Spain's service sector shrank in October at a record pace with the Markit Purchasing Managers' Index for Spain dropping to 32.2, a second consecutive record low and the tenth consecutive month of contraction. The index was down from 36.1 in September, which at the time really seemed very, very low, and evidently well below the 50.0 level which separates growth from contraction.
"There is no immediate light at the end of the tunnel for firms in the Spanish service sector as activity continues to fall at an alarming pace," said Andrew Harker, economist at Markit Economics."The explosive combination of falling output charges and rising input costs has made it very difficult for businesses to make profits."
Global Services Contract
Outside Spain, service sector activity in the euro zone hit a fresh decade low in October pulled down in part by the very low reading in Spain, and a quite low one in Italy (45.7). The final Markit Eurozone Purchasing Managers' Index slumped to 45.8 the lowest in the survey's 10-year history. The fact that the final reading is significantly below the flash estimate (of only one week ago) and sharply down from September's 48.4 would seem to indicate that the contraction in services is accelerating rapidly at this point across the eurozone.
Global services activity also slumped to its lowest level since 2001 in October, dragged down by the especially weak European service sector, according to the Global Services Business Activity Index, produced by JP Morgan, which plummeted to 44.2 in October from 50.2 in September.
That was the second lowest result in the survey's 10-year history, behind only the month after the September 2001 attacks in the United States.
European Sovereign Yield Spreads Widen
The yield spread between German 10 year bunds and some other eurozone sovereign debt of equivalent maturity is currently the largest since 1997, with investors demonstrating a preference for only the most liquid government bond markets as the implications of the scale of the European bank bailout begin to dawn on the financial markets. The gap between bunds and their Italian counterparts widened to 127 basis points earlier in the week, while difference with Spanish 10-year debt shot to 69 basis points following the news that the country's economy contracted in the third quarter for only the first time since 1993.
Also we learnt earlier this week that credit-default swap traders were prepared to bet more on the risk of default for Italian and Spanish government debt, and for Deutsche Bank than they were willing to put on any other comparable risk wager, according to a Depository Trust and Clearing Corp. report that gives us the most extensive data yet on the credit-default swap market.
A total $33.6 trillion in transactions are currently outstanding on government, corporate and asset-backed securities worldwide, based on gross figures, the DTCC said in a report released Tuesday. After allowing for overlapping trades, the report found that investors have taken out a net $22.7 billion of contracts based on Italy's debt, $16.7 billion against Spain and $12.5 billion on Deutsche Bank of Frankfurt.
The DTCC, which operates a central registry of credit swaps trades, released the data for the first time this week as the industry steps up efforts to counter critics among lawmakers and regulators who blamed the lack of data for exacerbating the financial panic.
Investors have focused their wagers on debt associated with those industries and countries that may be most affected by a credit crisis which is now entering its 15th month. The Spanish economy is seen as particularly vulnerable as it enters its first recession in 15 years amid a slump in its housing market, with banking and finance shares dropping as the credit seizure piles the pressure on builders and property devopment companies and the danger of a sector collapse increases the risk to the banks.
Credit-default swaps on Italy were quoted at 108 basis points yesterday after reaching a record 138 basis points on Oct. 24, CMA Datavision prices on 10-year contracts show. The contracts have more than doubled since August. Yesterday's trading represents a cost of $108,000 a year to protect $10 million of debt for 10 years. Contracts on Spain climbed to 112 basis points on Oct. 24, from about 47 basis points at the start of September. They have since dropped back to 79 basis points.
Turkey, Italy, Brazil, Russia, GMAC LLC, and Merrill Lynch had the biggest gross amount of contracts outstanding on their debt as of Oct. 31. Turkey alone had $188.6 billion of default swaps written against its debt. The gross figure however doesn't take account of offsetting trades. After netting the trades, there were, for example, only $7.6 billion outstanding on Turkey's debt, giving a final number way below the Spanish and Italian values.
Consumer Confidence Rebounds - Ever So, Ever So Slightly
Surprisingly enough against this background, Spanish consumer confidence edged up to 50.1 points in October from 49.5 points in September and from a record low of 46.3 in July, according to the ICO survey. Interestingly enough July was the month of peak oil prices, which seems to suggest that Spanish consumer confidence is very sensitive to the value of energy prices.
Or perhaps the people being interviewed know something I don't. Actually, if we examine the components which constitute the index, we will see that the only real improvement was in the expectations index. If we think about all the enthusiasm there has been in Spain for the election of Obama, could this give us part of the explanation, since I see little else (apart from this and energy prices) which could be fuelling rising expectations at this point, and of course, Barack Obama is not President elect of Spain, and even if he were, such optimism seems to reflect a very simplistic view of the world and the reality which we now, unfortunately, have before us.
Retail Sales and Industrial Output Both Strongly Down In September
Well, for those of you who are interested in staring at strange looking, downward sloping, charts, here are two more of them. Firstly retails sales were down year on year in September by 7.1% according to the latest data out today from Eurostat.
While working day adjusted industrial output was down 8.8% in September over September 2007, according to data from the national statistics office.
It almost gets monotonous, doesn't it? Anyway, my opinion, for what it is worth, is to follow the monthly services and manufacturing PMI data, and the EU monthly sentiment indicator, as the combination of these three will tell us pretty clearly in real time just how fast the deceleration is moving forward as we go. Fasten your seat belts, and hang on tight.
During the third quarter of 2008, the number of debtors processed reached 764, indicating a 263.8% increase as compared with the same quarter of the previous year. By type of bankruptcy, 728 were voluntary and 36 were necessary, implying interannual increases of 277.2% and 111.8%, respectively. Considering the type of proceedings, ordinary proceedings increased 369.1% and abbreviated proceedings increased 178.4%.
National Statistics Office, 4 November 2008
8 comments:
Hello Edward
I just got back today to Madrid, but I have been following your posts. Let me once disagree with you:
"and of course, Barack Obama is not President elect of Spain, and even if he were, such optimism seems to reflect a very simplistic view of the world "
Well I may be naive, but I am thrilled to have Obama as president of the US and sad for Spain. I wish we had someone as capable as Obama here.
For sure Having an intelligent and devoted president is not a sufficient condition, but i think it is a necessary one. Today, so many dificult decisions have to be made, that it is of the utmost importance to have someone knowlageable ennough to appoint a good team to stir the country in the rigth direction. (Clinton did a good job with stieglitz, ext...). So this is a beggining... He has also a capacity to breathe hope into people, and great things can be achieved with the rigth team. I wish we could say in spain: YES WE CAN, but with zaparero and solbes....
Hope Trichet will reduce interest rate more than 50 points, that would help us....that's about the only hope we have left (a tiny one indeed)
MDM
Hello MDM,
Glad to see you back, safe and sound. Your country needs you :)
Now...
"and of course, Barack Obama is not President elect of Spain, and even if he were, such optimism seems to reflect a very simplistic view of the world "
I think sometimes I have a bad - or awkward - way of putting things. I am very happy for the US that they may have found a president who may help to move them forward in these troubled times. I just don't think:
a) this is going to be easy for anyone, and this to some extent is reflected in the fact the stock markets fell back again after the result. I don't think that this is due to lack of confidence in Obama, but simply that economic policy may not change that much, and certainly not if the short term, since everything which is being done at the moment is consensually grounded.
b) that what happens in the US is going to change things that much in Europe in the short term. I think we need to focus on our own problems, and in this sense all the talk about Obama has the danger of being a kind of "escapism". What the US now needs to do is build factories, put people to work in them, not let the dollar rise too high, and get down to seriously increasing exports without sucking in too many exports.
More or less what Spain needs to do, but I think the US will get on with this job, while in Spain we are still busy trying to keep builders afloat.
"Well I may be naive, but I am thrilled to have Obama as president of the US"
Well me too, in this sense. We may well get a US which is much more focused on the third world - and in particular Africa's - real development problems, and this would obviously be excellent.
As I travel on the metro here in Barcelona, I keep looking at the Africans in the carragiages, and wonder what they feel when they look at the TV images of Obama. I think they too must feel good, and more optimistic.
"Today, so many dificult decisions have to be made, that it is of the utmost importance to have someone knowlageable ennough to appoint a good team to stir the country in the rigth direction."
Well, Bernanke is already a rock, and Paulson has been more or less doing what Bernanke has been telling him, so I think this will be hard to improve on. Big issues like pensions and social security reform are looming as the boomer generation ages.
Actually Zoelleck at the World Bank has been quite a positive force in recent weeks, and I do like the idea of moving towards a Marshal Plan like project to shift first world savings out of construction booms and into third world development. lets just hope Obama is the man for this.
I hope that explains what I was trying to say a bit better. Spain obviously badly needs to find some new leadership, but I have no idea where it is going to come from. This is the problem.
But in any event, do feel invited to keep on disagreeing with me.
Edward
MDM -
To this point, the only thing Obama has proved himself capable of is making people feel better. I suspect the crisis is a little too big to be resolved by a momentary outbreak of catharsis.
Not that I have any objection to him being president but, to date, every actor has proved him or herself to be mostly incapable. That's the nature of the beast and I don't expect any change in that regard for the time being.
Agree with you on leadership in Spain, Edward. The problem, other than the usual story of wanting to screw the enemy more than actually do any good, is that no politician in Spain has had to deliver anything but good news for an entire generation. Then again, the problem is so far from being contained by borders that the discussion becomes academic.
Cheers.
Charles,
Nice to hear from you again. Look Obviously, Obama will not stop the recession, but with the rigth policies it does not have to become a nasty depression. Actually Roubini says it better: (see rgemonitor)
Edward, I know Bernanke is doing a good job now, but he was still in march 2007 saying that the subprime problem was contained, and he was part of greenspan team advocating for loose regulation. But ennough about the US.
Let's talk about Spain. I am not as pessimistic about the situation as I have been in the last 12 months. I have been quite worried up to now, because our government was not even aware that we were in a recession. But now it is starting to aprove some financial facilities that will help the economy.
The last policy where the ICO will provide capital for companies, and not only for investment but for day to day operation will provide credit directly into the main economy.
This may seem little to you but remember this is what brougth down Martinsa-Fadesa (ICO was willing to give capital only for new international projects). You may say, that the amounts considered now are small, but they will eventually be increased. I know construction companies have to be folded, but in a structured manner and not in the way that MF was let down. So the talk has changed, no more: "we will not bailout irresponsible managers". We´ll see if the walk follows.
We have also a new policy for the unemployed, covering 50% of their house payments during two years... ext..
And also we have Trichet bringing down interest rates, (only 50bpt, but expect more next month) and the oil going down (to 60$ the barril today).
All these are good news and will help. Spanish families are all with ARM, so if euribor goes down (and this depends on liquidity being provided for the banks, as well as BCE rate going down), it will allow existing debt to be repayed without killing consumption. And If oil goes down, inflation will also follow down which is also excellent news. So yes, I am not positive, but I am less negative than a year ago.
The magnitude of the recession is such that it is calling action from all european governments, including some fiscal programs. The spanish government will just copy these.(They do not do much, but copy at least they know.)
What I am trying to say, is that first, due to the fact that the crisis is pan european, and not simply a spanish problem, Spain will benefit from the action of Trichet and basically copy Gordon. (Trichet would never bring down the interest if spain, greece or ireland had a problem, but will do so if germany falters sligthly).
Second, that we have entered a second fase in the recession, where governments,and the BCE are more aware of the magnitude of the problem and where finally comodities are easing down, opening the way for looser monetary and fiscal policies...
There is a good article in the FT on this subject: "Can we go up again, the world economy".
It's nice to be back home.
MDM
Hi MDM,
I just say your comment. Today I am rushing and will try and put something more serious up tomorrow.
I think all of this is going to be a lot more complicated than most imagine, at least in Europe.
Glad to see you are happy to be back,
Edward
MDM -
Thanks. Likewise.
The downside to Obama is that all we know for sure he stands for is 'rebirth'. That can take any form imaginable.
The threat to Europe is in the new government becoming protectionist in order to revive American manufacturing. This continent will take the brunt of that with Asia being saved because of the degree the US is in debt to various there.
Here at home, note that the 50% mortgage cushion does not apply to unemployed renters. They go to live in the street. For the moment, the only story here is banking. Any social benefits derived are purely coincidental.
Hi MDM,
Well, it's Saturday morning, and I now have found a free moment to get back to this.
Before getting on to the main issue in hand though, I would just like to say something about this:
"Edward, I know Bernanke is doing a good job now, but he was still in march 2007 saying that the subprime problem was contained, and he was part of greenspan team advocating for loose regulation. But ennough about the US."
First off, I think almost everyone has made mistakes here. Would anyone with absolutely clean hands at the present time please stand up! Even I was arguing (on a Finnish tv documentary about the euro) in June 2007 that with such large numbers of immigrants Spain and Ireland might be able to escape the worst of their negative interest rate driven housing bubbles through a win-win dynamic wherby sucking-in extra population helped furnish the extra demand for all those surplus houses that were being built. But then again, pyramid selling schemes (in this case quite literally) can only run for so long and then they inevitably run out of steam.
I would say, incidentally, that here in Europe is has been interest rate policy over at the ECB which has fuelled the worst of the problem - and a naieve faith that house prices could never come down - and not "deregulation" as such, although this is turning into a catch-all idea for exaplaining the problems (almost like "messiah" Obama) which is good at grabbing headlines.
Obviously it is now clear that my earlier hope - like so many others - was way way too optimistic. It is what comes, I suppose, from trying to find the silver lining in things. Hoping that what you know in your heart of hearts can't work can.
Which is why I am going to be such a stickler for trying to find a realistic perspective at this point.
I think it is important to remember that Bernanke was not a specialist in financial market regulation, but rather he was a theoretical economist - arguably America's best - whose specialism was the great depression, and in particular how to fight bank crashes and deflation. And it was for this expertise that he was brought in as a Fed governor by Greenspan during the 2001 deflation scare.
Since we are now about to have a rerun of just this problem, he couldn't be more of the "right man in the right place" as far as I am concerned.
And for the central bank watchers among us it may be just worth noting that the Swedish Riksbank last year took Bernanke's Princetoon colleague - and world champion "foolproof path" deflation escapologist - Lars Svenson discretely on the board, while the BoE's very own Mervyn King did post doctoral research in Irving Fisher type debt deflation, so some of them are going to be well armed and forewarned as the Tsunami rolls in, as indeed are the now very experienced Bank of Japan.
Indeed I would say that there are few working macro-economists (I don't count Robert Solow as "working") for whom I personally have more respect at this point, even if I do want to disagree with him on some things (and Solow too for that matter, but that is another story).
Bernanke has proved himself to be extraordinarily felixible and adaptable. He came in in 2002 with some very superficial advice for the Japanese, and has since had the good grace to rectify, and these days I guess he has a good deal more respect for Japanese policymakers (since Japan is the pilot study in all that is now happening) than he used to.
Incidentally, since a key part of the problem over the last ten years has been a Bank of Japan which has been INCAPABLE of getting interest rates very much above zero percent, since of course this is what has provided the platform for the burgeoning of the so called "carry" trade. So a word of warning. Anyone who says they have the explanation for why we are where we are, and doesn't mention why Japan has been stuck where it has, well quite simply be very careful. Anyone can cook up a witches brew of what seem to be explanations for things, but one of the criteria is that these explanations ought to be able to explain "key phenomena". Caveat emptor, as far as economic quackery goes.
Theoretically Bernake has also proved himself to be pragmatic, and the re-evaluation he made of a seminal paper by Mankiu, Weil and Romer which attempted to rescue the neo-classical theory of growth is a model of how to go about things in my book. Basically, the neo classical model of growth doesn't work - it doesn't fit the known facts - but we have no viable alternive - hence people keep churning out growth forecast after growth forecast which bears little evident resemble to the "facts on the ground".
Bernanke has also made a couple of very influential speeches since he joined the Fed board, one on the ongoing demographic transition in the US, and one on the "savings glut" being produced by population ageing and pension funds in the OECD countries (and which lies behind possibility of having such low interest rates in many cases) - speeches which came in for a lot of criticism at the time he made them, but which I think will weather the tests of time a lot better than some of the ideas which were put forward to rival them.
Really I would say the only serious contender Bernanke has as an economist in the US is Krugman, and Krugman did do some very interesting background work on Japan, but really has done virtually nothing in the way of serious theoretical work in a decade now. Let's just hope that now Bush is going he can make the time to start thinking again, because I for one am convinced that until we can start to adequately understand what is happening we stand little chance of putting it right.
Till we get to that point, whether or not we have appropriate policies will be pretty much a matter of luck, and I for one am not very comfortable with that situation. The next thing we will probably see is "bring on the leeches", and lets see if bleeding the patient a bit improves his health. I simply don't accept that serious economists have, of necessity, to be the next best thing to witch doctors.
And, to return to your point, basically, the job of a central bank is to adminster monetary policy, not to frame financial market regulations - and my feeling is for the latter you need to look at the politicians. And where better to start than with Mrs Margaret Thatcher, whose 1980's "big bang" rule change has left her more or less earmarked as being single handedly responsible for the sinking of the British Banking system (as well as the Belgrano) following the demise of Lehman brothers, and is thus badly in need of a "re-appraisal" at this point.
But again, rather than simply talking about "regulation" in the abstract, what we really need to look at here are specific products, and specific conventions (for catgeorising credit for example) and what works and what doesn't. First and foremost among the products in need of reappraisal would be what have come to be know as "covered bonds", and secondly I would have thought the criteria used by the ratings agencies in assigning investment grade, especially since these criteria seem to be applied pro-cyclically (that is, everyone gets "write ups" during the expansion, and then "write downs" during the contraction, and this just exaccerbates the whole problem, as we are seeing in Eastern Europe, and about to see, I fear, in Spain, Greece and Italy).
So finally, on all of this I would just say, that if you take the view, which I do,that the job of the central bank is simply to administer monetary policy, then I am not among the Greenpan critics (although what he has been saying since he left his job is another matter), and Bernanke has my full confidence.
For those very same reasons I would most definitely not say the same about the current occupants of the key positions at the ECB. So I would say Europe both needs its Obama and its Bernanke. But then, that is just my view.
Ok, so much for Bernanke,
"Let's talk about Spain."
Agreed.
"I am not as pessimistic about the situation as I have been in the last 12 months. I have been quite worried up to now, because our government was not even aware that we were in a recession. But now it is starting to aprove some financial facilities that will help the economy."
Well, we do seem to be going in opposite directions then, since while I suppose I would say that this isn't a situation for either optimism or pessimism, but rather cool and clinical analysis, I think the outlook is now a lot worse than even I imagined six months ago.
Part of the reason I think this is external to Spain - I think the situation in Austria and in Italy is much more serious than I had foreseen - especially due to all the exposure in Eastern Europe (which I did, I think, forsee, if you look at my East Europe blogs), but I simply didn't see the extent to which this would hit the domestic banking sector in Italy and Austria. Domestic credit is all but seizing up in Italy.
"because our government was not even aware that we were in a recession."
The thing is MDM, before - when we were facing recession - they were not recognising that this was the case, and now that we are facing a SLUMP they are suggesting we are going to have a recession, and that things might get better after the middle of next year (at which point they will most definitely still be getting worse). So they seem not to have moved from where I am sitting, since they have remained at exactly the same distance behind the curve. Still no sign of anyone willing to "take the bull by the horns" here in Spain.
Let's go back - like good dentists - to the original root of the problem, the fact that the Spanish banks found themselves unable to finance their mortgages in the international markets (and this international dimension is important due to the Spanish need to finance its external deficit) at prices which made the interest which they were being paid by their existing mortgage holders (1 year euribor plus something) profitable.
This situation continues, but now we have moved up a notch, since the Spanish government has effectively stepped in and said that it will act as the intermediary and refinance the mortgages (or cedulas and other RMBS) and the market response has been swift and immediate - fine, go ahead, but you will do this at the cost of having to finance your TOTAL debt as we move forward at a new higher price - at the present time 1% over ten year German bund and the "yield spread" is(probably) set to increase as the situation deteriorates.
That is the same situation as has existed since September 2007 has simply repeated itself only this time at the sovereign debt level.
Of course, we are being told that this is temporary, but we have been being told that since September 2007, and I no longer find this particular argument convincing (in fact I never did).
The reality behind this whole situation is that due to five years of negative interest rates, property values in Spain became greatly overvalued.
While more or less everyone agrees that this is the case, no one really knows by how much they are overvalued, but lets say that prices in 2007 were 30% above where they should have been (the number is almost certainly greater, but let's be conservative for once).
This means the entire stock of Spanish housing is worth less than people thought, and this means that all those mortgages which back all those securities are worth a lot less than they were.
The "correction" in Spain is then going to be about three things:
1) A downward adjustment in the value of the housing stock. let's simply say that by the time we arrive at 2011 Spanish housing will be worth 30% less than it was in 2007.
2) A downsizing in the construction sector from 11 to 5.5% of GDP. ie a reduction of half, and this is being optimistic. In Germany construction is at 3.5% of GDP.
3) A correction in the external deficit, to reduce it from the present 11% down to zero - by say 2011.
Now this correction is huge. I have estimated that the losses involved for the government and banking sector can be of the order of 500 to 600 billion euros - or a little over 50% of GDP.
What's more, I fully anticipate negative GDP growth during the transition, that is to say we will most probably see negative GDP growth in 2009, 2010 and 2011, and in 2009 by between 3 and 5 percentage points.
This sort of stuff is not funny at all. Also, we can imagine we can see general price deflation in each of these years, to include prices and wages.
Just to be anecdotal, I had coffee this morning with someone who told me she had had to sign a contract (with a sub contractor of El Corte Ingles) for a 10% reduction in base salary from January 2009. We will see plenty of this, and people don't like to talk about it - you know "a mal tiempo, buena cara",
"But now it is starting to aprove some financial facilities that will help the economy.
The last policy where the ICO will provide capital for companies, and not only for investment but for day to day operation will provide credit directly into the main economy."
If there is one thing Zapatero is good at it is making (empty) promises, ask the people here in Catalonia, who have heard a lot and received very little over the last few years.
Basically I am questioning where this money is going to come from. At the moment they don't seem able to go to auction, and all the people I am talking to are complaining that the money isn't reaching them.
Basically, you have to ask what are the control mechanisms here, and even when people do eventually get some money, who is going to decide who is to receive what. This is Spain, after all.
I would remind you that since Martinsa we have not had one important builder going into any kind of receivership. Real Urbis just rolled over their debts till 2011 with no need to pay interest at all between now and then. If this is the kind of loan Zpt is guaranteeing, then the only thing we can say is that we will arrive in 2011 with a lower level of GDP and a higher level of debts than we have now, that is the situation will simply be worse.
Well, sorry if these arguments help to spoil your day, but I can't really help this. In my opinion, the situation is serious, very serious. I don't want to scaremonger, so I won't start to speculate what might happen, but the future does not look good, and this government (and I am not political, so it is not an argument in favour of the others) has no plan, no idea, and no credibility as far as I am concerned.
Edward
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