Weekly Report  (12.05.12)

More families and companies go bankrupt

1. Among the business affected, one third were in the property sector. The worst hit regions were Catalonia, Madrid, the Valencia Region and Andalusia.

 

Dark view of situation in Spain

According to a government opinion poll, 90% of the population consider the economic situation in Spain to be bad or very bad and 60% hold the same view of the political situation; 5.6% expressed reasonable confidence in Prime Minister Rajoy, 20.6% were less confident, whilst 31.7% had little confidence in him and 39.9% none.

Madrid sells 9,144 dwellings

The municipal Institute of Dwellings in the Region of Madrid, IVIMA, has decided to sell 9,155 dwellings to the present tenants at a average price of 55,000 euros, with a bank arranging mortgages. IVIMA owns 23,563 dwellings. The offer goes to tenants who have been paying their rents for 11 years.

Catalonia reintroduces inheritance tax

The leader of the governing nationalists in the Catalan Parliament, Oriol Pujol, has declared that the region may re-introduce the inheritance tax that was abolished in 2011, with the support of the regional PP.

It is to be expected other regions will follow suit.

Unemployment falls in April

Unemployment fell by 6,632 in April, due to an increase in the number of tourists over Easter.  A fall in April is normal, however, this year it was smaller than the 34,309 last year.

One in every three unemployed in the Euro Zone are in Spain.

6,000 journalists out of work

More than 6,000 journalists have lost their jobs during the past 3 years. ‘It is the most severe situation journalism in Spain has gone through in all its history,’ said Elsa Gonzalez, President of the Spanish Federation of Journalists. She added that the figures for the last quarter are alarming and the outlook is dark.

Government favouring banks and developers

1. Without the change, the land would be sold as farmland, meaning, in most cases, for next to nothing.

The Government is supporting the banks and the developers, the two groups responsible for the property crash.

Government take back the rivers

The Government has taken back the responsibility for rivers which Ex Premier Zapatero passed to the regions. Since most Spanish rivers flow through several regions, this is a logical step.

Car sector in ditch

Last year was the second worst in the history of the car industry, when only 808,000 vehicles were sold, but this year looks even worse. In April registrations fell 21.7% compared with the same month last year, with many of the purchases being made by the car dealers themselves, selling cars with ‘0’ kilometres on the tachometer at reduced prices.

Industrial production down 10.4%

In March industrial production fell 10.4% compared with the same month last year. The steel and iron sector dropped 22%, metal elements for the building industry 39.5% and car production 17.9.

Government studying selling its buildings

The Government is studying selling some of its 53,662 buildings to save costs and help bringing down the deficit; 67% of them are agricultural, 26% buildings and 7% is building land.

CO2 increasing

According to the Ministry of Agriculture, industrial and energy sector carbon dioxide emissions (CO2) increased 9.2% in 2011. Spain is having difficulty in complying with the Kyoto protocol on reduction of noxious gases.

Illegal subsidies to film studios

The European Commission has found that subsidies given by the Valencia Regional Government to the ‘Ciudad de Luz’ film studios in Alicante are illegal; 265 million euros must be returned.

Crisis of the week

After the victory of socialist Francois Hollande in the French Presidential elections, the policy of hard budgetary cuts has lost support in the Euro Zone, giving way to incentives for increasing economic activity.

Greece was again at the centre of attention after a majority of voters in the parliamentary elections supported parties which are opposed to the hard conditions of the rescue operation; new elections can be expected.

The Spanish government has decided to rescue the wobbling Bankia bank, the third biggest in Spain with an injection of 7,000 million euros.  The bank was given 4,456 million a few years ago.  Bankia has 37,500 millions invested in shaky property loans.  Accounting company Deloitte has found overvaluation of 3,500 million euros in the accounts.

The country risk of Spain stood on Wednesday morning at 436 points and the interest rate on 10 years bonds was 6%. The IBEX fell 2.18 points to 6.854.

When Spain goes bust

By Per Svensson

Experts and commentators take it for granted that Spain will at some point during this year be unable to meet its financial commitments, that the markets will not be willing to buy unsafe public bonds anymore, not even at 6% interest, and that a number of banks will close their doors due to lack of credits and deposits from clients.

The Rajoy government will go on cutting the income and living standard of Spanish families, at the same time as taxes, charges and costs soar.  The result being a deepening recession of the Spanish economy, and falling consumption, leading to less tax income and thus the subsequent shrinking of public services.

We have asked ourselves how such a situation may affect the many foreign property owners in Spain, and have reached the following conclusions:

More and higher taxes

All taxes and charges will increase, and new ones will be devised, at the state level, by the regions and municipalities. Spain will become a country with one of the highest tax level in Europe (see report of last week).

Life more expensive

As domestic consumption fall and less people can afford to go out for a beer or a meal, prices in the surviving restaurants and bars will increase.  Spanish businesses have a habit of compensating lower turnover with higher prices!

Hiding the money

The banks are scrambling to find new sources of income, mainly based on the money clients have deposited with them. A modest deposit may be eroded by all kind of new or higher charges.  Many foreigners have taken their money out of the country (remember Argentine!).

When Spain goes bust, there may not be sufficient funds available in Europe for a rescue package. You may find that the Bank of Spain cannot honour the guarantee on deposits when a number of banks go bust simultaneously.

Pensions in danger

Some foreigners have Spanish pensions from working in Spain. They must be aware that contributions to the social security systems have been falling and the number of

pension payments increasing over the recent past due to the Spanish population growing older. The funds of the SSS have partly been invested in Government bonds (!) and in a real crash there will be no money in the treasury to pay the monthly cheques ……

More expensive health

Already Regional government’s health services are being reduced, with a fee being charged visiting the doctor and part payment for medicines and treatments. A national financial crisis will also affect the regional health services and probably the first to be placed on waiting list to see a specialist or have an intervention in hospital, will be ‘foreigners.’

Non-payers in Communities

As the crisis deepens, there will be more foreign and Spanish unable to pay their Community fees, leaving the bills for the necessary repair work and essential services to those better off.  Seizure of debtors dwellings is both unsocial and, with the bottom having fallen out of the property market, has little effect.

Longer waiting lines

You must be prepared for longer waiting lines in the public administration, as more and more functionaries are becoming redundant and not being replaced. That goes for the police foreigners departments, if you want to renew your registration permit, or receive attention in your town hall.

You will meet some grim faces from local civil servants!

WHAT TO DO?

Only keep the money you need for 3 months in your Spanish account

Consider if it is better to return the Spanish residence permit and become resident in a more stable country

Keep up your European Health Insurance Card, and register with a local health office in the country where you want to become resident

If you get a pension from a country other than Spain, keep the payments on an account in that country

If you are happy in Spain and can afford to live a more expensive life, by all means stay put

If you have difficulties meeting ends in Spain, sell your property at any price. The prices will continue to sink and will stay at the bottom for a long time!

VALENCIAN JUNK

(Reuters) - Once the beacon of Spain's new economic grandeur, the Mediterranean region of Valencia has become a symbol of all that is wrong with the country.

Over the last decade, surfing on a property boom, Valencia spent billions hosting the America's Cup sailing competition and the European Grand Prix motor race, launching Hollywood-style movie studios, and building the biggest aquarium in Europe, a Sydney-style opera house and several museums.

But now years of free spending, coupled with a hangover from a burst real estate bubble and the collapse of local banks, have put Valencia on the brink of being bailed out by the central government - which has huge budget problems of its own.

The building sector's implosion has forced into the open allegations that corrupt Valencian politicians, developers and bankers were in cahoots during a decade of easy money at low interest rates after Spain joined the euro in 1999.

Valencia and other indebted regions have become a liability for Prime Minister Mariano Rajoy, in office since December, as Spain sinks into a second recession since 2009 and investors speculate that it may follow Greece, Portugal and Ireland into the arms of an international bailout.

Valencia's problems are particularly embarrassing for Rajoy, who has made austerity central to his policies, as his centre-right People's Party has run the region since 1995, being re-elected four times in the process.

"They said it was all to put Valencia on the map, and that's what they did, put us on the map, for corruption, for waste ... bringing shame on Valencia," said Ignacio Blanco, a member of the regional legislature for the leftist Esquerra Unida party.

Valencia, home to five million people, is not the only one of Spain's 17 autonomous communities with debt problems.

Several of the regions, which account for close to half of all public spending in Spain, are facing liquidity problems and their massive overspending pushed the country's 2011 budget deficit to 8.5 percent of gross domestic product, overshooting a 6 percent target agreed with the European Union.

VALENCIAN JUNK

Valencia can no longer borrow funds from the banks or markets. Standard and Poor's credit agency rates Valencia's bonds as junk and said in February that the central government would probably have to provide further extraordinary support to help the region to service its debt in 2012.

If it cannot cut its deficit drastically Valencia may become the first of the autonomous communities, which control their own health and education spending, to have its budget taken over by the central government under new austerity laws.

In January the regional government delayed a 123 million euro ($162.80 million) payment to Deutsche Bank by a week and local press reports said the central government had to underwrite the payment.

Valencia's finance head did not respond to repeated requests for an interview on the region's debt situation.

The Generalitat, as the Valencian government is known, is sitting on 4 billion euros in unpaid bills to street cleaners, healthcare suppliers and other providers. The central government is now providing emergency lines of credit to get the providers, many of them small companies, paid.

In return for the loans, Valencia must cut its deficit to 1.5 percent of its economic output from 3.68 percent last year.

Beyond the money owed to the providers, Valencia has 20 billion euros in other debt, the second biggest regional pile after its wealthier northern neighbour Catalonia. Valencia and Catalonia are Spain's two most indebted regions, both with debt equalling 20 percent of their yearly economic output.

The Generalitat is drastically tightening its belt in administrative spending, as well as health and education.

In February, thousands marched in the city of Valencia, the regional capital, after students complained they had to take blankets to class because the schools could not afford to pay for heating.

Vicent Baggetto, a spokesman for the association of Valencia's public school directors, said about 60 schools might have to close down as they are not receiving enough money from the regional government to operate properly.

"We are in a part of the tunnel where we don't see the light, so we don't know if we're moving forward or backward or even if we're moving at all," he said,

In the hospitals, nurses and doctors complain they lack syringes and beds.

"The (central) state has to get us out of this quagmire or we won't get out of it," said Vicente Peiro Romero, a lawyer who acts as a spokesman for a group of 35 suppliers of material for hospitals - medical equipment, surgical gloves and the like - who have not been paid by the regional government for the last three years.

"WE DON'T NEED ANYBODY"

Last Friday the regional government raised taxes and university fees, and privatised chunks of healthcare. This followed spending cuts of about 1 billion euros announced earlier this year along with layoffs of public employees.

"We don't need anybody to come and save us," said Maximo Buch, Valencia's economic councillor, when he presented plans to cut the region's deficit.

Alfonso Grau, the head of finance for the city of Valencia, said local authorities can manage without being rescued.

"Obviously we have had to stop any investment but over the last two years we invested about 500 million euros, the normal amount for eight or nine years," he told Reuters.

"Today we're in shape to assume the cost of these investments, maintain our day-to-day spending and look at the future with a sense of tranquillity."

The city of Valencia, home to one of the Mediterranean's busiest container ports and famed for its saffron-laced paella rice dish, indulged in spending as much as the region that surrounds it. Parks, fountains and palm trees line the wide avenues of new neighbourhoods, conferring a Californian air on the ancient Roman settlement.

Valencian beach resorts such as Benidorm, a favourite with British and German tourists, are today known as much for the concrete skeletons of buildings left after financing evaporated as for their sunny weather.

Valencian savings banks, or cajas, loaned recklessly to local builders. Like other cajas all over Spain, the lenders had local politicians on their boards who steered them into development projects without managing the risk.

Banco de Valencia, a century-old lender, was rescued by the central government last year and is now being auctioned off.

Caja de Ahorros del Mediterraneo (CAM), a 135-year-old savings bank, was called "the worst of the worst" by Bank of Spain Governor Miguel Angel Fernandez Ordonez after it was also taken over in 2011 following an 8-billion euro hole in its balance sheet.

Spaniards were scandalised when it came out that CAM executives paid themselves 13.3 million euros in compensation as the company was being rescued.

And Bancaja, the largest Valencian savings bank, was forced to merge in 2010 with other cajas to form a new bank, Bankia, which is now the Spanish lender most burdened with toxic real estate assets.

A financial sector source, who asked not to be named, said that even after due diligence on Bancaja's books, it was not until after the merger that the extent of its exposure to the property sector became clear.

"The banks are the perfect reflection of what happened in the region. Political ties and obsession with short term profit led to a mad credit policy in which no assessment of the risk was made," said the director of a Bankia branch who asked not to be identified by name.

ROMANIAN "INTERPRETERS"

From an unused airport to overbilling during a papal visit, allegations of corruption have touched every corner of Valencian life. The president of the Generalitat, Francisco Camps, had to step down last year to face charges of accepting expensive suits in exchange for handing out government contracts. He was later acquitted.

Carlos Fabra, who served for 16 years as president of Castellon, one of the region's three provinces, has been charged with bribery and tax fraud.

Fabra is the man behind Valencia's most spectacular white elephant, the 150-million-euro Costa-Del-Azahar airport. "Do you like grandpa's airport?" he asked his grandchildren at the opening last year.

"Grandpa's airport" has yet to receive a single commercial flight.

Even Pope Benedict's 2010 visit to Valencia was tainted. An investigating magistrate has charged local politicians and a media group with colluding to overcharge the government for sound and video system services during the visit, then sharing the extra money among themselves.

In December, the mayor of the Valencian town of Manises and head of the public water treatment company, Enrique Crespo, was charged with looting 25 million euros from the company, EMARSA. Prosecutors say the money was spent on jewellery, luxury goods and monthly meetings at four-star hotels with bills for Romanian interpreters, who were actually prostitutes.

More recently, several top officials were put under arrest for allegedly diverting money earmarked for building hospitals in poor countries.

"Creating a structure to steal money from poor children: now that is a case of complete moral bankruptcy," said Luis Bellvis, a local economist who owns an hotel in Valencia's old town.

 

Spain to spend billions on bank rescue

(Financial Times) -- Spain is planning a state bail-out of Bankia, the country's third biggest bank by assets, in a move likely to involve the injection of billions of euros of public money into the troubled lender.

In an abrupt reversal of policy, the Spanish government, which had previously insisted that no additional state money would be needed to clean up the country's banking sector, confirmed that an intervention was being prepared.

Soon after the news broke, Rodrigo Rato, Bankia's executive chairman and a former International Monetary Fund managing director, resigned from the bank that had been formed in 2010 out of a merger of seven Spanish savings banks, or cajas.

Mariano Rajoy, Spain's prime minister, said in a radio interview that the government would consider injecting state funds into the banking sector if needed.

"If it was necessary to reactivate credit, to save the Spanish financial system, I would not rule out injecting public funds, like all European countries have done," Mr Rajoy said.

The bursting of Spain's property bubble has seen the level of bad loans as a proportion of total lending rise to the highest level in 18 years, leaving banks managing vast portfolios of repossessed and unsold real estate, and choking off credit to an economy that is suffering its second recession in three years.

The government can deploy the state-backed Frob bank restructuring fund to pump capital into Bankia and is considering the use of contingent convertible bonds, known as cocos, an economy ministry source said.

The official would not say how much money would be needed. But Spanish press reports indicated that Bankia could receive €7bn-€10bn of additional capital. Bankia declined to comment.

Mr Rato, a former finance minister who was placed in charge of Bankia in spite of having little experience as a commercial banker, announced that he had proposed José Ignacio Goirigolzarri, former chief executive of rival BBVA, as his successor.

Mr Goirigolzarri was recommended after consultation with the Spanish government, one person close to Bankia said.

Last month, the IMF singled out Bankia as the largest risk to the stability of the Spanish banking sector, with the fund recommending that it and other banks take "swift and decisive measures to strengthen their balance sheets and improve management and governance practices".

Part of the bank was listed on the Madrid stock market last year, raising €3.3bn from private savers and Spanish institutions -- a move criticised by many analysts and investors for failing to recapitalise Bankia sufficiently.

Two of Bankia's constituent cajas, Caja Madrid and the Valencian Bancaja, have historically had strong ties to the ruling centre right Popular party of Mr Rajoy.

Bankia shares, which slid 3 per cent on the news to €2.38, have fallen 36.5 per cent since their listing last summer.

Some bankers and analysts have argued that BFA, Bankia's parent company which controls the listed entity and houses the combined group's worst quality assets, needs significantly more capital.

BFA said last week it had renegotiated €9.9bn of assets last year to avoid them being classified as bad loans, equivalent to 5 per cent of the bank's €188bn loan book.

One adviser to Spanish banks and government agencies said that if the amount Madrid injected into Bankia was not sufficient, and did not involve a much improved management of its bad assets, then the plan risked achieving little.

"Just injecting capital would be the equivalent of rearranging the deck chairs on the Titanic," the person said. "I think Spain has not admitted to itself just how weak some of its banks actually are and how serious the situation is."