Inflation Falls Back Slightly in September

First Off, I'd just like to apologise to readers for being a bit erratic of late, but this is not a reflection of any flagging in my interest for Spain's problems. The thing is, in my opinion this is going to be a long haul - a very long one. And in fact the focus on and interst in the specifically Spanish dimension in the current (now global) crisis will obviously ebb and flow, as other events move into and out of centre stage. As a specialist in the rather more obscure topics I have been spending rather a lot of time looking into Russia's financial turmoil, and thinking about how that will affect Germany, and via Germany other eurozone countries like Spain. So the list of things to look at is almost endless at the moment, and I really sympathise with people who are feeling that this is all a bit to much for them at this point, and who may also, like me, be suffereing from short term memory "buffer overload".

Anyway. One of my big intuitions is that all that inflation may suddenly turn into its opposite, as credit dry's up all over the place, banks starts to hoard cash instead of lending it, governments use up their fiscal leeway to buy up bad debts (instead of being able to work via expansionary fiscal policy), and demand everywhere in the eurozone starts to weaken.




Inflation in Spain is already falling back, easing for a second month in September as slower economic growth relieved pressure on prices and oil fell. Consumer prices gained 4.6 percent from a year earlier according to the European Union's HICP methodology, following a 4.9 percent increase in August, according to the National Statistics Institute (INE) earlier today. Now all we can do is wait and see where it goes from here.

Spanish Construction Continues It's Decline In July

According to data published by Eurostat this morning, when compared with July 2007, construction output in July 2008 dropped by 3.3% in the euro area and by 1.5% in the EU27. Among the Member States for which data are available for July 2008, construction output rose in ten and fell in three. The highest increases were recorded in Eastern Europe, where the boom to some extent continues, with Romania still rising strongly (+28.4%), together with Slovenia (+17.9%), Bulgaria (+16.4%) and Poland ( 16.1%). Decreases were registered in three countries, with the largest being in Spain (-15.9%), followed by the UK (-2.7), Germany (-2.3%) and then Portugal (-1.4%). We should note that there is no data for Denmark, Ireland and Greece, although output almost certainly contracted in all three. Building construction was down by 3.3% in the euro area and by 1.8% in the EU27, following declines of 3.2% and 1.5% respectively in June. Civil engineering fell by 4.0% in the euro area and by 0.3% in the EU27.



Obviously Spain's performance comes as no special surprise, although the month on month reading - a contraction of only 0.7% compared with June (following a monthly contraction of 3.4%) - is perhaps surprising, even if it should not be taken as indicating any special change in trend, since the worst we can be pretty sure lies ahead of us and not behind us.


The Number Of Unpaid Bills Of Exchange Continues To Rise


The number of unpaid bills of exchange increased by 47.7% in July when compared with the same month in 2007. 5.2% of the total number of expired bills remained unpaid. In July, the number of returned unpaid bills of exchange was 618,133, and this was a year on year increase of 47.7%. The value of these unpaid bills hit 2,072 million euros, making for a 121.5% increase when compared with July 2007. So the pressure is making itself felt across the board now.




Spain's Services Activity Contracts Slightly In July


On the other hand services activity did possibly better than might have been expected, all things being considered (the slowdown in the UK, travel costs etc), and year on year activity was only down 0.2% (according to INE data), although this does, of course mean that it is more than likely that Spanish GDP was actually declining in July, since services is the sector which is possibly doing least badly at the moment.

Corbacho Ends Migrant Recruitment Abroad While Industrial Output Continues To Fall

Spain's Labour Minister Celestino Corbacho announced earlier this week that Spain has decided to stop hiring immigrants in their countries of origin next year because rising unemployment employment in Spain now means such workers are no longer needed, and Spain's newly unemployed can be transferred to fill the gaps which may arise. Spain began to recruit workers in the home countries in 2004 in an attempt to reduce the tragic flow of illegal immigrants who risk their lives to cross into Spain by sea from North Africa. Some 200,000 immigrants came to Spain under the programme last year, according to Corbacho, while so far in 2008 the number has been around 86,000.

The Spanish government is also preparing a 1 billion-euro plan to try to relocate around 100,000 unemployed construction workers in environmental work, social services or caring for the elderly and disabled, according to sources at the Labor Ministry.


Spain's Industrial Output Down

Spanish industrial production contracted for a third successive month in July. Production at Spain's factories, refineries and mines, which accounts for around 15% of the Spanish economy, fell 4.4 percent from a year earlier after adjusting for the number of days worked, according to data out today from the National Statistics Institute. That followed a revised 9.2 percent drop in June, the sharpest fall since a 1993 recession.



But in the same way that June's fall was perhaps unduly strong following the truck drivers strike earlier in the month, so July's real fall may well have been a little greater than appears in the data as work from June was carried over to July. This interpretation is plausible, and would fit in nicely with the data provided by the purchasing manager surveys, which show the output contraction gathering rather more pace in July than June, before finally beginning to ease back a little in August.  In fact the August PMI reading, which  stood at 42.4 (up from 39.2 in July) was still the third lowest recorded in the ten-year survey history.



Banesto Shares Cut To sell By Deutsche Bank

Banco Espanol de Credito SA, otherwise known as Banesto, had its shares cut to "sell" from ``hold'' by Deutsche Bank today. Deutsche generally lowered price estimates for Spanish banks citing concern about slowing economic growth and rising defaults.

Carlos Berastain, a Madrid-based analyst for Deustche, cut price estimates by an average 27 percent on Spanish domestic banks and 12 percent for the country's biggest banks. He reaffirmed ``sell'' ratings on Banco Popular Espanol SA, Banco Sabadell SA, Bankinter SA Banco Pastor SA. Santander remains ``buy'' and Banco Bilbao Vizcaya Argentaria ``hold,''.

Trichet Announces New Rules For ECB Funding

Time To Stop The Abuse?


The ECB and the Spanish banks are back in the news, following the decision by ECB president Jean-Claude Trichet to take advantage of this week's regular interest rate press conference to announce a number of funding rule changes affecting European bank access to ECB liquidity provision. These changes will affect all those financial entities that have developed an excessive dependence on the cheap "you can see my wallet if I can see your securities" funding which has been available up to now from the bank. The changes were judged by many analysts to have been slightly more radical than expected, and bank stocks in the Eurozone and the UK fell sharply on the news.

Irish and British banks fell the most in European trading after the ECB announcement. Anglo Irish Bank had fallen 12 percent by Friday afternoon. HBOS, a U.K. mortgage lender that has accessed ECB funding via its Irish operation, was down 8.2 percent over the same period, while Barclays, the UK's third-biggest lender, dropped 9 percent. In Spain Banco Sabadell fell 4.4 percent, Banco Santander, the country's largest bank, sank 6.1 percent and Bankinter SA fell 7.7 percent.

Since the UK is not a member of the eurozone, this fall in bank shares may give us some sort of measure of the kind of "abuse" which many have long thought was occurring, but which was not evident due to the lack of transparency surrounding such operations. Other European banks who were "badly affected" by the news were the Swiss bank UBS, and some smaller regional banks such as Erste Group in Austria and Piraeus Bank in Greece.

Ireland in the Forefront

What may well surprise many readers of this blog - although not perhaps after reading this post yesterday - is that it seems to be Ireland and not Spain which has been at the heart of most of the abuse (certainly you wouldn't have known this from the number of articles in the popular press which have been busy pointing the finger at the Spanish banks in recent weks though). Last week the ECB lent a total of 467 billion euros to European banks, or should I say to banks which have some sort of operating facility inside the 15-country euro area - although with banks like HBOS, UBS and even Australia's Macqarie on the list, the term "European" is getting to be a bit stretched - and in return had been accepting a broader range of collateral to back the loans than has been the case at Bank of England. Such collateral may include bonds with credit ratings five levels below AAA as well as asset-backed securities. The existence of this policy differential seems to have prompted a pretty motley crew of non eurozone financial firms to create bonds of variable quality solely and exclusively for use as collateral for ECB borrowing.

But when we look at how this money lent by the ECB has been allocated, then even more eyebrows may be raised on learning that lending to the much castigated Spanish banks has been "only" running at around 49 billion euros (as of July), while lending to Irish banks reached 44.1 billion euros according to data from the Irish central bank in Dublin. I say only, since everyone is aware that Spain's banks have a sizeable problem, so if a facility has been created to help them I would have thought that it is only natural that they use it. Thus I am not sure why this use by the Spanish banks has been being called "abuse", since a sizeable chunk of the lending has been going to Spain's hard pressed savings banks (see below), so I think it is worth asking what exactly it is they are supposed to do? Or put it another way, if people really are so concerned about Spain, then maybe a more appropriate question is why the ECB aren't doing more to help? Certainly US banks don't seem to be labouring under this kind of difficulty with the Federal Reserve, although of course it is precisely this position which has attracted criticism from a chorus of European commentators. Rather than talking about abuse in Spain, perhaps it might be more interesting to ask why we only have a temporary and transitional facility for what is clearly now a longer term and structural problem in the Spanish banking system.

To put what has been happening in perspective, since Ireland is about one tenth the size of Spain, it is as if the Irish banks had been accessing some 440 billion euros in funds. And things only get worse when we come down to the details, since about half of the funding from the ECB has been going of to the Dublin-based units of lenders from outside Ireland, according to analyst Eamonn Hughes at Goodbody Stockbrokers.

HBOS and Barclays are just two of the British banks that have been borrowing from the ECB. Earlier this year it emerged Macquarie Bank had set up a deal backed by Australian car loans specifically for use at the ECB. But the whistle really was blown in mid August when the UK's largest building society, Nationwide, got a lot of media coverage for saying it was planning to expand into Ireland to take advantage of "funding opportunities".

So the first thing to have clear is that the real abuse of the ECB funding has not been coming from Spain, and that access to these funds by Spanish banks has been more or less policed by Bank of Spain Governor Miguel Fernández Ordóñez and his team, who have attempted - as he explained in June in his appearance before the Economy and Taxation Commission of the Spanish Congress - to ensure that participation in eurosystem fundings rise "without going far beyond the "key" subscription of the BoS to the ECB capital" (which is 7.55%). And if Spain's banks have recently gone increasingly beyond this level (10.3% of total loans in July) then this is surely more to do with the pressing needs of Spain's savings banks sector (who really do need liquidity, see below), than it is with any organised system of abuse. But be that as it may, it is Spain's banking sector who will take the lions share of the hit from yesterday's decision, since while in some other countries the ECB funding may well have been considered to be mere "froth on the daydream", for Spain's struggly banking system the lifeline is likely to turn into a life and death issue.

The Measures Themselves


Trichet announced a battery of measures yesterday, all of them having one feature in common: they will increase the cost of using asset-backed securities to obtain ECB funds. Access will also now specifically exclude deals involving underlying mortgages or other loans not denominated in euros.

The changes - which will take effect as of February 1 2009 - include increases in the average “haircuts” applied to asset-backed securities. A haircut is the amount deducted from the market value of a product when judging its value as collateral. In future, a blanket 12 per cent haircut will apply to all securities, instead of the earlier sliding scale of between 2 and 18 per cent. There will be penalties for asset-backed securities valued using computer models and for unsecured bank bonds. Banks will in fact have to take an initial markdown of 5 percent on any ABS that has been valued using a computer model. At the same time restrictions already in place on banks using assets they themselves had created were extended to stop banks using assets from issues to which they had offered currency hedges or liquidity support above a certain level.

Analysts at Barclays Capital are quoted as saying that the extra haircuts would mean banks might have to post an additional €25bn-€45bn of securities for collateral purposes. The general opinion is that the changes will make it less attractive for banks to use asset-backed securities as collateral and will certainly push up the overall cost of borrowing funds from the ECB.


The asset class which will be most affected by the changes are ABS with a residual maturity of up to one year, which currently have a haircut of just 2 percent. In these cases, instead of receiving 98 euros in exchange for a security with a face value of 100 euros, banks will often now receive just 83.60 euros.


Spanish Savings Banks Will Be Affected

Spanish savings banks, such as La Caja de Ahorros del Mediterraneo (CAM), are likely to be hit quite hard by the new rules, and this on the face of it seems to be most unfair, since if there has been abuse of the earlier ECB rules it is hardly towards this quarter that we should be looking given the now evidently parlous state of their balance sheets. The savings banks accounted for almost 70 percent of the total growth in funds borrowed by Spanish financial institutions from the ECB over the last year, according to a research note from Banco Santander. Spain-based financial institutions borrowed 49 billion euros ($71.14 billion) from the ECB as in July, up from 18 billion over the same time last year, according to Bank of Spain data (so the savings banks have had approximately 21 billion euros in the last 12 months). Borrowing by Spain savings banks accounted for 4.4 percent of the 467 billion euro total funding from the ECB last week, up from 0.9 percent last year, according to the Santander research note issued yesterday. Regular Spanish banks increased their participation to 5.6 percent, from 4.6 percent.

Caja de Ahorros del Mediterraneo, which is based in Spain's Valencia region, has now been put on a watch list by ratings agency Standard and Poor's, and S&P's could downgrade the bank by as many as two notches due to the fast deterioration of its asset quality. Spanish RMBS's are currently trading in the secondary market at levels which vary between Libor plus 170 and Libor plus 350 basis points.

And this brings us to the heart of the question. Basically, either what has been happening recently is one of the most brillant recent pieces of "counter information" (or smokescreening) or someone somewhere really quite important just hasn't grasped what is actually going on. Maybe the fact is that the attention recently being focused on Spain's banks wasn't in fact to distract attention away from abuses which have been taking place in Ireland and elsewhere (yes, I am sure there are elsewheres, since total lending is, after all 476 billion euros), but the fuss about abuse could have been a way of diverting attention from the fact that some kind of longer term support system for the Spanish banks is being put in place (this is what I hope is happening, but there really is no visible evidence to support my hope). You see, if Spanish banks really are, as some are urging, going to have to "mark to market" and thus pay up to 350 basis points over 3 month Libor, then as they rollover the stock of existing cedulas over the next 5 years (which are financing existing mortgages, remember), there is just no way they can continue to charge the kind of basis points over 1 year Libor that their mortgage customers are currently paying, which means there will have to be another substantial hike in Spanish mortgages payments, over and above the upward movement we have seen in euro Libor itself. And we have already seen the extent of the damage that is being caused to the Spanish real economy with mortgage rates at their present levels. Do we really want to get to find out what would happen if everybody had to pay 200 to 300 basis points on top of this? I don't know about anyone else, but personally I could happily live out the rest of my life without getting to know the answer to this question. This is certainly the kind of "reality check" I could most definitely live without.

Moody's Warns Of Ratings Presure On Spanish Debt

Spanish asset-backed bonds isssued in 2006 and 2007 face credit-rating pressure according to a report out this week from credit ratings agency Moody's Investor Service. Moody's cut its performance outlook on Spanish debt secured by consumer loans to "negative" from "stable/negative". This move brings debt secured by consumer loans into line with bonds that pool home and company loans, according to the Moody's statement.

The weaker outlook means "increased negative rating pressure'' on bonds backed by Spanish consumer loans, the report stated. Spain thus joins the U.K. and Ireland as the only countries in Western Europe to have negative performance outlooks for all the asset classes measured by Moody's in the report, that is for debt secured by consumer and company loans and mortgage-backed bonds. Not coincidentally these are the three EU countries (together with Denmark perhaps) most at risk of serious macroeconomic problems resulting from the credit crunch induced housing correction.


Reyal Urbis Looking To Delay Debt Repayment

According to El Economista this morning, the Spanish real estate company Reyal Urbis is in talks with its creditors in an attempt to delay its debt payments. Two of the group's creditors - Banesto and Banco Santander - appear to be in favour of the debt refinancing plan, which seeks to extend the expiry date on some 3 billion euros ($4.4 billion) in loans by seven years.

Reyal Urbis, like a lot of other Spanish real estate companies, is facing increasing pressure to meet growing debt payments as revenues shrink and asset values drop on the back of the property crisis. The company, which is one of Spain's biggest developers and was formed through the merger of Urbis and Reyal in 2007, said at the end of last month that first half net losses jumped 874 percent percent to 332 million euros ($489.4 million). Revenue rose to 823 million from 624 million a year earlier as it sold off property. But financing costs were 191 million euros and the company also made provisions for 252 million euros due to falling property values.

Some 80 percent of Reyal Urbis sales come from residential properties and land -  a market that has slowed to a virtual standstill in most areas of Spain at the present time. House sales were down - for example -  29.6 percent in June year on year.

Reyal's net debt, which totalled 5.8 billion euros a year earlier, fell to 5.5 billion in H1. Reyal Urbis had total assets of 8.1 billion euros at the end of the first half, down 13.7 percent from a year earlier.

Colonial Struggling To Refinance

Another struggling property company, Colonial, said yesterday that it expects to finalise a multi-billion euro debt refinancing over the next few weeks, but turning this desire into reality looks to be quite problematic. Colonial, like  Reyal Urbis, is basically at the mercy of its lenders, and these have only granted temporary moratoriums on the debt at this point.

The proposed 8.9 billion euro ($13 billion) debt restructuring - with main creditors Goldman, Eurohypo, Calyon and Royal Bank of Scotland - is thought to be vital to save Colonial from insolvency in the very short term. The general consensus seems to be that extra cash investment by Colonial's main shareholders, Banco Popular and La Caixa, is highly unlikely.

Colonial was last bailed out back in April by a consortium of Spanish banks, led by La Caixa and Banco Popular, who swapped debt for a stake of about 23 percent in the firm. Popular has already made clear that it will  not inject fresh cash into the company, although reuters cite a source close to the Colonial refinancing process as saying  the bank had recently given a 40 million euro credit line to Colonial  - but as reuters also point out, this is  a mere drop in the ocean for a company whose  debts are now  pushing 9 billion euros. Colonial's reported assets include subsidiary property firm Riofisa, majority-owned French real estate company Societe Fonciere Lyonnaise  and 15 percent of Spanish building and services group FCC. Any sale of the FCC stake, whihc was bought for 1.5 billion euros or 78 euros a share at the end of 2006 (but which now has a market value of less than half that) would involve a substantial loss.

Colonial reported a 2.38 billion euro loss for the first half  of 2008 last Sunday, after taking charges for plunging asset values. Colonial shares have lost around 90 percent of their value over the past 12 months.

What all this seems to indicate is that more and more companies in the property sector are "wobbling", quite how long the wobbling will continue until the next candidate for the chop falls is basically anyone's guess. But the situation as far ahead as the ete can see, is very much for more of the same, with the pressure on Spain's bank sector simply mounting and mounting. 

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Update Friday 5 September


Colonial's foreign creditors are reported this morning to have agreed to refinance 6.1 billion euros ($8.86 billion) of the company's debt but they are still talking to domestic banks over the 1.48 billion of loans they have outstanding with them. The latest agreement would seem to give them some breathing space, though really it only seems to be putting off the inevitable.

Colonial now appear to have a basic agreement in place with their principal non-Spanish creditor banks RBS, Calyon, Eurohypo and Goldman Sachs who hold approximately 80 percent of their debt. Which is simply another way of saying that the exposure of La Caixa and Banco Popular is for less than 20% of the total 8,9 billion euro debt (1.48 billion euros reportedly), which in terms of liquidity and non performing loans issues in the Spanish banking system is obviously good news. I wonder how general the Colonial position is - that is, I wonder to what extent the burden of real estate and construction company busts is going to be shouldered outside Spain.

Colonial is thought to be less exposed to the worse-affected residential and land markets, since 83 percent of its assets in commercial property, but if we expect the present Spanish recession to be a long and deep one (and I do), and if we look at the general over-leveraging in Spain's corporate sector, then it surely can't be that long before the market in commercial property also goes the way of all flesh.


Tourism Down

And it isn't only construction and the banking sector who are feeling the squeeze, after 50 years of almost uninterrupted growth, Spain's overbuilt and relatively expensive tourist resorts seem to be starting to struggle, with steadily increasing competition coming from cheaper, less crowded destinations like Croatia and Turkey.

"In 48 years, I have never seen losses like this; tourism bosses I'm talking to have never suffered so much," said Domenec Biosca, president of Spain's Association of Tourism Directors and Experts.

Spanish tourism seems to have been really struggling this summer, as both Spaniards and foreigners travel less distance, stay less time and spend less money. Spain's biggest hotel group, Sol Melia, reported profits fell 41 percent in the first half of the year, while those at business hotel group NH dropped 20 percent. Revenues in the Canary and Balearic islands have fallen as much as 12 percent this year, according to estimates from the Association of Tourism Directors and Experts. Spain is now overloaded with what are politely known in the trade as "mature destination", and tourism, which accounts for up to 15 percent of Spain's GDP and one in seven jobs, is suffering just as the economy needs it to take up the slack left by the rapidly contracting construction sector.

For the first time in a generation, Spaniards are being forced to cut back spending on things like vacations as incomes stagnate, prices rise and credit dries up. Unemployment, which was up  by over 100,000 in August to a 10-year high of 2.5 million, has become a major concern for the first time in years, and the purse strings are not only being tightened, they are having a knot tied in them.

Spain was the world's No.2 tourist destination after France last year, with almost half of the 60 million foreign visitors coming from Britain and Germany. But both these countries are now facing recession themselves, and the British are turning away from eurozoen countries after the GB pound's fell 15 percent  against the euro over the last 12 months. Britain's Thomas Cook, Europe's No.2 travel company, has cut destinations in euro-zone countries and boosted offerings to Egypt and Turkey, which received 25 and 15 percent more tourists last year, respectively.

Eight percent fewer foreigners arrived in Spain this July according to the hotel confederation CEHAT, and in some northern areas, mainly visited  by the Spanish themselves there was an even larger 15 percent fall  over the summer. So at the present time one of the main activities which could have taken up construction slack is itself in decline, industry is suffering the effects of a eurozone-wide slowdown, and  so that only leaves us with agriculture. But to increase agricultural output you need water, and resolving the nation's long standing water supply problems was just one of the issues successive Spanish governments were unable to resolve all through the good years of the boom. So if there is one thing you could say we are consistent about down here, it is in being able to while away the good times in order to be totally unprepared to face the bad ones, even if we could recognise them as and when they arrive.

Spanish Consumer Confidence Rises (Slightly) In August

Well, I suppose the only real news out today about the Spanish economy concerns the fact that Spanish consumer confidence rebounded a little in August, rise to a level of 51.4 points following the record low of 46.3 points hit in July, according to data supplied by Spain's Official Credit Institute.

Now before we all get too excited about this, I think it is worth bearing in mind that August's was still the second lowest reading (only beaten by July's) since the series began in September 2004. Interestingly, all the sub components improved (including employment expectations) except current employment conditions (and this of course is a direct reflection of the data we have from INEM that I put up yesterday). Basically, I think two things happened in August, the price of oil fell back from the July high, and the government had a much publicised mid August "working session to address the crisis" where additional measures were announced to try to "refloat" the economy. I suspect both of these did something to help revive confidence. That, and the holiday break of course.

On a more anecdotal level, I happened to walk past the Italian Consulate in Barcelona yesterday, and the queue of immigrants seemingly there in an attempt to obtain documentation (to go and look for work in Italy presumably) stretched half way round the block. On the other hand I just visited my local supermarket, and after a long spell of "immigrants only" on checkout Spanish faces have now reappeared. I don't think these two things are connected by anything more than the very problematic labour market conditions, with everyone being pushed down a rung, which in some cases means, of course, getting a hefty shove straight out of the country. At the moment this exodus is a mere trickle, but I am worried that at some point it might become a flood, and then I worry about how long it will really take for the Spanish urban housing market to recover, and how long it will really be before we see positive GDP growth again in Spain. Perhaps one day we will learn to look back on that lamentable 0.1% growth we just squeezed out in Q2 with something resembling naustalgia. Always assuming that is, that we continue to drift along as we are at present - a la deriva - consoling ourselves that all the signs of inactivity we discern in Madrid and Brussels are not simply an optical illusion, and really do mean that nothing important is happening or about to happen.




Ireland Is Not So Different From Spain





Now the other eurozone economy which is facing a construction correction of a similar order of magnitude to Spain's is Ireland. (I say THE other, something may be happening in Greece, which also has had a construction boom of sorts, and certainly has a whopping 13% of GDP current account deficit, but the data from Greece is normally late, and often unreliable, so it really is quite hard to decide anything for sure at the moment, but building activity was down 16.3% year on year in May - which is the latest month for which they have data, and retail sales were down on May over April, and June over May, so something is definitely happening in Greece).

Anyway, in the Irish case we can drop the "maybe", something IS happening to the Irish economy, and it is the most similar of any of the old EU economies to what is happening in Spain at this point. Here's the latest Markit Economics services sector PMI chart which will give you some idea of the speed of the deterioration in the Irish economy.

Ireland's services sector has recorded a continuing downward trend since the turn of the year, and the seasonally adjusted Business Activity Index registered a new survey low of 39.8 in August. The Index has signalled a contraction of activity among service providers in each month since February 2008,

Ireland's Exchequer is also experiencing a rapid deterioration in its financial throughput (as is Spain's, see here). Figures for August from the Department of Finance show that tax receipts are now almost €2.8 billion short of target, signalling a further sharp deterioration in the Irish public finances with an expanding deficit. The Exchequer deficit for the first eight months of the year was just over €8.4 billion, three times the figure for the same period in 2007.

Evidentally, as business slows, and unemployment rises, the exchequer rakes a double hit. Total tax receipts were just under €24.8 billion, with VAT receipts at more than €1.1 billion behind target as consumer spending weakens. Stamp duties (which are associated with property transactions) are almost €500m behind target and capital gains taxes are more than €400m lower than expected.

Analysts now estimate that the tax shortfall for the year could exceed €5 billion. This is far worse than the Government had anticipated in July, when it had projected a tax shortfall of €3 billion for the year, but a rapid slowdown in consumer spending has hit VAT receipts, while the dramatic slowdown in stamp duty and capital gains tax receipts has continued due to the property slump. If tax revenue misses by €4.5bn it is almost certain that Ireland will breach the 3% GDP annual deficit limit imposed by the EU already in 2008. Spain will not breach this threshold till 2009.

What is most worrying about all this I think is the almost complete silence (or worse denial) at the European institutional level about the gravity of what is happening in Spain and Ireland (and maybe Greece), or about what responsibility ECB monetary policy might have had in the creation of the bubble in the first place (surely you can't supply the matches to start a fire and then walk away saying "I told you it was dangerous to play with them") or what role it may now have in exaccerbating the unwind. Basically Spain and Ireland are going to continue to need "exceptional funding" from the ECB - and probably a lot more than they are getting so far - and they are going to need a licence to break out of the 3% Growth and Stability Package straightjacket, and yet there is no visible accommodation at the official discourse level to the fact that any of this is happening.

The Irish government is clearly pretty worried about the way this issue is developing, and have taken the unprecedented step of advancing debate on the 2009 budget by six weeks - to October 14. In a statement which is very reminiscent in its wording to those we are now accustomed to receiving from Pedro Solbes, the Irish government declared that the country was now facing "an unprecedented set of unfavourable international factors", including turbulence on financial markets, weaker economic growth, currency movements and sharp rises in oil and other commodity prices. Not to mention, of course, that other little detail, the construction slump.

In fact the number of new homes registered in Ireland in August plunged by 70% compared with August 2007, according to figures from the Irish home guarantee scheme Homebond. Homebond said 510 homes were registered last month, compared with 1,714 in August 2007. In the three months to August, only 1,800 homes were registered, down 73% from a year earlier and the lowest reading for any three months since the figures began in 1995.

And the annual rate of increase in new mortgages is dropping steadily.The Irish Central Bank recently reported that the annual growth rate of Irish residential mortgages, inclusive of securitised residential mortgages, dropped to 9.6 per cent in July. The last time the annual rate of increase in residential mortgages was in single figures was at December 1987. And of course the rate continues to drop.

Even if new mortgage issues are not collapsing as fast as they are in Spain, house prices are already falling, and average Irish national house prices fell by 9.7% in year to July according to the latest edition of the TSB/ ESRI House Price Index. Prices fell 0.2% in July over June.

Sales are also falling, and August monthly car sales were down by 41.6 per cent on August 2007, not too different from the Spanish drop of 41.3%.

And unemployment is also on the rise. The numbers on the Ireland's Live Register increased in August by 9,100 to 235,100 - though the rise was not as big as in the previous two months. In the year to August there has been an unadjusted increase of 73,178 (+42.0%) - the highest in any year since 1967. The standardised unemployment rose to 6.1% in August.

Ireland is also similar to Spain for the way in which massive inward migration was required to find the labour supply needed to match the capital made easily available via the ECBs generous cheap liquidity offer. According to the Irish CSO total immigration into Ireland in 2007 was 109,500. For a country of just over 4 million people, this means about 2.5% of population annual rate which is, frankly, massive, and higher as a percentage even than Spain. The numbers of new migrants are now falling - between April 2007 and April 2008 there were 83,800 new arrivals, down 26,000 from the year earlier number. The number of emigrants in the year to April also rose slightly (to 45,300), and as a result net Irish migration is estimated to have fallen from 67,300 in the year ending April 2007 to 38,500 in the one to April 2008. But so far it is the rate of increase that is slowing, and there is little sign of net exit. Let's just hope it stays that way.

Or Is It?

There is one sense in which Ireland does seem to be different from Spain though, and that is in the volume of noise produced by Irish bank borrowing at the ECB. For the past nine months complaints about possible abuse of ECB credit lines by the Spanish banks have been virtually non-stop. But about the activity of Irish banks hardly a drop of ink has been spilt. Yet it turns out that in July Irish banks needed some 44.1 billion euros of funding from the ECB, not far short of the 49 billion euros the Spanish banks are drawing. Ireland is, of course, a much smaller country than Spain. In the photo above you can see European Central Bank President Jean-Claude Trichet welcoming Irish Finance Minister Brian Lenihan to the 10th anniversary celebration of the ECB, in Frankfurt on Monday, June 02, 2008. Would it be unfair to conclude that the Irish banks, for some reason or another, are more welcome over at the ECB, or at least, that the activities of Irish banks are somehow less controversial among financial journalists?

Oh, yes, now I have it: Ireland doesn't belong to the notorious "pigs" group (you know, Portugal, Italy, Greece, and Spain) so they can't possibly have contracted "swine fever" now can they!

Spain's Unemployment Passes 2.5 Million In August

According to the latest data from employment office INEM this morning registered unemployment in Spain shot up again in August. An economy where construction firms added more than a million jobs in the earlier years of the decade seems now to be shedding them just as quickly, as construction "downsizing" exerts its grip.

The number of people claiming unemployment benefits rose 4.3 percent, or 103,085, over July, and reached 2.53 million.



From a year earlier, the number of claimants jumped 25 percent, or 501,705. Jobless claims among construction workers rose 9.9 percent on the month to 429,060 while unemployment in service industries rose 3.3 percent to 1.46 million. Of course, unemployment normally rises in August as firms lay off temporary workers over the holiday season, but the rise this year has been much stronger than in previous ones, and it is not unreasonable to anticipate that far fewer of them will be "reabsorbed" in employment as activity resumes in September. In fact quite the contrary situation is to be anticipated, as more companies lay off workers. My feeling is that the numbers will keep ticking up, and it is not impossible that at the end of the winter we will be hitting the politically sensitive three million mark.




Bloomberg's Recession Call?


Also this morning Bloomberg announce that they are predicting a recession following a survey of 14 economists (no, I was not asked!).

Spain is probably entering into a recession that will push the unemployment rate to a peak of 14 percent, as a slump in the housing market spreads through the rest of the economy, a survey of economists showed. The chances of Spain's economy shrinking for two straight quarters by the end of next year increased to 67.5 percent from 50 percent a month ago, according to the median of 14 responses in a Bloomberg News survey. Eight of the 10 economists who forecast the start of the recession predicted it would begin in the third quarter of this year.

Basically this all seems pretty reasonable to me. I go with the 8/10 who said it starts in Q3, and I think the only real issue is how long it will last, and how deep it will be. Or perhaps better put: just how many quarters will need to pass before we see the level of GDP reached in Q2 2008 again? Quite a few I hazard to bet.

Industrial Output Down 22% In February


Spain's National Institute of Statistics announced that industrial output dropped a working day adjusted 22% year-over-year in February, after falling 20.9% in January. A year ago, production was up 1.7%. The general index of industrial production, was down, on an unadjusted basis, by 23.9%. In February, manufacturing output fell 25% on an unadjusted basis, while mining and quarrying output declined 34.2%. Production of electricity, gas steam and air conditioning dropped 10.7%.






Spain Services PMI

The Spanish service sector continued to contract in March amid a punishing recession but did so at its slowest rate since September, the Markit Economics Purchasing Managers' Index showed on Friday. The index of activity amongst firms ranging from hotels to insurance companies stood at 34.1, way below the 50 level where growth starts, but above 31.7 in February and November's record low of 28.2. The decline in business activity marked the fifteenth consecutive month




"Although the declines in activity, new orders and employment all eased during March, the latest PMI data still signalled a considerable contraction of the Spanish service sector," economist at Markit Andrew Harker said. "Any potential recovery remains a long way off as service providers fight to survive the economic crisis by slashing charges and jobs".

Spanish Manufacturing Contracts More Slowly In August

The rate of decline in Spain's manufacturing sector eased back a bit in August from June, breaking a six-month run of ever deteriorating readings, but this should be little comfort, since the rate of decline was still the third strongest since the seasonally adjusted time series started, and of course, August is mainly a holiday month in Spanish factories, so you can make what you want of the whole issue really. Meanwhile car sales dropped at their most rapid year on year rate yet in August, which doesn't bode too well for autumn activity for Spain's car factories, many of whom are already working short time.


The Markit Economics Purchasing Managers Index for Spain came in at 42.4 points, up from July's low of 39.2, but still well below the 50.0 cut-off point which marks the frontier between contraction and expansion.



The Markit Research survey revealed that operating conditions deteriorated markedly in the Spanish manufacturing sector in August as output, new orders and employment all continued to contract.


Car Sales Slump In August

Spain recorded the biggest drop this year in car sales in August, and they fell 41.3 percent to 58,530 vehicles, the fourth straight month of decline, according to results from the Spanish industry group Anfac. Sales for the first eight months of the year came to 882,397 vehicles, down 21.1 percent on the same period in 2007.


Colonial Declares 2.8 Billion Euro Loss


Troubled Spanish Real estate firm Colonial reported a 2.38 billion euro ($3.51 billion) loss in the first half of 2008, after taking charges for plunging asset values. Colonial recorded the loss, which compared to a 316 million euro profit a year earlier, after 2.58 billion euros in writedowns for the falling value of real estate holdings and its 15 percent stake in Spanish building firm FCC.

The firm also said in a statment issued late yesterday thatit had reached a preliminary deal with creditor banks to restructure its debt and hoped to reach a final accord in early September. In the statement Colonial declared that its debts totalled 8.99 billion euros as of June, while its assets were worth 10.5 billion euros at the same point in time. Since ongoing interest payments (plus risk premiums) mean that the former is set to rise, while the deteriorating property market will mean that the latter are set to fall, it seems to me that it won't be long before they are completely under water.