Spain Retail Sales Continue Their Decline

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

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



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

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

Caja Madrid and Banco Popular Struggle To Sell Loans

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

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

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

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

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

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


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

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


Consumer Price Inflation Falls Back Slightly In August


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

Spain's Budget Deficit Rising Sharply and Other Matters

by Edward Hugh: Palamos (Costa Brava)





Well, hello everyone. I'm supposed to be on holiday at the moment, but since economic events simply refuse to stand still (not even for me, and especially not in Russia), what else can I do. In theory I'm resting quietly in that nice looking building behind the Palamos lighthouse you can see in the photo above, and since time and Spain's developing economic crisis stand still for no man, then here I am sitting sweating it out in the local cyber cafe.

Rising Government Deficit



Spain's central government budget deficit seems to have shot up in July - reaching 9.97 billion euros ($14.75 billion) in the first seven months of 2008. The government did not provide a monthly figure for July, but the accumulated deficit for the first half of the year totalled 4.68 billion euros, so it looks like the July deficit alone as 5.29 billion euros (which presumeably has something to do with the impact on the balance of the government anti crisis measures, like the 400 euro cheques.

A sharp slowdown in economic activity, especially in the building sector, cut net non-financial revenues by 4.2 percent while net non-financial spending rose by 5.9 percent. Spain posted a record budget surplus of 2.2 percent of GDP in 2007, while the economy grew by 3.7 percent.

The Economy Ministry said on Thursday the deficit was equivalent to 0.89 percent of annual gross domestic product and that it compared with a surplus of 7.52 billion euros in the same period last year.But since the deficit was accumulated in only 7 months, then the annual rate would seem to be nearer 1.5% of GDP (up from an annual rate of only 1% of GDP in June and of course rising rapidly). At this speed, it would not be surprising if we were clocking up deficit at the annual rate of 3% by December (which means in theory no more additional measures with breaking the EU limit), and the deficit for 2008 as a whole now looks set to be more than 2% of GDP at a first guess approximation.

GDP Growth Detailed Figures Released

The INE confirmed the 0.1% q-o-q growth rate yesterday (I will try and go through the data a bit more over the weekend) and one thing stands out: investment in Spain slumped, falling by 1.7 percent from the previous quarter. Household consumption increased 0.1 percent after 0.3 percent in the previous three months and government spending propped up the expansion, increasing 1 percent after 0.7 percent.





Also, and as noted in my last post on the May balance of payments data, second quarter growth was actually supported by Spain's external account (which normally cuts into growth) and net trade added 0.3 of a percentage point (that is to say more than the total growth for the quarter, not due to improving exports, but due to falling imports. That is why you can get a strange statistical effect whereby everyone "feels" worse off since they are consuming at a slower rate, but headline GDP gets a boost from the slower consumption. (You can see the same effect in German GDP numbers earlier in the week, and in the US data today).

Basically, my view is that the positive growth registered in Q2 2008 will be the last positive q-o-q reading for the next several quarters.



Mortgage Lending Down Again

Home mortgages fell by 37.7% year on year in June, compared with a drop of 36.2% in May. A total of 43,090 homes were sold in June, compared to 61,595 in June 2007. Transactions in June were also down 6% on May. The capital value of the mortgages loaned in June was 37.1% less than in June 2007.




With stress in financial markets ongoing and unemployment rising rapidly, it is hard to find any convincing reason why the Spanish housing market should improve any time soon. In fact, the situation is likely to get a lot worse before it gets better. We have yet to see year on year falls in the official house price index and it seems only a matter of time until we do.


ECB Pressure ON Spanish Cedula Funding Continues



The debate about what to do about the creation of mortgage backed securities expressly for deposit at the ECB continues. According to Unicredit SpA Spain's banks have accumulated 89 billion euros of their own asset-backed securities, more than any euro-region country, for use with the ECB as collateral in auctions. As reported on this blog here, various influential members of the central bank governing body have been loudly indicating that the ECB is about to change the rules. Many of these securities may have been specifically created with a view to refinancing the cedulas which need to be rolled over in the autumn, but frankly I will believe it when I see it as far as any ECB action goes, since with all the rumpus they have created over their interest rate policy they would hardly want to find themselves being balmed for a major banking crisis in Spain at this point.


Large Estate Agents Slimming Down Rapidly

El Pais is reporting that the 10 largest estate agents in Spain have closed more than half their offices in the last six months. The collapse in home sales has forced 2 national chains of estate agents into administration (MC Inmobiliaria from Andalucia, and Expofincas from Catalonia). 2 others, Fincas Corral and Don Piso, have been put up for sale, though so far without any takers. At the end of last year, 9 of the 10 biggest agents in Spain had more than 100 offices around the country. Today, only 3 of them have more than 100 offices. They have gone from a combined total of 3,000 offices at the end of last year to just 1,434 today.

Spanish Producer Prices Hit 24 Year High In July

Spain's producer prices rose at an incredible 10.2% annual rate in July - the fastest pace in almost 24 years in July as record oil prices increased costs for Spanish manufacturers. Producer prices were up 1.4 percent from June, the biggest monthly increase in more than two years.




Crude oil prices a record $147.27 a barrel in New York in mid July, and that helped push euro-zone consumer price inflation to more than a 16-year high, in the process making it harder for European Central Bank to cut interest rates, even as the region's economy slows.

The price of intermediate goods in Spain rose 7.3 percent from a year earlier, compared with 6.3 percent in June, signaling further rises in consumer prices are in the pipeline.

Oil has now fallen back 22 percent from its July record and it is likely that Spain's producer price inflation peaked in July. Also the economic slowdown should, in theory, make it difficult for companies to pass on higher production costs to consumers. But what is hard to understand at this point is why German producer prices - where oil costs cannot have risen very differently - are only up by 8.9% in July, or why German monthly consumer prices rose at 3.5%, while Spain's consumer prices gained 5.3 percent in July from a year earlier. This is hardly evidence of an economy that is responding and correcting going into the slowdown, in fact it is quite the opposite, and demonstrates the presence of an economy with a high level of structural rigidities and time delays in response, which will only, unfortunately, add to the pain during the coming long recession.


ECB To Make "Changes" Yves Mersch Says


ECB council member Yves Mersch said in an interview with Bloomberg - given at Jackson Hole - that the European Central Bank is about to announce changes to the rules governing its money-market auctions in coming weeks to head off the risk of abuse by financial institutions.

These comments comments the controversy which has arisen surrounding a recent press interview with Dutch policy maker Nout Wellink where Wellink stated that banks shouldn't become too dependent on the ECB for funding (see my last post for more details on all this).

Two items which are being widely talked about as the most likely candidates for such changes are risk control measures, and restrictions on the place of issue for marketable assets eligible as collateral. The first is to address the concern that some banks are creating securities (like cedulas hipotecarias) specifically for use as collateral at the ECB which are being accepted by the ECB as having investment grade despite only having been rated by one agency (as opposed to the two which was standard practice in the past).

The second addresses the concern that securities may be being issued in one country of origin, deposited in the vaults of the ECB as collateral for borrowing, and then the funds themselves transferred for lending to bank deposits in a third country - for example Dutch banks might be raising money in the Netherlands (or German banks in Germany) and then transferring funds for aggressive lending in Spain (in order to gain market share against Spain's highly stretched national banks). There is no direct evidence that this is happening, but JP Morgan did estimate back in May that 240 billion euros of securities had been specifically created by eurozone banks with a view to being deposited at the ECB, and Spains banks only owe the ECB a total of 49 billion euros, so someone somewhere is doing something with all that money.

It is hard to know really what has been happening, since if there is one thing the ECB isn't it is transparent, and so we are only left clutching at straws and making suppositions. One recent piece of evidence we do have is that U.K. mortgage lender Nationwide Building Society said Aug. 18 it's planning to expand into Ireland, a member of the euro region, to take advantage of ``funding opportunities.'' But this would seem to refer to a non zone institution leveraging funds for use outside the zone (in the UK for example, which may well be happening), but what I am suggesting may well be happening is some sort of Credit Default Swap type "put" by canny non-Spanish banks who want future market share in Spain raising securities and making risky loans in the full expectation that since there is going to have to be some type of bail out for Spain, then they will get bailed out too.

Anyway, this is likely to remain a rather obscure topic, since as Mersch says in the interview, the ECB's response to any abuse case ``would not necessarily be a question to be discussed publicly.''

I am sure it wouldn't.