Spain Retail Sales Continue Their Decline

Retail sales in Spain fell for an eighth consecutive month in July as record oil prices and the knock-on effects of a housing market slowdown driven by a creeping financial crisis in the banking sector continued to hit consumers' purchasing power.

Retail sales fell a seasonally and working day adjusted 6 percent from July 2007, the second-biggest decline registered since the series began in 2005, according to the latest data from the National Statistics Institute. The largest decline ever on this time series was in fact the 7.9 percent slump registered in June. Adjusted sales were down 0.4 percent from June.



Car sales slumped 28 percent in July from July 2007, the Spanish Automakers Association said this month.

We should not expect this rapid rate of decline to be sustained going forward, even as the economic crisis deepens, since by the time we get to November we will start to see the "low base effect" from 2007, since of course we started entering negative annual numbers in the late autumn of 2007. According to the seasonally adjusted time series the INE supply to Eurostat, the all time peak in Spanish sales was in July 2007, and it will be a long long time (years) before we ever get back to that level. At least this is my forecast, now let's go and see.

Caja Madrid and Banco Popular Struggle To Sell Loans

As I say, this whol problem is being driven by a credit crunch related financial problem in Spain's banking system (and not by interest rate policy at the ECB) and Reuter's Elena Moya reports just this morning on the difficulties Banco Popular and Caja Madrid are now having selling their debt, and how they have had to delay and significantly reduce sales of non-performing loans (NPLs) due to lack of interest.

Of course, what "lack of interest" means here is that they are asking too much. And why, you may ask, do these banks want to sell their NPLs? Well in the first place they need liquidity, and in the second place selling the NPLs is a profit and loss issue, and not an issue for their loan delinquency ratio (since they no longer have the delinquency), and of course the credit ratings agencies are looking at the collateralisation levels on their bad debt provisions (these are what you will normally see quoted in the newspaper articles) a lot more closely than they are looking at declared profits at this point.

Thus, Spain's financial institutions, under pressure to clean up their books, are under growing pressure to cut prices to move the debt.

PriceWaterhouseCoopers, for example, the accountancy firm which advises Caja Madrid on its NPL sales, recently cut the size of one transaction to about 130 million euros ($191.6 million) from an initial asking price estimated to have been around 300 million euros. This is a very substantial reduction - I mean they don't seem to be getting much more than 30% off their debt at this point - and this suggests the level of pressure they are under.

Moya suggests that private equity firms and distressed fund investors which have recently bought distressed assets in Spain -- including Lehman Brothers, Apollo and Carval want to replicate the very attractive deals obtained in the US, such as Lone Star's purchase of a $30.6 billion distressed portfolio from Merrill Lynch at 22 cents per dollar, or a previous sale of UBS assets to fund manager BlackRock.

International investors also require further discounts in Spain as banks normally provide insufficient information, or use old or unrealistic valuation when setting up transactions. Martinsa Fadesa, the real estate firm which filed for Spain's biggest insolvency ever in July, for example, recently acknowledged that the 10 billion-euro valuation of its assets was totally out of date.


The number of bad loans held by Spanish banks jumpedby more than 10 percent in June, taking the rise to 164 percent over the past 12 months, according to Bank of Spain data earlier this month. Fitch Ratings recently downgraded six sets of Spanish mortgage securities issued by Banco Santander, highlighting "the high percentage of loans written off during recent periods".

"The substantial arrears within the transactions suggest the current pace of write-offs will continue, leading to further reserve fund draws in the coming quarters" Fitch said.


Consumer Price Inflation Falls Back Slightly In August


On mildly positive piece of news is that Spain's inflation rate eased back slightly in August, to an annual rate of 4.9 percent, thanks mainly to lower oil prices, according to a preliminary flash estimate from the National Statistics Institute yesterday. The institute said the harmonized consumer price index fell 0.4 percentage points in August, only the second drop in the past 12 months. The yearly rate compares to an annual 5.3% in July and 2.2 percent in August 2007.