I have been reading press accounts of the GM decision to back out of the Opel/Vauxhall sale to the Magna/Sberbank consortium from various countries. There are a lot of different perspectives on this event in the U.S., Belgium, Spain, Germany, Russia, the U.K and elsewhere, because a lot of players are involved.

The conclusion I come to is that economic nationalism is the driving motivator behind much of what you read. To the degree, we continue to experience a soft global economy, this should be seen as a warning of how individual actors will respond in future.

Easy decision to keep Opel

GM’s decision to keep GM Europe is fairly straightforward in my view. The cars and technology in GM Europe is something General Motors never wanted to part with. They only did so because of the need to raise cash in a weak economic environment. Now, things at GM (and Ford) are looking much better and GM has exited bankruptcy. There is no desperate need to sell.

Moreover, the EU was asking GM a lot of questions about the subsidy deal they struck with the German government in order to effect the sale of Opel. Other European nations, Spain and the U.K. in particular, were livid because they suspected an unfair subsidy of German jobs over Spanish or British jobs. But, it goes far beyond those two nations as GM Europe employs 55,000 people in places like Sweden, Poland and Belgium.

We saw what happened to ING, RBS and Lloyds due to the EU’s rules on competition. One could reasonably expect a similar crack down in the auto sector. Details will emerge at some juncture, but one could conclude that GM did a cost-benefit analysis in which the wrangling with the EU weighed heavily on their decision to back out of the Magna deal.

And, in the end, should we expect the restructuring GM performs to be qualitatively any different than what Magna’s consortium would have done? They too have announced 10,000 job cuts, a figure in line with what was expected under Magna’s control. So, on the surface, this looks like a net benefit for GM, a net loss for the Magna-led group, and a wash for workers and politicians.

Enter economic nationalism

But, unfortunately, that’s not how it is likely to be seen. Let’s look at it from a German perspective.  Germany’s Chancellor Angela Merkel went to bat for the Magna deal, winning what was widely seen as a measure of security for German workers at a critical time during economic weakness. This bolstered her election chances. As a result, the center-left SPD has now been replaced by the Libertarian-minded FDP in a coalition reminiscent of the Helmut Kohl days. Consider this a move to the right in Germany.

Nevertheless, Merkel has stuck with her allegiance to Barack Obama. In fact, as a result of this relationship, she was the first German Chancellor in 50-odd years to deliver an address before Congress just two hours before she learned of GM’s backing out. What’s more is the U.S. Government is the majority owner of General Motors. One would think the Obama Administration had some insight into the decision-making at GM. Either the Administration didn’t know and is being recklessly hands-off in an enterprise where it has sunk tens of billions or it did know and did Angela Merkel a disservice by not informing her of what was to come well before her speech to Congress.

So, you have an American company owned by the American government backing out of a signed agreement and potentially thousands of jobs at risk. Talk of plant closures at Eisenach, Bochum (and Antwerp in Belgium) and the loss of jobs is rampant in the German press. GM Europe’s head John Smith says, "if they like the Magna plan, they will also like the GM plan." That is not an argument likely to gain sway in a period of economic uncertainty.

The Germans are livid.  German workers have gone on strike. Meanwhile, you have the UK Business Secretary Lord Mandelson warning that the division of job cuts must be ‘fair.’ And the Spanish Opel workers had just OK’ed the Magna plans two weeks ago. This is a bit of a zoo, isn’t it?

It is every nation for itself – precisely what one would expect with a shrinking economic pie and a deep downturn.

Going forward

GM has mishandled this affair quite badly I believe. At least with the Magna deal, the Germans were in the driver’s seat. Now, all of the individual European nations are angling for their say in this matter. Yes, GM had little choice given the likely scrutiny it was under via Neelie Kroes, but it certainly could have handled the political aspects of this much better.

However, now that this situation is out, it gives us a bird’s eye view into how nations respond when a division of the spoils becomes an issue.  And what we have seen does not give confidence that a coordinated approach will prevail. I take this affair as a clear indication that economic nationalism is alive and well and very much a threat to our collective well-being.

Related posts:

• Germany gives GM a stiff arm on state aid
• GM board decides to keep European Opel unit
• German Press: Fiat to sign a deal with Opel, not Chrysler
• Germans reject Chinese offer for Opel
• GM considers keeping Opel, raising capital

When it comes to the housing meltdowns in the richest economies, the US has been matched only by Spain, Ireland and the UK. All four countries have seen spectacular losses of wealth in the housing sector over the last two years.

The response by all four governments was to apply as much stimulus as they reasonably could to prevent their economies from descending into free fall. This has opened up gaping holes in each countries’ government accounts. However, in contrast to the United States or the UK, both Spain and Ireland have the Euro as an external constraint which limits their policy choices.  This has resulted in credit downgrades for the sovereign debt in Ireland and Spain.

Looking at Spain, there was massive over-building in the property sector, which attracted a lot of labor to Spain. Now that these jobs have been vaporized, the unemployment rate has soared to near 18%. The problem is quite acute and there are few policy solutions. Reinforcing this point for me was a discussion I had with Spain-expert Edward Hugh, who writes at the blogs Global Economy Matters and A Fistful of Euros, in the wake of some downbeat comments by Paul Krugman about the country.

Edward wrote:

The problem is Spain can only create jobs through exports. The problem is, with Brussels prices we cannot attract investment to build new factories to create high volume unskilled employment. At this stage in the game we are not in competition with Brussels, but with Bratislava. That may not be a pleasant truth, but it is simply like that. We have attracted a large quantity of people here to work in unskilled low-value employment. The industry that gave them work just permanently disappeared out of sight. We need, urgently to find alternatives since we cannot pay them all 420 euros a month for ever. This is more than a simple academic exercise, it is now a question of life and death for the Spanish economy.

Basically we need to go back to 2000 wages and prices and start again. Maybe you don’t like this idea, but can you point me to anyone who has an alternative?"

Obviously, a huge cut in nominal wages is never going to fly in any country because wage prices are sticky. Call it “money illusion” or call it a desire to maintain a decent standard of living, across-the-board nominal wage cuts are a political non-starter. But, this is what is needed in Spain.

Edward does address the standard-of-living problem this presents:

This is not simply about bringing down wages. It is about simulating a devaluation by bringing down prices AND wages together. So you as an employee should be in the same situation as before. The only realistic way to do this is through a pact between employers, unions and political parties, everyone.

The only real problem is with the debts, since they will also need adjusting down, but see another thread here on this.

But OK, I’m not saying this is going to be easy, just that we have no alternative. We shouldn’t have inflated the housing bubble in the first place.

Of course, being able to devalue the currency is one way to achieve this. But, Spain does not have that option. These are the very real policy cul-de-sacs faced in the aftermath of a debt-fueled asset bubble. And since another one seems to be inflating right now, I reckon the U.S. and the U.K. will be joining Ireland and Spain on this dead-end street in due course whether their currencies are weak or not.

Related posts:

• European House Prices are slowing
• Spain and Ireland ‘thrown to the wolves’ after ECB move
• Spain intervenes to save Caja Castilla La Mancha
• UK real wages falling
• Spain gets deflation

According to the results of a study by the Spanish savings bank Caixa Catalunya, consumption will fall 4.1% this year, making the reaction to this downturn four times as severe as during the last big downturn in 1993.  Back then consumption only fell 0.9%.

The results are not only an indication of the deteriorated employment outlook in Spain but also of pressures due to the collapse in housing and shares as well as a loss of confidence by consumers.

The greatest falls are expected in the Canary Islands (-6%), Cantabria (-5.1%), Extremedura (-5%) and Navarra (-5%).

More here in Spanish from Finanzas.

Related posts:

• House price declines accelerate in Spain
• Spain gets deflation
• UBS: ‘The disaster in Spain will continue’
• Consumer credit down a massive 33% in Spain
• Spain: Bleak forecast puts unemployment at 22% in 2010

Spain has been a laggard in the search for improving economic fundamentals.  The news coming out of Spain has been dreadful from employment to house prices to mortgages and banking. But the first ray of hope appeared yesterday when it was reported that late payments on loans granted by banks, savings banks and cooperatives fell for the first time in two years.

According to the numbers released by the Bank of Spain the delinquency rate for June 2009 stood at 4.488%, down from May’s 4.563% and the first fall since July 2007.  Mind you, the rate of delinquency is still at levels not seen since 1996.  But this is the first countertrend in the upward march of financial distress for Spanish mortgage holders.

Nevertheless, the news was not all good yesterday.  Edward Hugh reported the same day that twenty percent of Spanish mortgages are now considered high risk.

According to an article which appeared in the Spanish newspaper Expansion this morning, one in five Spanish mortgages is now considered as being high risk and liable to become “non performing”.

The mortgages at greatest risk are naturally those contracted after 2005 where the loan to valuation was over 80% of the total. In 2006 and 2007, according to data from the bank of Spain, LtVs were over 80% in 17.7% of the mortgages granted, since prices are now heading back towards the 2005 level, we can easily conclude that something in the region of one in five Spanish mortgages are now high risk.

Prior to 2006, the main source of data comes from a study by Genworth Financial, who show that loans with +80% LtV rose from 12.2% in 1996 to 26.4% in 2005 (see chart below which comes from Expansion). These loans were especially popular between 2003 and 2006, but then started to decline as the decision of the ECB to raise interest rates made the likelihood of a price correction rise sharply.

It is the Spanish savings banks, the cajas, which are most affected by delinquency and high risk loans. See my April post “Spain’s savings banks may have 40 billion in writedowns.” The big Spanish banks are in a much better capital position.  Just today, it was leaked that BBVA is expected to win a government-run auction for the troubled American lender Guaranty Financial. The FDIC had set a deadline for today for bids.

Both BBVA and Santander have used the credit crisis as an opportunity to strengthen their position internationally. Santander previously bought Sovereign Bancorp in the US and Alliance and Leicester in the UK.  For some time now, BBVA has been making a tactical expansion into the Sun Belt markets in the US, an area with a large Spanish-speaking population.  Obviously, the purchase of Guaranty fits into that strategy.

Santander has a market capitalization of over 80 billion Euros (nearly $120 billion) while BBVA has a market cap over 40 billion Euros (nearly $60 billion). By comparison, only Goldman Sachs, Wells Fargo, JPMorgan Chase and Bank of America are bigger in the U.S., a country with six times the population of Spain. So, these are very international banks of enormous size, well regarded in the capital markets.

So while Spain is a country still beset with problems, especially in the banking sector, there is an extreme dichotomy between the fortunes of the international big banks and the domestic savings banks.

Source

La morosidad del crédito baja en junio por primera vez en casi dos años – Finanzas

Related posts:

• Spain’s savings banks may have 40 billion in writedowns
• Banco Santander is very confident
• Spain’s BBVA making a push in the US
• Sovereign Bancorp: Santander looking to buy regional bank
• Guaranty is bankrupt: BBVA gets its FDIC-seized assets

Citigroup has just released a forecast which is very troubling in regards to employment and growth in the Spanish economy.  With unemployment already having hit 17.9%, Citigroup expects layoffs to increase this to 22% in 2010.  Below is my translation of the Spanish-language article in Finanzas.

The stabilization that the Spanish labour market seems to have shown, with an increase of 0.5% in the unemployment rate to 17.9%, is only an illusion. Unemployment will continue rising, reaching 22% at the end of next year, economists estimated as U.S. bank Citigroup.

In the opinion of the experts at the company, the recovery will reach Spain later than elsewhere in Europe because of the extent of deleveraging facing the Spanish economy. Therefore, there remains a substantial possibility that unemployment will continue to rise, after the withdrawal of the effects of fiscal measures taken by the Government.

However, the company recognizes that the figures published today confirm that the pace of job destruction did slow in the spring. But a large part of the improvement occurred in the construction sector, primarily due to the impact of government support measures (Plan E).

But given the sharp adjustment that the construction sector has to face, Citi doubts much of the data that showed a real change in the trend in employment today. Ultimately, the analysts suggest that the improvement is cyclical and not structural.

According to the data released today in the Labour Force Survey (LFS) by the INE, the number of unemployed persons increased by 126,700 in the second quarter compared with the first, to 4,137,500, bringing the unemployment rate to 17.92% of the working population. The number of unemployed is a record number, the highest since 1976 when record-keeping began.

Moreover, the number of households with all members unemployed rose by 49,900 in the second quarter and 564,400 in one year, which brings the total to 1,118,300, while that of households with all members employed fell by 9 8% to 9,519,400.

Basically, things are looking bleak in Spain despite the positive spin some are putting on today’s numbers.  Hopefully my last two posts on Spain, House price declines accelerate in Spain and Hypo Real Estate need for 10 billion also reveals huge problems in Spain, give you a sense that there is more downside to come for Spain’s property sector and its banking sector. This very definitely will negatively impact the employment market in Spain.  Zapatero should feel lucky he was re-elected last year or he too would soon find himself unemployed.

Related article

El paro alcanza los 4,13 millones, el 17,9% de la población, pese al Plan E – Finanzas

Related posts:

• 651,000 jobs lost but unemployment rate at 8.1% in U.S.
• Spanish unemployment up
• 467,000 jobs lost in the U.S. in June 2009
• Spain begs to be at upcoming G-20, Brazil says no
• Comprehensive unemployment rate is 17.5%

Every country has a problem child or two in the financial services sector. America has Citigroup and Bank of America. Britain has RBS and HBOS/Lloyds.  And Germany has Hypo Real Estate. 

I have been chronicling problems at the real estate lender on this blog for some time now and last posted on HRE in April (“HRE: defusing the German financial time bomb”).  Back then, the German government was looking to step in and effectively nationalize the company.  Subsequently, on June 23rd, Hypo Real Estate warned of heavy future losses. Having already received €100 billion in support from the government, you could be forgiven for thinking HRE is a bottomless pit. 

Now that the company is a ward of the state, taxpayers are on the hook for another 10 billion. But, Hypo Real Estate’s plight reveals stresses in Spain as well. Ambrose Evans-Pritchard reports.

"The bank clearly has a solvency problem," said Michael Endres, head of the board in an interview with Welt am Sonntag. "It wouldn’t surprise me if a capital injection of €10bn proved insufficient."

Meanwhile, the extent of credit damage in Spain is becoming clearer after America’s GMAC revealed that it had been selling Spanish mortgage assets at 14.5 cents on the dollar as it withdraws from global ventures to focus on the US home market.

Until now, it has been hard to measure the extent of the "haircuts" being suffered on Spanish mortgage securities since there is no obvious gauge such as the ABX Index used to track sales prices on US subprime and Alt-A debt.

The GMAC sales suggest that Spain’s property crash will inflict large losses on foreign creditors, mostly from Germany and France. The Spanish government has long insisted that higher credit standards in Spain have spared the country the sort of debacle seen in the US.

Hypo Real’s Mr Endres said earlier management had expanded at breakneck speed in foreign markets that they never understood, wading cluelessly into US housing through its Dublin operations. "The property market is like farming: you don’t buy a field until you have walked around it a few times," he said.

First of all, I would love to know what GMAC is doing in the Spanish mortgage market. Considering GMAC just got a second bailout in May, American taxpayers have the right to know what GMAC is doing and where. 

The revelation of GMAC’s involvement also makes clear how intertwined the global financial system is – an American auto lender gets a bailout and then dumps Spanish mortgage assets for a ridiculously low price. These losses make clear that a reckless German real estate company speculated away billions in the same foreign market, turning it into a government-owned company and requiring yet more money from German taxpayers.

But, I should also add that 14.5 cents on the dollar is extremely low given the fact that Spanish house prices have only fallen 13% to date (see my post “House price declines accelerate in Spain”).  What does that tell you about likely losses in the Spanish banking system going forward?

Related posts:

• Hypo Real Estate: 600 billion in off-balance sheet assets
• Germany: banking system collapse possible due to Hypo Real Estate
• Spain: Bleak forecast puts unemployment at 22% in 2010
• House price declines accelerate in Spain
• More problems at three European financial institutions

My translation below is of an article from the website Finanzas.

House prices accelerated their decline in June, down 10.1% over the same month of 2008, which is three tenths more than the previous month, when housing fell 9.8%, according to an Index of Spanish real estate market (IMIE) from Tinsa.

This fall, which is typical at the beginning of the year, adds to those ongoing since December 2007, a date from which the cumulative decline in the price of housing is 13%.

The IMIE shows further that this past June two of the five regional sub-indices showed decreases greater than the overall average.

Thus, house prices in the Mediterranean coast fell by 12.3%, while in the capitals and big cities, it fell by 10.5%. Still, in metropolitan areas the price of real estate declined by 9.9%, below the 10.1%.

Cumulative decline of 17.7% in coastal housing

For their part, house prices fell by 9.3% in the case of the Balearic and Canary islands, while the drop was 9.8% in the category of the remaining municipalities.

Based on the cumulative decline from the peaks of each subs-index, the Mediterranean coast, with a correction of 17.7%, and the capitals and major cities, reaching 14.3%, and the municipalities of metropolitan areas, with a fall of 13.6%, stand out.

What you should notice here is that the decline in house prices in Spain is much less than the declines we have witnessed to date in Britain or the United States.  Some might see this as a positive sign regarding the Spanish economy.  However, given the huge run-up in prices during the boom, I see this as a warning that declines in prices have much further to go in Spain.  The resulting losses will be catastrophic for the savings banks in the region. Therefore, developments in regards to Spanish house prices bear watching, in particular because the ECB had been instrumental in providing liquidity to the savings banks (debt owed by Spanish banks to the ECB hit a new record in June above €70 billion – see Spanish-language article here).  I suspect this liquidity is no longer on offer and that means the cost of larger problems in the banking sector will fall on Spanish taxpayers.

Source

El precio de la vivienda acelera su caída en el último mes y baja un 10,1% - Finanzas

Related posts:

• Case-Shiller shows home price plunge
• Case-Shiller index: Across the board declines in U.S. housing
• Consumer credit down a massive 33% in Spain
• Hypo Real Estate need for 10 billion also reveals huge problems in Spain
• Nationwide: UK house prices up strongly for third month

You have probably heard the stories about China National Offshore Oil Company (CNOOC) bidding for Repsol YP’F’s Argentine assets in a quest for more natural resources for China. Well, apparently, the Chinese want a lot more than just Argentina; they want the whole of Repsol’s Latin American asset base.

The Chinese have been buying up African oil assets left and right.  But, this is a HUGE asset grab by the Chinese in America’s backyard.  Remember the Monroe Doctrine? Well, forget about that now, because it is game on for the Chinese.

Here’s my translation of the important bits of a Spanish-language article discussing this development.

Contacts between Repsol and several Asian companies goes beyond their Argentine subsidiary YPF. As confirmed by sources close to the talks, the Spanish oil company has negotiated with China National Offshore Oil Company (CNOOC) to unite all exploration activities in Latin America.

According to what Finanzas.com has learned, the discussions between representatives of the Spanish energy group and the Chinese oil company began a little over six months, but intensified in April and May. The aim was to create a group owned by the two companies, with the majority owned by Repsol, which bring their exploration activities.

The negotiations progressed to the point that both requested a valuation of the assets by two investment banks. However, according to official sources of the Spanish group, there has been no agreement between Repsol and CNOOC on price, such that the contacts have cooled in June. In fact, yesterday, the president of the third largest oil company in China said "CNOOC’s strategic focus remains focused on the search for cooperation, rather than mergers and acquisitions," explained Fu-Chengyuan.

Irrespective of whether these developments yield results, CNOOC obviously is willing to spend a lot of money to get access to more oil.  And several sources are saying that Chinese companies are willing to pay top dollar.  You will recall that CNOOC is the same company that attempted to buy Unocal in March 2005.  Their overtures were spurned on national security grounds despite the very limited domestic asset base that Unocal controlled and despite their offer being materially higher than Chevron.

I have a couple of takes on this news.  First, the Chinese clearly want access to natural resource assets in order to power their domestic growth. Previous attempts to acquire Unocal and and the over-indebted Rio Tinto by Chinese companies proves this. But, these attempts have been met with protectionism and I imagine the Chinese find this extremely frustrating.  So, they have decided to look elsewhere for their natural resources.

In my view, the fact that they have met protectionist hackles in the West makes them all the more desirous to acquire good assets outside of developed countries both to power their economy and to reduce dependence on the West. Let’s see if the Repsol deal meets with a protectionist response.

Source

Repsol negocia una alianza con la china CNOOC para toda Latinoamérica – Finanzas

Related posts:

• Will the U.S. allow China to buy more Gulf of Mexico oil assets?
• China detains Rio executive on suspicion of espionage
• Should we expect a protectionist China?
• Spain: consumption drop four times as much as in ‘93
• China company performance

This is a translation of a Spanish-language article from Finanzas.

For UBS, there is no debate about the economy’s green shoots despite the improvement in employment and the slowest fall in consumption and industrial production. In a harsh report on Spain, the Swiss bank says that the worst is yet to come, and that unemployment will reach 20% of the population.

The institution ensures that the latest figures released “have shown a marked deterioration in the situation.” For the bank, the problem began with an unprecedented housing bubble, both in size and price, which now has spread to other sectors as demonstrated by the collapse of industrial production – which has fallen by nearly 30% and contributed more than the construction sector to the fall in Gross Domestic Product (GDP).

“We see very few reasons to be optimistic in the short term. The future will be much better, “say UBS analysts, none of them Spaniards, whose work has been supported by another study on the domestic banking sector. “The labour market will continue to deteriorate rapidly, with devastating effects on the rest of the economy!” they say. According to their calculations, unemployment will exceed 20% at the end of 2010.

In the view of the Swiss group, the construction sector has gone from employing 2.7 million workers in the second quarter of 2007 to 1.97 in March of this year. That is to say, 760,000 jobs have already disappeared, reducing its weight in the economy to 10%. In Europe, this figure is 7.5%, so building could lose another 500,000 jobs by the first quarter of next year.

The Swiss bank added that as a result of the aforementioned, the government fiscal situation has deteriorated, as it has subsidised work schemes to revive the economy. Moreover,  it has suffered lower revenues as well due to lower contributions to the Treasury. However, UBS believes that the Government has ample room to manoeuvre because the debt burden is still low and because the level of taxation is low compared to other European countries. However, they qualify this saying that the State has little capacity for new large stimulus packages due to the huge public sector deficit.

The price of houses

Regarding the real estate sector, UBS says that in late 2007, Spain was the country with the more overvalued house prices in Europe. It amounted to 55%, followed by Ireland, with about 30%. For the bank, the situation has not changed much since the prices of homes have only fallen by 6.5% from the peak.

The bank says that this market behaviour is logical because sellers do not want to dispose of assets if it is not at an attractive price. This attitude leads to a collapse in the number of transactions, which are ever increasing supply, which results in a longer fall of the house prices. According to their estimates, this fall will be at least 20%.

Source

UBS, contundente: “El desastre en España va a continuar” – Finanzas

Related posts:

• House price declines accelerate in Spain
• Spain: Bleak forecast puts unemployment at 22% in 2010
• Spain: who is responsible for the property bubble?
• Hypo Real Estate need for 10 billion also reveals huge problems in Spain
• Spain: “we need to go back to 2000 wages and prices and start again”

Credit in Spain is contracting at an unprecedented rate, down 33% in the first quarter as Spain faces a housing bust and near 20% unemployment. Below is my translation of part of a Spanish-language article explaining the situation.

Consumer credit fell by 33.7% in the first quarter, to €5.796 billion, and late payments rose to 17.54%, according to the National Association of Financial Institutions Credit (Asnef).

Of this total, 4.254 billion euros corresponded to consumer goods, which fell by 23.9% and 1542.3 million euros to the automotive sector, which fell by 51%.

Asnef stressed that the fall in the consumer sector has been mainly due to losses on personal loans, due to the sharp decline in the credit available for consumer goods and by the contraction of revolving credit associated with credit card usage.

Specifically, consumer goods fell by 30% to 882.9 million, revolving credit card loans by 14.5% to 3.142 billion, and personal loans by 65% to 227.9 million euros.

With regard to late payments, the financial institutions put their rate at 8.03% and by activity, consumer credit stood at 17.54%, while in the automotive sector, it stood at 13.70%.

The total number of contracts signed during this first quarter was 1.64 million, representing a 27.6% lower over the same period last year, of which 1.5 million were for consumers, at an average 2,720 euros, 5.7% less, and 119,822 automotive contracts, at an average of 12,870 euros, 45.7% less.

Clearly, these are disastrous numbers.  This is one reason that ratings agencies have been downgrading Spanish banks.  I expect more bank failures or bailouts in Spain in the coming months.

Source

La morosidad se eleva hasta el 17% en los créditos al consumo – Finanzas

Related posts:

• Credit in the US is collapsing
• Chart of the day: consumer credit growth
• Spain: savings banks suffer while BBVA and Santander expand
• Spanish local governments struggling with bust
• Spain intervenes to save Caja Castilla La Mancha

We are starting to get a sense of who the winners and losers of the Great Unraveling are. Spain is definitely a loser.

Just think, a few years ago Spain was the envy of Western Europe with a dynamic and booming property market and prodigious GDP growth. The country was THE holiday-maker’s paradise, with many buying second homes. It ranked with Ireland as a perennial winner in economic growth in Western Europe.

Today, Spain has 4 million unemployed citizens and 1 million households where every member is unemployed. The overall unemployment rate is now edging ever closer to 20%. Property prices have plummeted. And  In Spain’s version of General Growth Properties‘ bust, two major property companies, Martinsa Fadesa and Drac, have hit the wall. The banking crisis is only just beginning in earnest as Spanish savings banks are weak and only one major savings bank, Caja Castilla-La Mancha has gone under. Just recently, Mexico surpassed Spain as the largest Spanish-speaking economy.

Spain is suffering from, in a word, depression. And this must be a great come-down for a nation once lauded as one of Europe’s most promising economies.

Unfortunately, more humiliation is being dumped on Spain. You see, Spain is NOT in the G-20. Last November, a lot was made of this because John McCain had dissed the Spanish government during the Presidential elections in the United States and Spain was not invited to the G-20 meeting in Washington D.C.  Eventually, Spain – along with the Netherlands – got a hall pass.

Now, another G-20 meeting is coming up – and Spain has not been invited… again. But, to add insult to injury, Brazil is saying that Spain should not ever be invited. After all, it is not a member of this club of the richest, largest economies.

With more economic pain in store for Spain, the country will have to accept its newly diminished status.

Sources
España pide la entrada formal en el grupo de países G-20 – El Pais
Brasil dice que España no estará más en el G-20 – ABC

Related posts:

• Spain avoids negative GDP
• Spain: Bleak forecast puts unemployment at 22% in 2010
• Spain panicked over possible rate hikes
• Spanish property market implosion
• Spain gets deflation

We should consider Spain one of the four original bubble markets where residential property markets soared to ridiculous levels during the housing bubble.  The bubble has now popped and those countries, the U.K., the U.S., Ireland and Spain, are reeling.  To be sure, there were bubbles in other markets as well. However, these four markets should certainly be the big economy markets to watch.

You may have seen the recent report on the Spanish savings bank Caja Castilla-La Mancha where the government was forced to intervene.  This is the tip of the iceberg when it comes to the savings banks.

Back in August, you may recall that Dutch Central Bank head Nout Wellink, who is also an ECB governing council member, said the ECB has to stop propping up banks.  Most people in European finance knew he was pointing the finger at the Spanish cajas in particular as they were addicted to ECB credit.

Fast forward to today in the wake of the Caja astilla-La Mancha episode and reports are emerging of huge potential losses in Spain:

The cajas, which are mutual banks controlled by regional politicians, have a bigger problem with bad debts in Spain than shareholder-owned counterparts such as Santander and BBVA.

The cajas were more aggressive during the good times – loans to developers increased by more than 50pc in 2006, and account for a fifth of their total loan books. This explains why the ratio of non-performing loans stands at 4.5pc for the cajas, against 3.2pc for commercial banks.

It looks like the Bank of Spain, which kept Spanish banks from buying toxic assets out of the US, wasn’t prudent enough at home. True, banks were ordered to build a thick cushion of generic provisions during the good years. But for some cajas, these provisions will be eaten up by losses. In the last year, the sector’s ratio of provisions to bad debts, or coverage ratio, has fallen from about 200pc to just 56pc.

As property prices fall and new developments sit unsold, the cajas’ losses mount. Credit Suisse estimates the cajas will need to raise €60bn just to keep the ratio of equity to non-performing loans at 160pc.

That may be high. Suppose 10pc of whole loan book – and a quarter of the €172bn of loans to developers – go bad. And suppose only 40pc of their value of the loans is recovered. The total losses would be about €34bn – eliminating nearly half of the current equity in the sector.

Savings banks could cover part of the hole with operating profits and existing provisions. But they have only €23bn in provisions now. To get the buffer up to 75pc of non-performing loans, another €16bn needs to be found.

Some of the missing capital – losses and reserves – will be generated by operating profits, running at €15.2bn annually. Add it all up, and there still seems to be a capital hole of nearly €40bn. The gap isn’t spread evenly, and the richer cajas aren’t likely to want to share much with their poorer brethren via mergers. The Boss of Spain’s biggest savings bank, La Caixa, recently said mergers made more sense when financial margins were wider. So in practice, the shortfall is likely to be larger.

Some cajas can sell industrial stakes. But they can’t raise equity from private shareholders, as Santander recently did, because they are not listed. It looks like the government may have to foot most of the bill.

As I have said many times, the banks in Europe are well under-capitalized. Spain is not the only one here and this is going to become ever more apparent as 2009 takes its course.

Source
Spain’s savings banks could face €40bn hole in capital – Telegraph

Related posts:

• Spain: savings banks suffer while BBVA and Santander expand
• Spain intervenes to save Caja Castilla La Mancha
• Hypo Real Estate need for 10 billion also reveals huge problems in Spain
• Spanish unemployment up
• Consumer credit down a massive 33% in Spain

Spain is one of the original four bubble economies to implode.  This group includes the U.S., the U.K. and Ireland.  Unfortunately for the Spanish, in the wake of their property crash, things in Spain are looking particularly bleak with unemployment rising, GDP plummeting, and banks like Caja Castilla-La Mancha and property developers like Martinsa Fadesa and Drac hitting the skids.  Add deflation to this list of concerns.

The harmonized inflation rate in Spain – measured in the same way in all countries of the euro-zone – fell 0.1 percent in March, representing the first interannual decline in prices in the history of this indicator since it began to be developed in 1997.

Throughout the history of this indicator, which began in January 1997, this has never come to pass. It is also the eighth consecutive decline experienced by the annual HICP, which has tailed off since July 2008.

The annual rate of HICP usually tracks — and it varies little, usually by tenths of a percent —  the overall CPI, for which March figures are to be published next April 15.

Look at the graph below to see how precipitously inflation has dropped in Spain.

Clearly, Spain is in depression — and things are likely to get worse before they get better. The U.K., the U.S. and Ireland will have to do some heroic things to avoid an equally dismal outcome.  While the U.S. and the U.K. can try to print their way out of depression, Ireland, along with Spain doesn’t have that option.

Source
La inflación cae el 0,1% en marzo, su primer descenso de la historia – Finanzas.com

Related posts:

• Ireland gets deflation
• Spain begs to be at upcoming G-20, Brazil says no
• Spain and Ireland ‘thrown to the wolves’ after ECB move
• Switzerland gets deflation too
• Germany gets deflation

This comes via Edward Hugh at “A Fistful of Euros“:

The governing council of the Bank of Spain has taken the decision to intervene in the operation of the Caja after carrying out an analysis of its financial position, thus taking as read that the negotiations which might have lead to its merger with the Andalucian ‘Unicaja’ have not been able to reach a successful conclusion.

The “intevention in Caja Castilla La Mancha will mean in the first place that the Bank of Spain will now manage the Caja directly via the management commission it is about to establish. Sources at the central bank have given an assurance that all the banks clients’ savings are guaranteed. The Bank of Spain will now negotiate with the government urgent measures to guarantee the liquidity of the Caja, and its normal functioning.

Add this to the three other European financial institutions having difficulty this weekend. We are likely to see much more of this from Spain’s savings banks as depression takes hold there.

Related article
Caja Castilla-La Mancha se enfrenta al momento más crítico en sus 17 años de vida – El Mundo

Related posts:

• Spain gets deflation
• Spain begs to be at upcoming G-20, Brazil says no
• Spain’s savings banks may have 40 billion in writedowns
• Spanish local governments struggling with bust
• Consumer credit down a massive 33% in Spain

As recession takes hold, European citizens are starting to ask questions about how they were led into this, the deepest downturn in three-quarters of a century. The leading Spanish daily El Pais published a very thoughtful article today asking how things had unravelled so quickly and so spectacularly in Spain, previously one of the fastest growing economies in Europe.

These are the same questions that one must ask in the United States, Britain and Ireland regarding their own property bubbles.  And, in view of recent turmoil in Eastern Europe, I suspect answers will be sought there as well.

This first part in a series of articles lays out the statistics of bubble and bust, demonstrating the scale of the bubble in Spain and it also makes a number of suggestion as to how to prevent a recurrence. You should note that this article points out Spain’s helplessness due to its lack of control over interest rates as a key impediment to solving the problem. Below is my translation of the article:

This week, El Pais will begin publishing in the business section a series of reflections by a group of well-known economists about the origins and effects of the crisis in our country as well as specific and well-argued proposals to exit from it quickly and rejuvenated. Affiliated with universities and research centers in Spain and abroad, their common feature is extensive experience accumulated through research on the characteristics of our economy that make it particularly vulnerable to negative changes in the economic cycle. Fundación de Estudios de Economía Aplicada (FEDEA) served as a vehicle for channeling this initiative coordinated by Antonio Cabrales (Universidad Carlos III and Fedea), Juan José Dolado (Universidad Carlos III), Florentino Felgueroso (University of Oviedo and Fedea) and Paul Vázquez (Universidad Complutense and Feda) which will result in an eBook. The property sector, the labor market, financial institutions, fiscal policy, R & D and education are just some of the topics addressed in these articles.

A generation of Spaniards will lose their savings because they have spent to buy homes which are falling in price. So, in our old age and our children, we cannot count on what we hoped for. And many are so indebted that now they cannot cope with their debts. Moreover, we specialized in being masons, plumbers, electricians, truck drivers, glaziers, manufacturers of doors, beams, cranes, tile or sinks, gear, selling mortgages, appraisers, registrars and a host of occupations related to construction. And now that our experience is no longer valid and we must dedicate ourselves to something else.

In addition, the Spanish economic miracle was a mirage, because we were dedicated to building homes that we would not have wanted to build had we knon how little they would be worth in the future. A house is only valuable as something in which to live. And if no one wants to do so, then it is not worth anything. We have purchased flats which are still being constructed or which we visit only a few days a year, not because we were eager to consume housing, but because we thought they were a store of value for the future.

Further, our banks and building societies were dedicated to lending to developers and builders, and many of them now cannot repay the loans, which could lead to bankruptcy for banks and building societies — if they are allowed to go bankrupt. And municipalities have enjoyed unsustainable revenues due to land reclassification and the waste to which they have become accustomed is over. There are the cars that we bought, which we actually could not buy because we were not as rich as we thought. And from there led a complete distortion of the fabric.

Finally, as this kind of unsustainable activity has stopped, the economy has entered recession. To help understand the very adverse consequences of delirium, it is necessary to review the path house prices have followed in Spain, and their causes, their predictability and what could have been done to prevent it.

Growth in construction sector
The growth of the total construction has been high, 5% per year in 1996-2007. Between 1998 and 2007, the housing stock grew by 5.7 million, nearly 30%. In the third quarter of 2007, construction accounted for 13.3% of total employment, far above, for example, 6.7% in Germany or 8.5% in the UK.

Several factors have stimulated the demand for housing. They exaggerated the economic expansion (partly due to real estate boom itself) and the resulting fall in unemployment and cuts in mortgage interest rates after the integration into the euro, from 11% in 1995 to 3.5% in 2003-2005 –rates which were often negative after discounting inflation. Moreover, banking competition has facilitated access and improved conditions of mortgage credit. It has also increased the number of households, especially due to a massive influx of immigrants, about 4.2 million between 1996 and 2007. Finally, the purchase of properties by families not living in Spain has increased by a scale that is hard to calculate.

Supply responded to increased demand, as the data above demonstrates, but could not completely satisfy it, leading to large increases in housing prices: an annual inflation rate of 1% in 1995-1997 came to 18 % in 2003 and 2004. On average, between 1995 and 2007, house price inflation was nearly 10% annually.

In fact, to the extent that agents have expectations of future increases in housing prices and demand is positively influenced by them, for a time one can see a spiral of growing demand, supply and prices.

Has there been a speculative bubble?
A bubble is characterized by the presence of a high volume of transactions at prices different from the fundamental economic value. It is not easy to identify because of the difficulty in calculating the latter value well. Often, the identification is made retrospectively, after a sudden collapse in prices. However, in the real estate market, because of low liquidity, the collapse is slower than in the financial markets and is reflected initially more in quantity than price. In Spain, the sale of homes has plummeted in 2008. It is estimated that at the end of the year there were between 650,000 and 1.3 million unsold new homes.

In any case, the revaluation of property in Spain between 1997 and 2007 was 191% according to The Economist, the second highest in the OECD and higher than in countries where there is no doubt about the existence of a bubble, like the United Kingdom (168%) or USA (85%). As for the fall, according to INE, in the third quarter of 2007 house prices have risen a further 3.7% in interannual terms, and the price of previously-owned houses has fallen by 11.4%, compared to increases of 9.2% and 7.5% respectively a year earlier. The speed and magnitude of these changes point to a bubble.

More rigorously, the key factors mentioned above (the expansion, interest rates …) are not explained by price alone. Available estimates –for example, those from the Research Department of the Bank of Spain — indicate that the observed prices were well above levels justified by economic fundamentals. This overstatement is estimated at between 8% and 20% in 2003 and between 24% and 35% in 2004. Thus, it seems clear that a significant part of inflation in housing is due to speculative reasons: people bought houses as investments, because they expected them to be revalued. Furthermore, it was considered a safe investment compared to the risk of financial assets shown by the collapse of the stock exchanges in 2002.

It is worth noting that a bubble has nothing to do with states of collective optimism or pessimism that can be associated with levels of economic activity, high or low, but are transmitted through a mechanism of self-expectations. In the case of a bubble, prices do not perform their function as a mechanism for the proper allocation of resources and actual errors. If the bubble is big and durable, the misallocation of resources from savers, companies and workers can cause extensive destruction of real wealth.

Did we know that there was a bubble?
Since 2002, the Bank of Spain has warned about the overvaluation in housing — although it has been too optimistic about the likelihood of being “consistent with a gradual and orderly decline”, perhaps because it feared pricking the bubble. In 2003, The Economist estimated overvaluation in Spain at 52%. In 2004, the International Monetary Fund stood at 20% -30%. Among the Spanish economist José García-Montalvo 2003 figures by 28.5%, stating: “In short, it is very likely that the Spanish property market is a time bomb waiting to be detonated.” However, senior politicians and businessmen refused repeatedly and until recently to admit there was a bubble.

Were the politicians aware of the bubble?
The PSOE’s electoral gamble in 2004 spoke of “a new pattern of growth that is more robust than the current.” Its candidate for president of the Government, José Luis Rodríguez Zapatero, said: “Since we have an economic model based on construction and mortgages, Spanish families are now more indebted than ever in their history.” And then the coordinator of PSOE’s economic program stated: “The policy of renters which (…) prevents people from selling and producing a catastrophic collapse in prices, due to a change in expectations. Indeed, the then minister of economy of the Partido Popular said: “The truth is that we are living in a long cycle and low uncertainty. This is indisputable. And what is important is that a model is sustainable.”

Could something have been done to prevent the bubble?
Tackling a bubble is easier (technically) if you have the right tool: interest rates. It’s harder if you do not have it, as in Spain, who has left it to the European Central Bank (which has long kept rates too low for the needs of the Spanish economy). However, we believe that the following measures — designed to really know the level of housing prices and reduce tax distortions that made this type of investment artificially profitable — would have mitigated the bubble:

1. Improve information on housing prices. Unlike other countries, in Spain there is no information on actual transaction prices. Only since 2008 are prices available from the registry and notary– only in index form, not of monetary value (perhaps due to suspicion about overstatement in written values). Up until then, there are only official in the Ministry of Housing developed from data supplied by companies that priced homes for customers, often in the granting of mortgages. For obvious reasons, this is not a reliable source. And the official information policy has been lamentable. For example, the ministry announced in October 2004 that it was suspending publication of data on housing prices, but later corrected itself. It then introduced a methodology bias into to the measurement that held prices down. At present, the ministry does not offer on its website any data prior to 2005 prices! And at no time sought to make the public aware of the possible overvaluation of housing. However, it would be possible to have information on the actual value of real estate transactions, for example, collected in one of the household surveys conducted by INE, or to conduct a survey specifically for this and use it to correct the measurement of changes in the price of housing quality.
2. Reduce the the income tax deduction to shelter, which heavily skews investment decisions of households toward housing over other assets and, together with the law on leases, promotes home ownership (81.3% of households in 2005) compared to renting. In 2002, 79.7% of the gross wealth of households was related to real estate, compared to 75.5% in Italy and 38.4% in the U.S.. In 2005 the figure was 80%. In 1998, the Government of Partido Popular reduced the existing high relief, but after that no progress was made.
3. Increasing the regulatory oversight on real estate companies and transactions. Recent estimates place in Spain between 2004 and 2005 as having the third-largest black market economy amongst developed economies (20.5% of GDP), after Greece and Italy. This percentage has been reduced by 2.2 points since 2000. Probably a large part of the hidden activity is channeled through the housing market. The Union of Technicians of the Ministry of Finance estimates tax evasion in the property sector at 8.6 billion euros per year (about 0.8% of GDP).

Why not attempt to stop the bubble?
First, because the construction sector is labor intensive, which is important in a country with a structurally high unemployment rate. Secondly, because an increase in the value of housing benefits the average voter, who is the owner of his home. And thirdly, because the real estate sector generates substantial revenue for the public sector at national, regional and municipal levels. For example, in 2004, it accounted for 60% of the budget (excluding liabilities and current transfers) of Valencia and 50% of Madrid.

The Partido Popular [People's Party] government was wrong with its law liberalizing the land in 1998. It believed that with more land, housing would increaseand house prices would  fall. Big mistake. Homes were bought and built not because they were cheap, but because they were expensive and one had expectations that they would be even more so  in the future. Thus, the land law threw fuel on the bubble’s fire, triggering frenetic activity which reclassified thanks to local rulers who saw municipal coffers filled (if not their own pockets).

For their part, the PSOE government’s attempts to encourage housing and rent and their new land law of 2007 have been completely ineffective. In reality, it has only prevented us riding the bubble until its last death rattle.

Ultimately, both Governments have failed on one crucial issue: saving their citizens from economic excesses which carried off their savings, their jobs and their prosperity. It is a failure that must be learned for the future and for making appropriate accountability.

Source
¿Quién es responsable de la burbuja inmobiliaria? – El Pais

Related posts:

• House price declines accelerate in Spain
• UBS: ‘The disaster in Spain will continue’
• Spanish property market implosion
• Spain: Bleak forecast puts unemployment at 22% in 2010
• Hypo Real Estate need for 10 billion also reveals huge problems in Spain

Niels Jensen from Absolute Return Partners based in London sent me the following insightful analysis regarding the Euro, the possibility of Eurozone default, the possibility of a Eurozone bust-up and all things European. As Niels is snowed in under 8 inches of snow in wintery London, he obviously has had the opportunity to craft a piece of brilliance.

He has given me permission to publish this piece in full. However, you should also be able to find it at Absolute Return Partners’ website (www.arpllp.com), where there is a wealth of other research and commentaries. For further questions, the contact email is info@arpllp.com.

When the euro was introduced about ten years ago, the pessimists didn’t give it much chance of reaching its tenth anniversary. The euro, or so the argument went, was doomed from the outset because of the wide spread in economic performance and discipline amongst the member countries. At one end you had, and still have, the highly disciplined, but also slow growing, economies of Germany and the Netherlands. At the other end you find the faster growing but poorly disciplined countries such as Spain and Greece. As icing on the cake, you also had, and still have, countries that lack in both departments, such as Italy, making it difficult for the union to ‘gel’ – well, according to sceptics.

There is admittedly an embedded weakness in the way the European currency union is structured. In the United States, arguably that largest currency union in the world, fiscal transfers between member states allow for the federal government to adjust for variances in economic performances. There is no such mechanism within the euro zone, which explains why the member states are subjected to a number of rules¹. These rules require for everyone to exercise a high level of economic discipline. The problem is that there is little or no such discipline.

The best example is the huge spread in the rise of unit labour costs over the past few years. Unit labour costs measure labour (wage) costs adjusted for changes in productivity. It is probably the best measure that exists in terms of tracking the changes in competitiveness between nations. When the Stability and Growth Pact behind the euro was established, there was no reference made to unit labour costs which, with the benefit of hindsight, was a major mistake. Even Jean-Claude Trichet, the Head of the European Central Bank, who rarely admits mistakes, has publicly stated that if he could design the currency union all over again, he would push for a unit labour cost stability pact.

Back to the sceptics. What they failed to realise was that Europe, together with the rest of the world, was about to enter a period of unprecedented prosperity. The good times would not only gloss over the deeper problems, but the euro would actually go from strength to strength to a point where it now threatens to unseat the US dollar as the premier reserve currency of the world. It is therefore perhaps a mystery to some of you, why one should question the longer term viability of the euro. That is nevertheless what I intend to do.

The problem, as I have already alluded to, is poor discipline amongst several of the member states. Ever heard of the four PIGS? This less than flattering acronym stands for Portugal, Italy, Greece and Spain, four members of the euro zone which are all in much deeper trouble than they are prepared to admit. They are often considered the ‘antidote’ to the BRIC countries, the fast growing emerging market economies of Brazil, Russia, India and China. Let’s take a closer look at the unit labour cost index for various countries (see table 1).

Table 1: 2007 Unit Labour Cost Index (2000=100)

Notes: *2006. PIGS countries in bold. Source: http://stats.oecd.org/

Since the introduction of the euro, the PIGS have failed miserably to keep up with Germany on this measure of competitiveness. So has Ireland by the way, hence its current predicament. On the other hand, Brazil (the only BRIC country which the OECD reports unit labour costs on) scores very well on this account, a fact which is not going to make life any easier for the PIGS.

EU countries outside the euro zone, such as the UK, have also lost out to Germany in recent years, but the UK has been able to play a card which is not at the disposal of the euro zone members. That card is called devaluation. Whether by design or otherwise, the UK has received a massive boost to its competitiveness in recent months as a result of the sharp fall in the value of the pound. Italy used to play this card repeatedly back in the days of the Lira. So did countries like Denmark in the dark days of the 1970s.

Back in those days there was less economic integration and recessions were rarely global. Devaluations could therefore be used to stimulate exports. The situation today is fundamentally different. The global nature of the current crisis makes it far more difficult for any country to grow its way out through higher exports. The UK will offer a great case study to test whether devaluations are still a powerful tool.

Another issue, which is potentially even more destabilising for the euro longer term, is the massive liabilities facing Europe as its population ages. We have borrowed table 2 below from Goldman Sachs which makes no secret of the challenges facing a number of European countries. Greece is clearly facing the biggest challenge. Public debt, which currently stands at about 95% of GDP, will grow to a whopping 555% of GDP by 2050 if the current pension and social security programme is left unchanged. The Greek government is painfully aware of this and have been working on several new initiatives. It was the passing of one of those new laws which caused the riots in Athens before Christmas.

Table 2: Actual Debt & Age Related Contingent Liabilities

Source: Goldman Sachs, European Weekly, 22/01/2009

Considering the poor record of fiscal discipline, many euro zone members will probably allow their debt to grow much larger before decisive action is taken. The problems are so massive – and the solutions so painful – that most politicians chicken out and pass the problem to the next generation of politicians.

A third problem facing Europe is the sheer scale of the banking crisis. Although this is not just a European problem, European countries are probably worse off than the US because a larger part of European debt has to be financed externally. As you can see from chart 1, more than $2 trillion of European and U.S. bank debt needs to be re-financed before the end of next year. Unless there is a material improvement in market conditions, re-financing at such a massive scale is simply not doable.

Chart 1: Maturing Bank Securities in 2009/10 (USD)

Source: UBS

The European approach, at least until now, has been to save the banking system at any cost. It is therefore possible that a significant share of the re-financing cost will find its way to the sovereign balance sheets and hence ultimately to the tax payer. This could further destabilise the currency union.

All these challenges are surfacing as the global economy faces the worst year since World War II. I have noted that most economic forecasters are still quite sanguine about the prospects for 2010. Be careful. The models upon which these forecasts are built are based on experience from prior recessions; however, this is no ordinary recession and historical data is therefore largely irrelevant. I am becoming increasingly convinced that most of us are underestimating how long it will take to get the global economy firmly back on its feet again.

Kenneth Rogoff and Carmen Reinhart published a research paper about a month ago which should be mandatory reading for all investors². They have studied every single banking crisis of the past 100 years and reach some rather unsettling conclusions. As they point out: “Broadly speaking, financial crises are protracted affairs”.

Following a banking crisis, asset prices fall more and for longer than most investors realise (see charts 2a and 2b). So do output and unemployment. Most importantly, though, the real value of government debt explodes (see chart 2c) but not for the reasons you might think. Yes, the bailout costs are significant, but the main driver of rising government debt is actually the subsequent collapse of tax income.

Chart 2a: Decline in Real House Prices during Banking Crises

Peak to Trough Decline & Duration

Source: See footnote 2.

Chart 2b: Decline in Real Equity Prices during Banking Crises

Peak to Trough Decline & Duration

Source: See footnote 2.

Chart 2c: Cumulative Increase in Real Public Debt

First 3 Years following the Banking Crisis

Source: See footnote 2.

So when we are told that the bailout cost, although large, is still manageable, it is only half the story. The loss of tax revenue is another nail in the coffin and could lead to a dramatic – and unpredicted – rise in public debt. Have you heard any mention of that from your government?

At this point I need to introduce something as alien as the “flow-of-funds accounting identity”³:

?(G-T) = ?(S – I) + ?NFCI⁴

I rarely throw formulas at you for the simple reason that it scares many readers away. I urge you to stay with me for a bit longer, though, because this formula is critical in order to understand how the government response to the current crisis is likely to impact interest rates longer term. The equation states that any change in fiscal stimulus (?(G-T)) must equal the change in private sector net savings (?(S-I)) plus the change in net foreign capital inflows.

Translation: If our government stimulates the economy through public spending, as it is currently doing in spades, we must either save more or we have to rely on foreigners being prepared to invest in our country. There are no exceptions to this rule.

The key question, as our economic adviser Woody Brock points out, is what will cause this equation to hold true? It is quite simple. We will save more if we get paid more to do so (through higher interest rates) or if we are so scared of the future that we stop spending and start investing instead.

Foreign investors are no different. Now, with the trillions of dollars being spent around the world to shore up our financial system, the fear factor alone is not going to be enough. Higher – possibly much higher – interest rates will be required to ensure sufficient savings.

Obviously, there is another option at the government’s disposal. The central bank can monetize some or all of the deficit by buying the bonds issued by the government. This line of action will keep ?(G-T) down; hence the need for increased private savings (and/or capital inflows) drops accordingly. The problem with this approach, as an old Danish saying states, is that it is like wetting your pants to stay warm. Monetization executed on a big scale is highly inflationary in the long run, inevitably driving bond yields higher.

The good news is that we are very unlikely to loose control of inflation in the short run. The economy is simply too weak for that to happen. In Frankfurt, the ‘eurocrats’ are currently congratulating themselves that they, through strict monetary discipline, killed inflation in the aftermath of last year’s explosion in commodity prices. The reality, however, is that the credit crunch killed inflation – they didn’t – and Europe is now at a junction where even the smallest policy mistake could be very expensive indeed. In my opinion, the ECB has been way too slow in responding to the current crisis and they must act swiftly and reduce the policy rate to near zero levels in order to avoid a deep recession throughout the euro zone.

So, could all this lead to the destruction of the euro? Could the currency union actually break up? It is not that the risk to the PIGS has not been recognised by bond investors. As you can see from chart 3 below, investors in long dated Greek government bonds now earn about 2.5% more than they do by investing in correspondent German bunds.

Chart 3: PIGS Sovereign Debt Spreads over Germany

Source: Goldman Sachs, European Weekly, 22/01/2009

On the other hand, I may disappoint one or two readers (I will certainly disappoint Ambrose Evans-Pritchard of the Daily Telegraph who appears to have declared war on the euro), but I firmly believe that the euro will almost certainly survive the current crisis. I am much more worried about some of the member countries.

There is nothing in the Maastricht treaty which prevents a member country from leaving the euro, yet the decision to join is effectively irreversible. There are a number of reasons for this, the most important being economic costs. Take Italy which has a history of compensating for lost competitiveness through regular devaluations. If Berlusconi did the unthinkable tomorrow (sorry – nothing is unthinkable in Berlusconi’s world), Italy’s borrowing costs would explode. My guess is that bond investors would demand double digit returns on a Lira denominated bond to compensate for the dramatically increased devaluation risk. Already in a precarious fiscal position, Italy could quite simply not afford that.

So, if any country were to leave the euro, it would more likely be from a position of strength, and only one country possesses enough strength to pull that off in the current environment. That country is Germany. And, although the euro is not particularly popular in Germany, I believe it is extremely unlikely for Germany to make such a move unilaterally. There are several reasons for that – Germany’s history in Europe being the most important.

At the same time, the fact that the euro has saved the bacon of more than one country in recent months – Ireland being the most obvious example – should not be ignored. For this very reason, the euro membership is actually far more likely to grow than to shrink as a result of the financial and economic crisis engulfing the world. The issue the EU has to deal with is whether the new applicants should actually be welcomed. Most of those who would want to join will bring plenty of baggage.

Another possible outcome, which you hear almost no mention of, is the possibility of a new Transatlantic currency. When I mention this possibility, everyone laughs, but think about it for a second. The economic crisis on both sides of the Atlantic is enormous. Both are resorting to the same formulas – large fiscal stimulus and quantitative easing (a word invented by central bankers because ‘printing money’ smacks too much of Zimbabwe). There is a real risk that the entire financial and monetary system on either side of the pond needs to be re-designed. If that were to happen, I am pretty confident that the Fed and the ECB would at least sit down and discuss the possibility of a joint currency. That would also allow the UK to join a currency union without too much egg on its battered face.

In the short to medium term, though, there is no such bailout on the horizon. In recent years, the weaker members of the euro, such as Italy, have managed to ‘muddle through’ (to borrow one of John Mauldin’s favourite terms), mostly because the global economy has been strong enough to gloss over any weaknesses. D-day is now firmly on the horizon. As I see things, it is not inconceivable that a member country could be forced to default on its sovereign debt. Interestingly, any euro member country defaulting on its debt could (and probably would) carry on as a full member of the currency union. And I will bet almost anything that the EU would rather have one of its members defaulting on its debt than having to break up the currency union.

Another, and more likely, outcome is the possibility of one or more member countries coming under EU administration. This would almost certainly include the most painful of all cures – mandatory wage reductions in order to get unit labour costs back in line. It would be a lot easier for the government of, say, Greece to get the EU to do the dirty job than to do it itself. Civil unrest will no longer be the privilege of countries such as Indonesia or Thailand. The recent crowd trouble in Greece could very well turn out to be the dry run for much bigger and more organised labour market unrest across Europe as reality begins to bite.

For the time being, though, European governments continue to be in denial. When the IMF recently recommended that Spain implement various structural reforms, the idea was flatly rejected by Prime Minister Zapatero. In the meantime, you can sit back and prepare for the drama to unfold. Very simplistically, it is a choice between Zimbabwe and Japan. Our central bankers can choose to monetize their way out of the current slump and run the risk of much higher interest rates and a rapidly deteriorating currency like Zimbabwe or they can show fiscal discipline and accept perhaps ten years of below par growth a la Japan. Or they can find the delicate balance in between the two and everyone will live happily thereafter. But that requires both skill and luck.

 

---

¹ The Stability and Growth Pact is the main tool to keep economic policies (and hence performance) broadly synchronized within the euro zone. The pact states that no member country’s gross stock of debt must exceed 60% of GDP and that the public deficit in any year must not exceed 3% of GDP. However, the pact allows for these limits to be broken under certain circumstances.      

² “The Aftermath of Financial Crises”, Carmen Reinhart and Kenneth Rogoff, December 2008.

³ This part is taken from Woody Brock’s latest research paper, SED Profile, February 2009. See www.sed.com.

⁴ G = government spending, T = tax revenues, S = private sector savings, I = private sector investments and NFCI = net foreign capital inflows.

Related posts:

• Ireland votes No on Lisbon Treaty
• Iceland fast tracked for EU membership
• The case against the Euro
• Greece sees credit rating cut by S&P
• Denmark wants in on the Euro

FT Alphaville is reporting that Martinsa Fadesa, the bankrupt Spanish property developer, has seen the value of its drop 30% this year alone. Spain has largely slipped from view as the credit crisis has reached global dimensions. However, it bears remembering that Spain, along with the U.S., the U.K. and Ireland have been at the forefront of residential property price falls.

The real story here is the potentially criminal inflation of asset valuaions, something that plagued the American residential property market. See details in the translation below. But, first, the FT Alphaville comments:

The administrators of Martinsa-Fadesa have submitted a report that values the assets of the insolvent Spanish real-estate company at €7.34 billion, sources said.

According to reports in El Pais, the valuation of the assets is about 30% lower than the figure arrived at earlier in the year by CB Richard Ellis.

It gets worse (emphasis ours):

The administrator values Martinsa-Fadesa’s liabilities to just under 10,000 creditors at €7.156 billion, compared with the €6.3 billion declared by Martinsa Fadesa in July. The report was submitted to creditors last week and lists Martinsa-Fadesa’s assets and liabilities as well as the ranking of the creditors.

I found the original Spanish source, and translated it.  The article is quite damning as it shows lapses by auditors, appraisers, lenders and the company itself. Note the asset value inflation of 32%, which I have bolded. This story sounds as if it could easily have been written in the U.S., the U.K. or Ireland:

The report by the directors of Martinsa’s bankruptcy reveals some accounting entries that allowed the company to say that it had closed 2007 with profits despite its precarious financial situation.

But in addition, according to this document, the administrators interposed a demand “without delay” to terminate all the guarantees demanded by financial institutions which participated in the refinancing of Martinsa’s debt to ensure the recovery of other previous commitments. Some entities already renounced these guarantees when Martinsa filed for bankruptcy. In addition, the administrators will determine if the refinancing of the 4,000 million euro loan by Martinsa aggravated the situation. They want to clarify whether “the information available to members of the syndicate of banks was sufficient to know that said refinancing would not prevent bankruptcy.” More than 40 organizations took part in the loan. Among them, La Caixa, Caja Madrid and Banco Popular Savings Corporation, among others.

Lawyers and economists are warning of the possibility that a judge, at the request of administrators, may cancel operations it considers detrimental to creditors within the period of two years preceding the date of the declaration of bankruptcy, as contemplated by Article 71 of the Bankruptcy Act. They do so because they believe that certain conditions and safeguards imposed by banks (the most common, mortgaging or divesting more assets) can be detrimental to the “mass” of creditors, but also because they fear that managers will be asked to nullify payment in kind ( deliver assets to the banks in exchange for canceling credits) until the purchase by another company.

But the investigation of administrators reveals further that the value of Martinsa-Fadesa’s assets (essentially land) was inflated, according to new valuations carried out by three firms for taxation. That will require the company chaired by Fernando Martin to rewrite the accounts that informed the Commission Nacional del Mercado de Valores (CNMV). The bankruptcy report valued the assets of the firm at 7336.9 million, 32% less than what was deemed by CB Richard Ellis.

Martinsa-Fadesa did not act alone. The vertiginous accounting revaluations were based on a report of Tasamadrid, 100% subsidiary of Caja Madrid, the main creditor of the estate, even while the report contained small print caveating that the scope of the revaluation was subject to unverified assumptions provided by the company itself.

The auditor, Ernst & Young, also approved these revaluations, so that Martins-Fadesa, the subject of the largest bankruptcy in Spanish business history with a liability of about 7200 million euros, was one of the few listed real estate companies which achieved a clean audit report in 2007.

Accounting for the merger of Martins and Fadesa attributed value to the real estate acquired by the company from La Coruna such that it allowed the firm to revalue accounts by 4,617 million. This transformed the purchase of Fadesa, whose 86.5% cost 3,512 million in March 2007 – into a bargain, to the point where the company accounted for 416 million as profit on the difference between the amount paid and the real value of the assets.

And things could have been worse. Another alternative valuation by CB Richard Ellis, who, according to market sources, was not accepted by the CNMV, would have, had it been used, revalued assets by 1,900 million instead of 416. Martins maintains that it commissioned the valuation by Tasamadrid “out of prudence”.

Now, new assessments made on behalf of the legal administrators sharply lower the value of the assets of the company. Under the heading of current assets, instead of 5912.8 billion contained in the company’s accounts to September 30 last, administrators valued that inventory at 4654.6 million. The difference is due almost exclusively to “tacit subtractions in accordance with the valuations received from independent third parties and amounting to 1255 million euros,” according to the report of the judicial administration.

Administrators also warn that “the balance of the current assets for the year 2007 included costs capitalized as business costs amounting to 57,291,000 euros — expenses not capitalized under General Accepted Accounting Principles”, despite which Ernst & Young did not make any objection.

Sources
More pain in Spain: Fadesa creditors see asset values slide – FT Alphaville
Martinsa se apuntó revalorizaciones de terrenos hasta del 19.000% – El Pais

Related posts:

• Martinsa Fadesa: the largest bankruptcy in Spanish history
• Drac: Bankruptcy in Spain as housing downturn bites
• Spain begs to be at upcoming G-20, Brazil says no
• Hypo Real Estate need for 10 billion also reveals huge problems in Spain
• Spanish local governments struggling with bust

Below are links to a few posts on the web that I found particularly good. For more posts and news, see the news feed.

Mirabile Dictu! Rubin Takedown by the Wall Street Journal! – naked capitalism

The Fed’s QE Operations and the Dollar – Stephen Jen, Morgan Stanley (Hat tip Stevie B)

Monetization, sterilization: What’s going on between the Fed and the Treasury? – News N Economics (Hat tip Stevie B — update in news feed and comments below)

The boom in gun sales – The Economist

Bailouts hit $8.5 trillion – The Mess That Greenspan Made (Tim Iacono is a speaker at this weekend’s Hard Asset Investment Conference)

The REAL Maverick: Present Economy worse than Depression – The Big Picture

Krugman: How did a few failed banks add up to a financial meltdown – The Big Picture

Poverty spreading in suburbs: study – Reuters

U.S. Stocks Gain, Capping S&P 500’s Best Weekly Rise Since 1974 – Bloomberg (Last week was a really good one in Europe and Asia too)

‘Chief Yahoo’ Yang May Make New CEO’s Task Difficult – Bloomberg (I worked at Yahoo! and remember the good ol’ days before Yang screwed it up)

Spanish developer falls with €2.3bn debt – Times Online (remember Martinsa Fadesa? The Spanish property crash is still very much a concern)

Commerzbank seals Dresdner deal early – Financial Times (The Germans are eager to get their banking sector on a stronger footing, now)

Related posts:

• Links: 2009-01-31
• Links: 2008-12-08
• Links: 2008-12-17
• Spain: consumption drop four times as much as in ‘93
• News Roundup: 28 Apr 2008

Spanish banking giant Banco Santander has pulled through the credit crisis with a much higher profile than ever before. I was initially skeptical that the firm was hiding huge losses at it had exposure in Spain, the UK and the US, all terrible bubble markets. Yet, it has seemed to come through swimmingly and is using the current market turmoil to consolidate its overseas positions.

The latest move by Santander is its merger discussions with Sovereign Bancorp, the beleaguered U.S. regional bank based in Philadelphia. Regional banks in the U.S. have suffered more because mark-to-market rules under accounting rule FAS 157 has put off foreign buyers afraid of significant credit writedowns applicable under a merger due to the FAS 157 rule. Rumors have circulated that Canadian banks have avoided the U.S. for just this reason.

With Santander looking seriously at Sovereign, this should put the likes of NCC and Fifth Third into play as well. I reckon this news will further fuel a massive rally in financial shares come Monday morning.

Banco Santander of Spain is in advanced talks to acquire Sovereign Bancorp for virtually no premium, people briefed on the matter said, as the acquisition of weakened banks continued apace in another hectic weekend.

Santander is likely to pay $3.81 a share for Sovereign, a savings and loan that has been hobbled by bad mortgages. That would mean buying Sovereign for about $2.53 billion, these people said.

The move would bolster Santander’s footprint in the United States, something the Spanish bank has desired for some time. Unlike other banking giants throughout the world, the firm has been largely unhurt by the global credit crisis, having foregone trading in subprime mortgages and other risky debt that have since imploded.

Santander has been considered a logical white-knight for Sovereign, ever since it took a nearly 25 percent stake in the bank three years ago and filled three seats on its board. By buying out the remaining shares, Banco Santander will be able to put Sovereign on stronger financial footing. It also would reduce the chance that its original stake would be wiped out as Sovereign’s prospects soured.

Shares in Sovereign have plunged 77 percent over the past year, but closed up 16.9 percent on Friday.

As other Spanish banks are deluged by losses, Banco Santander has been one of the more robust players to emerge from the credit crisis. It steered clear of many of the problems tied to American subprime mortgages and other complex investments, and is now seizing opportunities on a global stage. On Friday, it completed its bargain-basement 1.3 billion pound purchase of Britain’s Alliance & Leicester. And it had been among the early bidders for Washington Mutual and Wachovia in the United States.

The bank is no stranger to mergers: Its current form was born in 1999 by the merger of Banco Santander and Banco Hispano, giving it big presences in Europe and Latin America. In 2004, Santander bought Abbey National of Britain for $15.6 billion.

Along with Banco Bilbao Vizcaya Argentaria, Banco Santander has been seeking gain a bigger foothold faster-growing American markets, especially places like Florida, Texas, and Arizona that have strong ties to Latin America where it also has expanded.

Sovereign, a Northeast regional player based in Wyomissing, Penn., outside suburban Philadelphia, has suffered mightily as the housing crisis worsens. After barreling into new markets in the southeastern and southwestern United States, it became swamped by mortgage and home equity losses as home values in those regions collapsed.

The bank has also been hit hard large auto loan portfolio and big holdings of Fannie Mae and Freddie Mac preferred stock, which have effectively been wiped out. As a result, it has sharply pulled back from making new loans.

Source
Santander In Advanced Talks to Buy Sovereign – Deal Book

Related posts:

• Banco Santander is very confident
• Santander buying Alliance & Leicester for £1.3 billion
• Santander: US, Spanish and UK mortgage exposure
• Spain: savings banks suffer while BBVA and Santander expand
• Spain’s BBVA making a push in the US

In July, I made my ten predictions for the markets and global economy for the rest of the year. Some of my predictions were pretty pedestrians, and some were fairly bold. Let’s take a look and see how I’m doing.

Here’s what I originally said:

1. Oil prices will dip below $100 before year-end. Let’s face it $130-$140 oil is a real deterrent to energy consumption. After weeks of demand destruction, the price of oil is finally reflecting this fact. Moreover, with the global economy headed for recession, expect oil prices to fall sharply. This will be a great relief for consumers and a net help to GDP.
2. Inflation will fall globally. With oil prices coming down sharply, inflation will recede too. Therefore, I expect to see headline inflation in the US, the UK and the Eurozone in particular head down into the sub-4% area by year’s end, another happy turn for the economy.
3. The Fed will lower rates. With oil prices down, the Fed can give up its talk about being hawkish on inflation. We didn’t believe them anyway! When push came to shove the ECB acted and the Fed did not. With inflation sinking, the Fed can focus its policy response on the turmoil in the financial services sector.
4. A major financial institution will fail. The happy talk about the credit crisis being over is rubbish. It is now plainly obvious that writedowns have just begun in earnest. With a global recession looming, weaker financial institutions will go to the wall. A major bank will fail. My money is on a super-regional in the United States.
5. 2nd quarter GDP in the U.S. will come in above 1%. A pall of gloom has spread over North America, Europe, Japan, and ANZ. People are predicting the worst of all possible worlds for the US. However, this is not to be. The U.S. may be in serious trouble but it won’t be reflected in the Q2 GDP number to be released this week. Why? First, the GDP deflator will understate inflation. Real GDP may come in at 4-5%, suggesting a negative real number given the CPI is at 5.0%. But, the GDP deflator has not been keeping pace with the CPI. Moreover, the stimulus package has had its wanted effect in stimulating some consumer demand.
6. America will need another stimulus package. By September, it will become apparent that the U.S. economy is headed for recession. Politicians being politicians will need to forestall this with the election coming up in November. Therefore, they will vote to pass a second stimulus package. The great thing about the second package is that the year’ Federal deficit associated with it won’t be apparent until one year later.
7. The Eurozone will fall into recession. Europe looks weak. It seems ironic that a downturn that started in America will first be confirmed as recession in Europe, but the numbers point in that direction. Spain, Ireland, Germany, Denmark and Italy are all looking particularly weak. Denmark is already in recession. Ireland and Spain probably are. The whole Eurozone average will follow soon.
8. Britain will enter recession. The UK is looking as weak as Europe. And with a property bubble and high debt burdens, British shoppers are in no mood to keep on spending. The result will be recession the UK.
9. A major home builder will bust. The latest threat to house builders in the UK, Spain, the U.S. and Ireland is land prices. As a property bubble takes hold, home sales slow, followed by falling prices. However, one must ask, what is falling, the value of the physical structures or the land itself? With material costs not significantly lower, it is land prices that are falling. And house builders who have been buying up land in huge quantities in the U.S. and the UK in particular are exposed to this reality. I expect land price writedowns to step up in earnest producing a second major home builder bust after Martinsa Fadesa in Spain. Where will it be? My best guess is the U.S. or the UK.
10. Stock markets will fall. When the summer is over and people have returned to work again, preliminary readings on Q3 earnings will start to take shape. The will not be good. Warnings will increase in September and earnings will be bad in October, precipitating a global sell off in share prices. The financial services, retail, hospitality and discretionary consumer sectors will be hit hardest.

So, that is my list of ten predictions — not all bad, but certainly not all cheery. I would not describe this as a muddle -through prediction. I see a muted, but long recession gathering hold in the developed economies with financial services fragility being a determining factor in limiting the upside until the end of 2009 or 2010 at the earliest.

Let’s see how events unfold.

Let’s take them one-by-one and see what the trend should be going forward.

1. Oil Price: Here I was on the money. Despite believing in peak oil, I did feel that demand would collapse and prices along with it. Oil did fall to $100 and went much lower. Now it is trading at $88. I don’t see it dropping much more from here, but that all depends on how robust the economy is going forward. At a minimum, we’ll see a nice little inflation dividend from this.
2. Inflation: On the money, again. My call was pretty much a no-brainer given the first call I made. Inflation will continue to fall. BUT, with credit contracting the question now is about DEFLATION, rather than inflation. I expect inflation to crater from here and deflation to be a serious possibility.
3. Fed Funds Rates: The deed is done. Now, I do think the central banks are doing their best to keep this thing from going pear-shaped, but I am not a believer in liquidity from lower interest rates as the solution. Low interest rates are the problem. But, expect more of the same going forward.
4. Bank failures: Lots of them. That one was easy. — or at least so I thought. The question now is whether we will see more major bankruptcies. I am not worried about Itty Bitty Bank, but about RBS, UBS, Fifth Third and so on. I do think that a major U.S. regional will bust by the end of Q2 2009. But, with the central bankers on the case, maybe the worst is over. At least we can hope.
5. U.S. GDP: It was way over 1% in contrast to the two previous quarters — almost unbelievably so. But Q3 was a bust and it could be negative. The U.S. is clearly in recession and I expect the GDP numbers to reflect this for both Q3 and Q4.
6. Stimulus: I think we got it. The Bailout package had a lot of tax cuts and other incentives attached. I certainly see this as a stimulus package and I expect more of the same in the first quarter of 209. On the other hand, the Europeans are going to be constrained from getting crazy like the U.S. The UK, Ireland and Spain will want to do what the U.S. has done, but they are in a fiscal straight jacket and will not do so in the same measure.
7. Recession in Europe: Unfortunately, yes. Italy, France, Germany, Ireland, Spain, and the UK are not looking good. Denmark saw a reprieve last quarter, but mat fall back into recession. One reason the Euro is weak is that Europe is weak and will continue to weaken going forward.
8. Recession in Britain: Yes! That’s a foregone conclusion. The question now is how deep. I say it will be deep. But the BoE and Labour Government actions today should mitigate some of the worst of it. I am cautiously optimistic about the UK.
9. Home Builder Bust: Only one so far – WCI. Will others go bust? Maybe. The UK, Spain and the U.S. are place
   s to expect house builder problems.
10. Stock markets down: Way down! Global equity markets have gotten their clocks cleaned. It has been nasty and much worse than I expected. This has been a crash-like scenario that I did not foresee. Obviously, things unraveled rather quickly. At this juncture, all we can do is hope for the best. U.S. futures are predicting another massive selloff as I write this.

So as I see it, I am ten for ten now. Pretty good prognosticating. But, before I get giddy and start slapping myself on the back, I must admit that things are a bit more murky now. Once we see how the real economy reacts to the monetary and fiscal moves we have recently seen, we can determine how deep the global recession will be.

Look to Asia and BRIC (Brazil, Russia, India and China) to see what is going to happen next. If they have a hard landing – especially China, this will boomerang back toward the West and we will see another leg down in the Spring.

If they pull through, then we might see an economic bottom in the second half of 2009.

Related posts
Ten predictions for 2008
Revisiting my predictions for 2008

Related posts:

• Ten predictions for 2008
• Revisiting my predictions for 2008
• Europe is next
• Denmark: the latest victim of falling house prices
• Nouriel Roubini: we are in recession

Spain narrowly escaped negative GDP with a very marginal 0.1% increase in GDP on the quarter in Q2 2008. This is up 1.8% from last year, but way below growth rates seen in Spain over the past decade.

The latest bulletin of the Bank of Spain confirms the havoc wreaked by the economic crisis in Spain, which has become accentuated in the second quarter with a slowdown in quarterly growth of 0.1% (previous quarter was 0.3%). The data also reduce the increase of GDP to 1.8%, a decline of nine-tenths.

This morning, the government’s chief economic advisor acknowledged that in the next few quarters economic growth will be “very close to zero,” while still dismissing that Spain is entering a recession. These statements occur barely one week since Pedro Solbes drastically cut growth forecasts for this year (1.6%) and for the next (1%).
-ABC, 30 Jun 2008 (my translation)

The Spanish government still refuses to admit that Spain is in recession, not unlike the U.S. government. Somehow they think this will trick people into believing something about the economy that’s not true.

Related posts:

• Spanish economy slowing fast
• Spain: Bleak forecast puts unemployment at 22% in 2010
• Spain’s problems
• Spain begs to be at upcoming G-20, Brazil says no
• Spanish unemployment up

Housing: US, UK and Spain
Bright spots in the housing nightmare – MSN
U.S. Mortgage Rates Soar on Inflation Fears – Housing Wire
U.S. Existing Home Sales Continue Freefall – Housing Wire
Oversupply killing U.S. lender giants and house prices – Irish Independent
UK Major mortgage lenders cut interest rates Telegraph
What to do if you’re trapped in Spanish property gloom – Money Week

Global Economy
Outlook for Canada’s economy darkens – Financial Post
Spending drop hits pound – FT
The Eurozone – That Sinking Feeling? – Claus Vistesen
Storm clouds gather over Spain – Money Week
Japan Inflation Rises to Decade-High 1.9% on Gasoline – Bloomberg

Earnings
Ford reports $8.7-billion shortfall, its largest quarterly loss ever – LA Times
National City Boasts, Despite Record Q2 Loss – Housing Wire

Finance
Mortgage Writedowns to Total $1 Trillion, Gross Says – Bloomberg
5 big losers in the banking crisis – MSN
JPMorgan leads possible HBOS break-up – FT Alphaville
WaMu Slumps as Gimme Credit Cites Liquidity Concern – Bloomberg
JPMorgan Predicts More Pain for European Banks – Deal Book
U.S. financial stocks in worst fall since 2000 – FT
Spanish Bank Defaults Up Sharply In Q2 – Euro Watch

Financial Lawsuits
New York Joins List of States Suing UBS – Deal Book
MBIA, Rivals Sued by Los Angeles Over Bond Insurance – Bloomberg
L.A. sues financial firms, alleging fraud in bond issues – LA Times

Politics
U.S. passes housing rescue bill – FT
SNP stuns Labour in poll blow for Brown – FT
Europe Fails to Endorse Milk and Meat From Clones – NY Times
With Fannie/Freddie Bailout Plan, Treasury Secretary Paulson is Armed and Dangerous – Peter Schiff, Money Morning
Wilful ignorance – Politics
Prepare to Profit From the Trillion Dollar U.S. Budget Deficit – Martin Hutchinson, Money Morning
Making Fannie and Freddie Pay for Their Free Lunch – Mark Thoma

Germany
Stimmung in der Wirtschaft kühlt sich stark ab – Spiegel
Regierung rechnet mit 15,5 Prozent Kassenbeitrag – Spiegel
Lufthansa will Streiks mit Notfallplan aushebeln – Spiegel
Lagebeurteilung bleibt – Börsennotizbuch
Buffet als Penner … – egghat

Spain
El paro del transporte en junio rebaja un 15% la producción de coches – El Pais
La crisis golpea las cuentas de Popular, Sabadell y Bankinter – El Pais
Los modelos sociales de Europa y EE UU se miden en la crisis – El Pais
La economía desbanca al paro como primera preocupación – El Pais
Tribulaciones de quien compró un piso a Martinsa-Fadesa – El Pais

Odds and Ends
Janet Jackson’s Breast Freed, This Time by Court: Ann Woolner – Bloomberg

Related posts:

• News Round-up: 11 Jul 2008
• News Round-Up: 16 Jul 2008
• News round-up: 9 Sep 2008
• News round-up: 20 Aug 2008 – financial institutions special edition
• News round-up: 8 Sep 2008

Spain had an unemployment rate of 10.4% in the second quarter of 2008, up sharply from 9.6 in the first quarter. The Spanish National Statistics Market said employment in construction jobs were particularly weak as the housing bust in Spain takes hold. Construction jobs fell 4.5%. But manufacturing, agriculture and services also saw major declines in employment.

The Spanish government has so far resisted to call this slowdown a ‘recession,’ echoing the happy talk in the United States. Nevertheless, it is clear that Spain, Ireland and the UK have joined Denmark as European economies which have slowed considerably due to a major housing slowdown.

I expect these developments to lead to a worsening of credit conditions across the EU, with the obvious inevitability of further writedowns by European Banks, who have yet to report second quarter results. These writedowns may not actually start to be recognized until Q3 figures are available in November.

Sources
El paro sube en 207.400 personas el segundo trimestre y alcanza el 10,44%, la más alta en cuatro años – El Mundo
Spanish Unemployment Rises Sharply Again The Second Quarter, Bank Lending Slows and Banco Popular Default Provisions Ratio Plummets – Euro Watch

Related posts:

• Spanish economy slowing fast
• Spain: Bleak forecast puts unemployment at 22% in 2010
• Santander: US, Spanish and UK mortgage exposure
• Spanish furniture sales down on housing bust
• US Unemployment shows 5.5%, net loss of 62,000 jobs

While I don’t agree with all the opinions expressed in the articles below, they are all still very good reads. Today, there is a lot more on politics. Warning: some articles may be controversial.

Politics
Why Jesse Jackson Hates Obama – WSJ
Senate Clears First Hurdle for Oil Speculation Bill – Bloomberg
Infrastructure Spending and Stabilization Policy – Economist’s View
Kissinger Says Pullout Timeline Poses Danger to Iraq – Bloomberg
EU Pondering Restricting Sales of Securitized Debt – naked capitalism
How China’s Taking Over Africa, And Why The West Should Be Very Worried – Evening Standard
Madness and Shame – Bob Herbert, NY Times
McCain gaffes pile up; critics pile on – Politico

Economy
Oil Falls to 6-Week Low as Storm May Miss Fields, Dollar Rises – Bloomberg
House Prices: Home improvements are a waste of money – Telegraph
Key terms in oil-supply debate – LA Times
Why the oil crunch may grow worse – LA Times
ECB Lowers Growth Outlook – WSJ
Japan’s Government Cuts Growth Forecast – WSJ

Finance
Sponsoring Recklessness – New Yorker
WaMu Has $3.3 Billion Quarterly Loss on Rising Delinquencies – Bloomberg
Assured Guaranty Plunges, Bond Risk Soars on Review – Bloomberg
Two Short Lists – Market Beat
The death-knell of Bernankeism – Martin Hutchison, Asia Times
The Mother Of All Short Squeezes May End Badly – Safe Haven

Germany
IKB bekommt erneut Milliardenkredite – Spiegel
German Strikes Pose Challenge for ECB – WSJ
SPD mobilisiert Mitglieder für Obama – Financial Times Deutschland

Spain
El consumo de gasolinas cayó un 10% en mayo, y el del gasóleo un 3,9% – ABC
Martinsa centra su plan de viabilidad en la venta de suelo y la mora de pagos – ABC
Los pilotos de aerolíneas preparan una huelga para agosto – ABC
Solbes dice que lo importante no es el déficit del Estado sino que la deuda no aumente – El Mundo
El Euribor retoma su escalada y sube al 5,418% – El Mundo
Madrid y Barcelona, entre las 50 ciudades más caras del mundo – El Mundo
Los empresarios turísticos alertan de que el sector ya nota la crisis – El Mundo

Odds and Ends
Batman Denies He Assaulted Mom, Sister – Bloomberg

Related posts:

• Spanish economy slowing fast
• News Round-Up: 24 Jul 2008
• News Round-up: 11 Jul 2008
• News Round-Up: 2 Sep 2008 – housing, economy and currencies
• Foreign Press Alert: 28 Aug 2008

Top Story
Why No Outrage? – James Grant, WSJ (A MUST read.)

Jim Grant: “Why No Outrage?” – Naked Capitalism (Yves’ take on the article, you’ve seen mine)

Financial Services
Banks responsible for the loss of trust – LA Times

A Call to Ease the Way for More Bank Mergers – DealBook

David Einhorn’s Gloomy Month – DealBook

Citi’s Dividend Debate: Here We Go Again – DealBook

Barclays and HBOS cash calls shunned – FT

Qatar now Barclays’ biggest shareholder – FT

Barclays’ investors snub £4.5bn open offer – Telegraph

Emerging Markets
Argentina drops disputed farm tax – BBC News

Spain
La morosidad sube en mayo tanto como en cinco años juntos – El País

Martinsa infló ya en 2006 sus fondos propios, según el informe del auditor – El País

Economy
Luxury market feels the pinch – FT

June Home Resales In California Slowest Since 1988 – Housing Wire

Why a used Civic still costs $16,118 – MarketWatch

Survival strategies for home sellers – MarketWatch

Retail Sales – What a Difference a Deflator Makes – Paul Kasrel, Safe Haven

Politics
Britain Reconsiders Borrowing Rules As Public Finances Weaken – WSJ

Economic Woes Get a Fix: Witch Hunt – WSJ

Related posts:

• News round-up: 20 Aug 2008
• News Round-Up: 6 Jul 2008
• News Round-Up: 26 Jul 2008 – weekend edition
• News Round-Up: 7 Jul 2008
• News round-up: 12 Aug 2008