Spain Is A Serious Country

José Luis Rodríguez Zapatero, Spain’s prime minister, said in Davos this week: “We are a serious country and we will fulfil our promises.”

With these words Spain's Prime Minister sought, during his visit to Davos last week to reassure international investors that Spain, despite the severity of the recession it is currently suffering, and the major challenges facing its banking system, is not about to become another Greece.

Just to prove the point he had Labour Minister Celestino Corbacho and Economy Minister Elena Salgado announce in short order that a) Spanish citizens are going to work two more years each in the longer term, and b) face continuing and sweeping cuts in services and increases in taxes in the short term. The trigger for this rather unexpected show of determination seems to have been the growing danger of contagion from debt crisis worries in Greece, as Spanish 10 year bonds spreads nudged briefly through the 100 base point level over the comparable German benckmark. Unfortunately, enthusiasm for the new-found seriousness doesn't seem to have lasted long, since this just morning (and only three days after that strong demonstration of will for change) the Spanish press inform us that Elena Salgado - faced with strike threats from the main trade union organisations - is having second thoughts, and is willing to be "flexible", since the proposal for pension reform, was only that, a proposal which is up for negotiation.

Spain's banks have extensive government bond holdings, and as the spread rises the market value of these bonds falls, so - given that another important part of the banks capital base is composed of land and property assets of uncertain value - the prospect of a slide in the value of the bonds they hold leaves Spain's government with little alternative but to be seen to be taking "serious" measures, whatever the cost. But quite how Spain's citizens will react to the news that their government's policy is now being driven by the need to "calm market fears", and that the country's leaders are actively considering asking them to retire at 67, still remains to be seen. Yesterday's warning shot from political rivals and unions alike may leave their mark in the short term, but it is now clear that things have, in fact, changed, and Spain's politicians (and the bankers who influence them) are now likely to be much more sensitive to market sentiment than they are to public protest.

The Economic Slide Continues

While eurozone manufacturing sector grew at its fastest pace in two years in January, the divergence between laggard Spain and the rest of the big four economies simply widened, according to yesterday's Global Manufacturing PMI report. Spain was actually (and just one more time) the worst performer among the 26 countries surveyed. Here in Europe the Markit eurozone manufacturing purchasing managers’ index for January rose to 52.4 from 51.6 in December, but while the data showed activity in Germany, France and Italy continued to expand it was a different story in Spain, where the reading did edge up slightly to 45.3, from 45.2 in December in a move that offered little more than token consolation, since the changes is marginal, and simply confirmed that business conditions in manufacturing deteriorated for the twenty-sixth successive month.

“The recovery is becoming two-track, with Spain and Greece in particular falling further into recession when growth in most of the other nations, led by France and Germany, is accelerating,” said Rob Dobson at data provider Markit.

Commenting on the Spanish Manufacturing PMI survey data, Andrew Harker, economist at Markit, said:

“The Spanish manufacturing sector began the new year with output, new orders and employment all continuing to fall. The steepest decline in input buying for seven months highlights the lack of confidence in the sector, with firms reluctant to invest in new stock until sales have been secured. Manufacturers were again forced to cut prices in January as weak demand made it difficult to pass on higher raw material costs to clients.”

Again,Spanish car sales rose 18.1 percent in January comp.ared with the same month of last year, but these sales are destined to fall back sharply in the second half of this year as government subsidies are withdrawn. According to car makers' association ANFAC the January sales increase followed a rise of 25.1 percent in December and 37.3 percent in November. Year on year car sales fell 17.9 percent in 2009 (over 2008) to 952,772 vehicles.

The Spanish government began offering 2,000 euro subsidies to new car buyers last May, in addition to a 700 million euro subsidy to replace old cars with energy-efficient models, but this kind of spending is simply likely to disappear as the government moves forward with its austerity programme.

As ANFAC noted, "The continuation of government subsidies is having a positive influence on car sales........in the second half of the year sales will benegative, with falls over 18 percent as a result of the 2 percentage point rise in VAT and an end to government subsidies."

Unemployment Still Heading Onwards And Upwards

As the PMI report points out, Spanish manufacturers continued to adjust their workforces in response to extensive spare capacity during January, resulting in further substantial job cuts. Employment in manufacting has in fact now declined in each and every month since September 2007.

Not unexpectedly, the number of workers registered as unemployed in Spain increased by 124,890 in the month of December, and is now over the 4 million mark (4.05 million), according to Labour Ministry data out today (Tuesday). Since January last year, the number of registered jobless has risen by 720,692.

According to Maravillas Rojo, head of the Labour Ministry's employment department, "January is traditionally a bad month for unemployment. Historically it rises in that month even when the economy is growing". She added that "The rise in joblessness is a very bad figure, but the tendency for the rise to slow, which began about a year ago in March, continues, although we have yet to hit the ceiling". And the rate of increase is slowing (see chart below), although there is a marked increase in people who are not registering, and the government deficit adjustment plan will surely start to add to the queues again.

In addition to the rising unemployment figure, the number of taxpayers to the Social Security system has also fallen starkly: there are 257,828 less of them (more than doubling the unemployment figure increase). Such a number implies that, apart from the expected people retiring and in retraining courses, there are many entrepreneurs that are shutting down their businesses. Let us recall that on January 2008, even though the fall in unemployment was similar (132,378), the number of taxpayers affiliated to Social Security was only reduced by 84,697.

The psicological threshold of 4 milion people unemployed has now been broken, with a grand total of 4,048,493. Let us recall the Minister Corbacho asserted repeatedly last year he "did not believe" Spain would reach the figure of four milion people unemployed.

Today's unemployment figures illustrate we are now in the second phase of the current crisis, since we have gone beyomd the first credit-shock part (which induced layoffs mainly in the construction sector) and are into the second, provoked by the sharp reduction in global output, and now continued by an ongoing drop in internal consumption. The evidence for this is the fact that most of the new unemployed belong to the services sector (102,130 (a monthly increase of 4.5%) and the industrial sector (8,873, monthly increase of 1.7%). Construction "only" added 7,036 layoffs (0.9% monthlyincrease).
Jordi Molins, independent Catalan economist.

So 4.05 million is just the number of people who are signing on at the labour offices, on other measures the level of unemployment is even higher. According to Eurostat data (ILO comparable methodology) there are around 4.5 million unemployed already, not counting those who have already left Spain in the search for work elsewhere (the so called "discouraged" workers). According to the latest Eurostat data the seasonally adjusted unemployment rate for European Union member states (EU-27) was 9.6 percent in December 2009, compared with 9.5 percent in November.

Among member states, the lowest unemployment rates were recorded in the Netherlands at four percent and in Austria at 5.4 percent, and the highest rates were seen in Latvia at 22.8 percent and in Spain at 19.5 percent (see chart). Spain thus ended 2009 with the highest jobless rate in the Eurozone, and by a large margin.




Elena Salgado Fails To Convince

According to the FT's Victor Mallet Elena Salgado was unable to conceal her discomfort last week, when she met the press to announce her austerity plan designed to slash successive budget deficits and restore the country’s credibility on international markets. Ms Salgado "had good reason to be uneasy. The table of figures she presented on Friday showing Spain’s “fiscal consolidation path” through €50bn of savings over four years had some embarrassingly blank spaces for the projected budget deficits in 2010, 2011 and 2012".

Spain, as Mallet points out, wants to reduce its total public sector deficit from 11.4 per cent of gross domestic product in 2009 to the European Union target of 3 per cent of GDP in 2013, but - as the empty boxes show - is not sure either if it can, or how to do it. Alfredo Pastor, a professor at IESE business school in Madrid and former deputy finance minister, shares the same doubts: Spain will also struggle to reach the EU deficit ceiling by the 2013 deadline, “We would have to have very high and fast growth, higher than what we can expect,” he told Bloomberg in an interview last week.





"It's a plan that is essential after our most recent deficit figures," Finance Minister Elena Salgado told journalists at the meeting which followed the government's weekly cabinet meeting. But the main problem facing the Spanish government now is credibility. Spain announced an annual deficit of 11.4% for 2009 after previously (even two weeks ago) forecasting the deficit would come in at 9.5% of GDP. In fact it is rather surprising that as recently as last September (when the government first presented its budget plans for 2010) the deficit was still being forecast to come in as low as 5.2% of GDP (52 billion euros), while by November the forecast had already risen to 8.5% of GDP (85 billion euros) and now (just two months later) we are told that it was 11.4% (over 110 billion euros). A number of questions automatatically arise, like just what level of control the Spanish government actually has over its deficit, and just how convincing is the government's plan to make a three year, 50 billion euro reduction in a deficit which has just shot up in four months by more or less exactly the same amount without anyone (officially) forseeing it!

And Elena Salgado's still incomplete deficit reduction plans critically depend on economic growth forecasts – which rise to about 3 per cent a year in 2012 – that many independent economists regard as totally unrealistic. Even the IMF, with whom Ms Salgado recently took issue, are not convinced by her numbers and forecast a 0.6% (and not a 0.3%) contraction this year. The government now projects a 1.8% gain in GDP in 2011, with growth in 2012 up as high as 2.9%, from a prior 2.7%. Of course, you can pull numbers (like rabbits) out of any hat you like, but that won't bring you growth, and certainly not nearly 3% growth in 2012.

"We are moderately optimistic for 2010 and 2011," Elena Salgado said "If you recall, in June, international agencies also forecast the worst, ultimately, convergence has been to our data" she added.

How she has the temerity to say this is really beyond me.

So even after Friday’s announcement serious doubts remained about Spain’s ability to control its budget spending, particularly since a fifth of the proposed adjustment is supposed to come from the autonomous regions and local authorities that account for more than half of spending. The central government, furthermore, specifically ruled out cuts in pensions, unemployment and social security payments, education spending, research and development or foreign aid. Half the deficit reduction is to come from spending cuts, including a near-freeze on hiring for the civil service (only one in every ten who leave is to be replaced). This means central government, which will bear the load of the austerity plan, about 40 billion euros of it, or 5.2% of GDP.


As is well known Spain is currently grappling with the collapse of a decade-long housing boom that has pitched the wider economy into a deep recession, sent tax revenues plummeting and social welfare costs soaring. Furthermore, in the aftermath of the housing bust, even the government doesn't expect the economy to return to pre-crisis growth rates anytime soon, making it impossible to meet spending commitments taken on during the boom years. Even more worryingly, despite the fact that the pension reform is needed, and the austerity programme to rein-in the deficit essential, Spain has not one measure currently on the table which is able to restore growth and employment in the short term.

And time is running out. As Victor Mallet puts it - the recent austerity announcement does little answer the one question which is now uppermost in the minds of all those investors and economists who are busy worrying themselves about the future of Europe: can Spain control its budgets and once more become competitive within the constraints of the single European currency?

Mr Zapatero insists it can – “We are a serious country and we fulfil our promises,” he said in Davos – but he and Ms Salgado have yet to prove it, and today's news that the retirement plans may well be substantially modified only serves to reinforce the doubts.