.

La decisión está tomada en fin de semana previsiblemente para evitar la posible fuga de depósitos. La caja manchega se encuentra actualmente en plenas negociaciones con la malagueña Unicaja para una eventual fusión, una operación avalada por el Gobierno y tutelada por el Banco de España y que el PP ha denunciado por "oscurantista".

Los 'populares' incluso han solicitado en las Cortes de Castilla-La Mancha una comisión de investigación que determine las responsabilidades de los "gestores políticos de la caja" en unos posibles créditos dudosos que han supuesto que CCM tenga ahora un abultado agujero, que algunas fuentes cifran en 3.000 millones de euros.

La entidad que preside Juan Pedro Hernández Moltó obtuvo en 2008 unos beneficios individuales de 92 millones de euros y 30,2 millones de euros de beneficios consolidados.

Fuentes próximas al Consejo de Administración de CCM han indicado hoy a Efe que la caja manchega prevé adelantar al 31 de diciembre de 2008 las dotaciones previstas para el 2009 e incurrir incluso en resultados negativos, con la finalidad de fortalecer su estructura patrimonial, en la próxima reunión del Consejo, que tendrá lugar este martes.