The biggest drops were registered in areas like the manufacture of coke oven products and in the refinement of petroleum (-11.2%), Metallurgy ( -6.5%) and Food and beverage products industry (-1.1%). In contrast prices for electricity and gas continued to rise (4.4%). Consumer goods droppped by –0.4% on the month (a 0.1% rise for durable consumer goods and – 0.5% for non-durable consumer goods), while capital goods cost still rose (0.1%), while intermediate goods (-1.5%) and energy (-2.9%) both fell. If we look at the producer price index itself, we will see that (just as is the case with the consumer price index) the peak was hit in June and we are now coming down. It seems pretty clear to me at least the likelihood of Spain entering a price deflation dynamic in 2009 is now strong.
Mortgage Lending Drops An Annual 31.5%
According to the latest data from the INE, the number of new mortgages issued in Spain in September (100,868) was 31.5% down on September 2007. The value of new mortgages was down by 35.4%.
The average value of new mortgages was also down - by 5.7%.
Obviously September was a pretty key month in the evolution of the Spanish crisis, and construction activity itself was also down by an annual 24.1%.
The Repsol Saga Continues
The capacity of the Spanish means of communication to treat even the most important life and death issues for the Spanish economy as if they were just another "Dallas Style" soap opera, never ceases to amaze me. As I explain in this post at some considerable length, when you are effectively facing national bankruptcy you just can't afford to be that choosy about who you get into bed with. The basic facts of the case are that to get out from under the debt they have associated with their Repsol stake Sacyr need to receive something like the quantity they initially paid, and with shares at near half of that value it isn't too clear who apart from Lukoil (and maybe not even Lukoil now) would be prepared to pay anything like that prices. So I think people would do better to lock their emotions in the wardrobe and take a long cold look at the real alternatives facing Spain's government, corporates and banks, because basically none of them look especially attractive at this point.
Nonetheless the saga continues (some papers seem to have been even trying to involve the King in the affair - un poco de picante nunca va mal) and Prime Minister Jose Luis Rodriguez Zapatero told Parliament yesterday that while he didn't intent to block the sale the Sacyr stake to OAO Lukoil, “the government will defend the Spanish nature of Repsol,” Zapatero said today. This would seem to mean to me that they would be willing to offer the Sacyr part, but that La Caixa may not sell, thus avoiding Lukoil being able to gain a 30% share and make a bid for the whole company, but in this case it isn't clear how they are going to sustain Lukoil's interest, and thus the show goes on. They better move pretty rapidly though, since the stricter terms on the Sacyr loan come into force at the end of December.
The stake in Repsol, the supplier of 42 percent of Spain’s oil, is up for sale because Sacyr Vallehermoso SA, the Spanish builder whose debt is six times its market value, must repay more than 2 billion euros in loans by 2010 as the nation’s housing slump deepens. Lukoil, which owns oil-producing assets in Siberia, is adding refining capacity in the Mediterranean to process its crude.
Metrovacesa in Talks With HSBC
Metrovacesa, which is Spain’s biggest property developer, is reportedly in talks to sell HSBC Holdings' headquarters in London back to the bank as its loan on the building comes due today (Thursday). Metrovacesa borrowed 800 million pounds ($1.2 billion) from HSBC last year for the 1.09 billion-pound purchase of the 45-story tower in the Canary Wharf financial district. The loan matures today, and the company hasn’t been able to refinance apparently. Negotiations on the price HSBC would pay in the event of a deal remain open at this point.
The acquisition of the 210-meter (689-foot) tower, at the peak of the U.K. property boom in April 2007, was the U.K. capital’s most-expensive single property transaction ever. Commercial property values in central London have fallen about 32 percent since then, according to Investment Property Databank Ltd.
Metrovacesa accumulated debt of 7.1 billion euros by acquiring properties across Europe. The Sanahuja family, who own more than 80 percent of Metrovacesa, was in talks with lenders including Royal Bank of Scotland Group Plc and may give them more than 50 percent of the company to cancel debt, according to a statement on Nov. 6. Alternatively or in addition, the family may offer assets as collateral for the next three years, the statement showed.
EU Confidence Index Hits 23 Year Low
Yet another measure of how EU consumers and businesses feel about the economic outlook fell to an all-time low this month. The EU economic sentiment indicator tumbled to 70.5 points in November from 77.2 in October, hitting the lowest level since the survey was created in January 1985.
Meanwhile, the EC's eurozone economic sentiment indicator fell to 74.9 points in November from 80.0 points in October, dropping to its lowest level since August 1993. 'Reflecting the widespread deterioration in economic sentiment, all EU countries reported weakening sentiment,' the commission said. The EC's separate monthly business climate indicator for the eurozone retreated to the lowest level since October 1993, dropping to a negative 2.14 points in November from a negative 1.34 in October.
Habitat Throws The Towel In
According to Barcelona newspaper L'Avanguardia this morning, property delevoper Habitat - who have an estimated 1.5 billion euros of net debt - has decided (according to reports) to enter some form of judicial administration (during the next two weeks according to the paper - those of you who understand Spanish see below). The developer had been unsuccessfully trying to get an agreement from creditors on a debt restructuring following the rejection of a 900 million euro capital increase proposal by shareholders at a meeting held at the end of last month.
Habitat ha decidido presentar concurso de acreedores, una medida que se formalizará en las próximas semanas, confirmaron ayer fuentes financieras y jurídicas. La compañía inmobiliaria no quiso efectuar ningún comentario. La demanda para pedir al juez que declare la insolvencia ya está preparada por el despacho Uría Menéndez y, salvo un improbable cambio de parecer, se llevará a los juzgados durante la primera quincena del próximo mes de diciembre. La deuda de Habitat supera los 1.500 millones. La decisión de la inmobiliaria se produce justo un mes después de la celebración de la junta de accionistas, en la que no salió adelante la propuesta del consejo de ampliar capital para restablecer el equilibrio patrimonial del grupo, dañado por las elevadas pérdidas. Desde esa junta, el consejo de administración de Habitat tenía dos meses para encontrar nuevos fondos, presentar concurso o liquidar directamente la empresa. ...
9 comments:
Hi Edward, I beg to add a bit more doom and gloom to this post. I understand that in the month of September, about one hundred thousand new mortgages were approved in Spain. That is, some 22000 mortgages per ten million citizens per month. Now, in a somewhat less developed Czech Republic, the current ratio is just about 5000 per ten million (AND just about everybody here believes that the number is too high and the real estate bubble is growing). What will happen if the Spanish mortgage approvals/population ratio will drop to, say, 7000 per ten million? Maybe it is just a silly play with numbers... But in fact, if I look at, say, Spanish new car sales, they have dropped right to the Czech level and will in all likelihood go way below. And just everybody will probably know what the sudden death of the car market is doing to the Spanish economy.
Hello Hynek,
"I beg to add a bit more doom and gloom to this post."
Well feel free to go ahead, although I think what we are short of in Spain is not gloom and doom - which is now rife - but solutions, and policies which address the real problems rather than fantasies.
I take the view that what is happening in Spain at the present time is most grave - possibly the worst situation in a developed economy I have personally ever seen. The fundamental problem is that the whole country - households, companiies and the government - is collectively in way over its head in debt. This problem cannot be solved by simply shifting the debt from households and companies over to government - as they initially tried to do in Japan, ending up with a 182% gross debt to GDP ratio in 2008 for there efforts, and an enormous headache for the future.
We have had collective "lunacy" here in Spain, and as this all reaches its limit, then desperation feeds on desperation. Yesterday we had the depressing spectacle of Catalan president José Montilla pleading with the population to "please spend as much as you can", buy a house, buy a car...
This is to simply pile more debt on more debt and more bankruptcy on top of yet more bankruptcy.
What Spanish people need to do - collectively - is to start to seriously save, and pay down the debt. And the only way to do that is to start seriously selling to others (exports), and then possibly with the money you make from the exports you can consume a bit more. I really do think it is as simple as that. Follow Germany and Japan in this sense, and do it before you have government debts which look like those in Japan or Italy.
So really, these are not normal times, and the "normal" theories, models and monetary and fiscal tools find themselves hopelessly swamped at this point.
As one example of this I am taking the possible deflation situation. I think there is a significant risk that Spain enters a deflation dynamic in 2009, following a short sharp negative energy price shock accompanied by a very rapid contraction in the economy (possibly 3% to 5% of GDP). If this nightmare scenario is realised it will be very difficult to break the negative feedback dynamic that this will introduce into the whole Spanish economy.
"Maybe it is just a silly play with numbers... But in fact"
Not at all, this is a very reasonable way of looking at things. In fact, IMHO, the CR - which I follow, and have a blog about - has been having a mild construction boom, which is now slowing, and in fact headline GDP may well drop sharply as both domestic consumption stagnates, and exports fall back sharply as the German economy - one of your principal customers - falls into recession.
But in the mid term the outlook is not so bleak for the CR. I think domestic consumption - for ageing population reasons - will probably stay pretty flat, but the CR - unlike Spain - has a great capacity for exports, and if you let the value of the Koruna drop somewhat, you should be capable of attracting significant additional FDI (read more factories for exports) once the global economy starts to pick up again. Maybe you can even offer jobs to what will by then be the very large number of supernumery immigrants here in Spain, since you share the same low fertility problem which racks Spanish society.
Basically, and to illustrate the difference, the CR has a construction share of 5% to 6% of GDP, while the Spanish share has been in the 11% to 12% range.
German construction (which could be seen as some sort of benchmark) is now steady at about 3.5% of GDP, so both economies face a correction, but the Spanish one is obviously going to be much sharper than the Czech one.
Also you current account deficit in 2008 is around 3.5% of GDP, while in Spain the deficit will be nearer 10%. As I say, I don't think such comparisons are idle. Not at all.
Really I try not to say much more about all this at this point, since I don't want to be simply alarmist, and I think the Spanish situation is better to take day by day now. All I can say is that it isn't going to be funny.
"As one example of this I am taking the possible deflation situation. I think there is a significant risk that Spain enters a deflation dynamic in 2009"
Deflation is a way of cancelling debt, although painful (through defaults). The other way, inflation, is not possible, as monetary policy relies in the ECB.
Deflation is also a way of making our products more competitive abroad, through price reduction.
Sure deflation is painful. But there are policies which could mitigate it. Perhaps a broad consensus on salaries and incomes (like the "Pactos de la Moncloa").
I think Keynesianism and more debt only will make things worse. It will only buy a bit more time, but spending our last amunition.
Hello José Luis,
"Deflation is a way of cancelling debt, although painful (through defaults)."
Quite. The big question here is who is going to pay the bill for all the defaults, the Spanish Treasury or Brussels. Part of my argument is that the Spanish Treasury alone cannot shoulder all this. Simply pushing debt up over the 100% to GDP mark with all those elderly people arriving between 2012 and 2020 is simply a recipe for enforced default later on down the line. None of this is going to be easy from here on in.
Also, the capital value of all those mortgages is going to need to be "written down" (possibly via a special law) as wages and prices drop, and again, who takes the "haircut", the banks are already on life support from the Spanish treasury, so we are back to the same question: who are the Spanish treasury going to be on life support from - the EU or the IMF (Hungary and Latvia are already EU precedents for the IMF road).
"Deflation is also a way of making our products more competitive abroad, through price reduction."
Definitely, but could we say that there was good and bad deflation just like there is good and bad inflation? Basically a 10 year programme like the one Germany entered in 1995 following her housing bust (of steady and slow relative price adjustments) is fine, but we have a big danger at this point in Spain of positive feeback type serious deflation, which can basically feed on itself and wind the Spanish economy all the way back down the path which it came up from 2003. This really needs to be avoided, although at this point I really don't see anyone with an active policy to stop it.
"I think Keynesianism and more debt only will make things worse."
Agreed, conventional fiscal policy will do very little at this point, this is what I meant when I said that we were now beyond the point where conventional fiscal and monetary policy would have much effect.
Good question Hugh, is there a good and a bad deflation? I haven´t studied much that stuff, but as there is normal inflation and hyperinflation (or runaway inflation) perhaps the same difference can be made between deflation and "hyperdeflation".
The most solid theory on hiperdeflation I´ve read comes from Antal Fekete, an unorthodox monetarist who professes the gold standard.
Basically Fekete says that a runaway deflation is a product of a massive speculation in the bond treasury market. That´s what is happening in the US treasury market, with speculators pushing down the yields (and making obscene profits). The speculators know the FED will buy T-Bonds in the near future so as to pump in more dollars in the economy. All they have to do is to buy first.
So here in Spain we can´t have hyperdeflation (the BDE doesn´t have open market operations). In the EU it´s not likely, as I see Trichet much more touchy with the interest rates.
You can see Fekete´s theory here, for example:
http://www.professorfekete.com/articles/AEFRevisionistTheoryOfDepressions.pdf
I quite agree with all your remarks on my past intervention.
Edward, I had a coffee with our CFO this past Friday and spent quite some time discussing your reaction to my post. An interesting point was raised to which we could not find any immediate answer: how long it can take before a population used to receiving credit as easily as one buys a beer turns back the clock and reverts to saving instead of spending? You say - and you are perfectly correct in saying that - "people need to start saving". Yet do you really believe that the Spaniards (or the Irish, or the Czechs) will do that on their own volition? I am very much afraid that the average citizen of Europe will not get the point before it is too late. In fact, this is the only thing about the whole crisis of which I am seriously afraid - namely, that the Europeans are too spoilt to realise that there are tough times ahead and that their belts simply must be tightened.
Well, the good thing is that the web works and that your posts from faraway Barcelona are discussed every other morning just a mile or so from the Prague Castle.
By the way, the more than cynical enterpreneurs around here have recently started greeting one another by asking "How is your financial crisis..."...
Hi Again Hynek,
"Yet do you really believe that the Spaniards (or the Irish, or the Czechs) will do that on their own volition? "
You raise a good point, and no I don't. And my argument is in no way a moral one (you know, seven good years and then seven lean ones etc). They will stop borrowing (although please note that the Czechs are a lot less leveraged than either the Spanish and the Irish) simply because no one will lend to them, or at least no one will lend to them at a price which they are prepared to pay. Same case US, and same case UK. Since these countries depend on other people's savings, and the other people now see them as "risky", then at least in terms of wholesale money funding, the supply dries up, and the local banks become a lot more cautious.
So they are being forced to stop. The point is, if you then want to have GDP growth you then need to export, and this means a CA surplus, and this is what I mean by "enforced" national saving. The real question isn't whether these people will or won't stop borrowing (or borrowing in sufficient quantity to get GDP growth like before) but just who is going to now do all the importing? Who are going to be the world's new "customers of the last resort"? Once we can answer this question we might get to know a bit more about what the next decade is going to look like.
In the Czech case people will still be able to borrow, but in koruna, not in euro, or at least this is my feeling. Keep an eye on my Czech blog, since sometime soon I will write something on that topic. Today I am busy with Romania, which is just about to start looking more like Spain or Ireland. The Romanians WILL start saving, since they aren't going to have any choice as their economy crashes and the CA deficit become impossible to sustain. I mean, to become solvent again basically you have to start paying off all that international debt you have accumulated.
In any given moment you can have deficits or supluses, and these can (in extremis) run for some years, but in the longer run stability means the sum total needs to be around zero.
I just wonder what other countries will follow the Spanish/Irish/Romanian example and how deep they are going to fall.
I have just seen the last Anfac Spanish car sales data as well as the tourism statistics. As far as I am able to read them, the meltdown is just beginning to happen.
"(some papers seem to have been even trying to involve the King in the affair - un poco de picante nunca va mal)"
I'm sorry to see how poorly inform you are about the crown's business. The king's REAL job (enough with the "representing the country" childish Salsa rosa view) is to go around the world negotiating with dictators (like his "hermano" as he likes to call him, Mohamed VI) and getting paid for it under the table. Other "his highness" partners include king Abdulá from the very democratic Saudi Arabia, Chinese "government", etc...
I feel most disappointed with your lack of knowledge about this country's history. Do you know a guy by the last name of Franco? He gave Juan Carlos his job.
Post a Comment