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Weekly Report (21.01.11)

By Per Svensson

miércoles 22 de octubre de 2014, 11:21h

Ibex up 8.6%

Following the publication last week of a possible increase in the amount of the  “rescue fund” to 750,000 million euros and positive information on the US economy the Ibex rallied 8.6%.  (See below for further comment on the Ibex).

Bonds placed, but at high interest

The Government managed to place almost 3,000 million 5 years bonds. The demand exceeded the offer; however, the interest rate rose to 4.590%, the highest since 2008 and 27% higher than that for the last issue.  The country risk of Spain now stands at 240 points above German and Spain must borrow a total of 47,200 million euros this year.

 

Inflation of 0.6% in December

Inflation rose 0.6% in December, compared with November. This is the fifth consecutive month of price increases. Last year prices hiked 3%.

 

Euribor moving up

The Euribor interest index is moving up again and last week reached 1,536, its highest since 23rd November.  President Trichet of the European Central Bank has warned, due to the petroleum price increases, inflationary risks exist in the Euro Zone.

 

Banesto has 10 billion exposure in real estate

Banesto, the sister company of Banco Santander, has admitted is has 10.4 billion euros at risk in relation to the Spanish real estate and construction industry. The profits of the bank fell 18% during 2010, due to setting aside 1 billion euros to meet the risks. Bad loans as a proportion of total lending have climbed to 4.08% from 3.80 in September.

 

Santander director barred as banker

Alfredo Sainz, Executive Director of Banco Santander,  due to his part in the takeover of Banesto, when he was the President, has been sentenced by the Constitutional Court to abandon all activities connected with banking. He has 20 days from the day it is published to enter an appeal against the sentence.

 

Castellon airport continues in the air

Castellon airport, financed by the Valencian Government and the “Diputacion” of Castellon Province, was supposed to cost 113 million euros and to come into operation in 2006. The works are finished, the costs have increased by 50 million but the airport is still not operational. The company with the concession to run the airport is demanding renegotiation of the conditions, due to the present economic situation.

 

Tourism: China beats Spain

  1. France had most visitors, USA was in second place. However, Spain maintains its second place when it comes to income from tourism.

 

Spain important player in crisis-ridden Tunisia

There are 57 Spanish companies operating in crisis-ridden Tunisia, most of them, including Globalia Hotels, Grupo Barcelo, Iberostar Hotels, Sol Melia and Riu Hotels, are in the tourist sector.  Now that the North African country has got rid of its dictator it will hopefully succeed in becoming a democratic system.

 

No more bullfights on public TV

  1. The Canaries Region has also forbidden the activity; and the Basque Parliament is also considering similar action.

 

The world's greatest waiting line

  1. With more than 4 million unemployed in the country, all accustomed to standing in line for work or support, the organisers expect to have no problems achieving their goal. The objective of the demonstration is to deliver a letter to the President of the Government and the political parties, protesting against the suppression of the 426 euros support to long time jobless and to demand that the Government stops the repossessions caused by owners' inability to meet mortgage repayments, due to unemployment, which then results in the eviction of the owners and shutting off of electricity supply.

 

No hope for bricks

Señor Iñigo Meiras, Director General of the leading construction company Ferrovial has estimated the construction sector will fall another 12 to 15% in 2011 as a result of the decision by the Government to reduce infrastructure works. The company believe that 2012 will also be another bad year for constructors.  Ferrovial intends selling 10% of the company, which operates a number of British airports, including Heathrow.

 

86% of Spanish suspend Zapatero

The Euro-barometer (a series of surveys regularly performed on behalf of the European Commission) reports that 86% of Spaniards believe their government has not acted in an efficient way to combat the economic and financial crisis. Only 10% consider the Prime Minister, Rodriguez Zapatero, has responded in an adequate form to the turbulences.

 

  1. It is almost incomprehensible that he did not know what was happening in the country and should have slammed on the brakes of the speculation.

 

Our modest Report saw it from 2004; understood the dangers and warned all who wanted to hear.  Alas, to no avail!

 

Walking the precipice

By Per Svensson

Some of our readers may not yet have had time to read all our lengthy Yearly Report 2010/2011, where at the end of chapter 7 we wrote:

“2011 will be the decisive year, with a 20 to 50% chance that the country will throw in the towel.”

  1. (Portugal had to accept an interest rate of 6.71% to have its bonds accepted by the markets, dangerously close to the 7% which is considered as the intervention point).  After publication of Germany's economic growth in 2010 (3.6%) the markets become less nervous and the risk rate for Spain decreased to 250 points, and Spain was able to place a bond offer of 3,000 million euros,  albeit at a higher interest rate than the previous one, 4.590%.   It is clear the European Central Bank has been buying Portuguese bonds to keep the interest rate below 7%.   It is at this moment not clear if the ECB has also bought Spanish debts.

In this situation, and after the publication of a possible extension of the “rescue fund”   to 750,000 million euros, the Ibex rallied to 8.6%.  The country risk of Spain now stands at 240 points above that for German bonds.

 

Rescue fund still to be agreed on

The proposal for an extension of the “rescue fund” to 750,000 million euros is an impressive one and it certainly halted the international speculators attacks on Portugal and Spain in the first week of the year, but there are at least two weaknesses to it :-

 

- Firstly, it is just a proposal, not a firm decision, even though the President of the European Commission, the Portuguese Jose Manuel Barroso, has firmly defended the proposal and suggested that the meeting of the European leaders, which will take place on the 4th February, should adopt the decision. The proposal has the endorsement of the European Central Bank and the International Monetary Fund, however, the two leading economic powers in the Euro Zone, Germany and France, are not convinced and suggest that a decision be delayed until the meeting of the European Council in the spring.

 

- Secondly, the proposal does not mean the sum of 750,000 million will automatically be available if a rescue of Spain should be necessary. It has been calculated that after the retention of guarantees “only” 450,000 million will be available. If Portugal goes first, that will diminish the fund by 100,000 million, leaving 350,000 million to save Spain and that may not be enough !

 

The debts

The sovereign debt of Spain stood at 611,198 million at the end of last year, and the high interest rate is increasing it rapidly, and it is already close to 60 per cent of gross domestic product, the limit established for EU-countries.

This figure supposedly includes the debts of the regional governments, meaning the debts declared by the regional governments, however, there are widespread suspicions that the regional governments have higher debts, conveniently outsourced to public companies and agencies. Such debts may soon come to the surface.

Moreover, the knowledgeable Japanese Nomura bank has estimated that banks, when they are forced to declare the real value of the 'bricks and the farm land' they have on their books at “boom time” valuations, must increase their share capital by 43,000 and 80,000 million euros and reduce their declared assets by some 142,000 million euros.

Of course, the European rescue fund is not meant to save private banks, but Spain will be pointing to what happened in Ireland.

 

Economy still retracting

The Spanish Government pinned their hopes to a recovery of the economy during 2010, with higher tax income, to be able to pay off debts. Even if we do not yet have the final figures, all indicators points to the sad fact that economic activity is still in decline. The increase in VAT has channeled some consumer’s money into the state coffers but at the same time has reduced their spending power.

 

When the final figures are out, it can be expected that the number of active companies in the construction sector will have shrunk an additional 7.38% and those active in other sectors will have diminished 14.58%. From 2007 to August 2010 the building sector saw a total of 153,048 companies disappear. At the beginning of 2009, construction activity represented 41.7% of the total companies in Spain.

 

The double stroke of the Spanish Government in 2010 to suppress financial assistance to the long term unemployed and promising to cut the time and cost of setting up a company, has not shown any positive results.

We have started 2011 under dark skies. Spain is walking the precipice.

 

Under siege

The state of Spanish banks

Jan 13th 2011 | MADRID | from PRINT EDITION

SPAIN’S public debt, less than two-thirds of GDP last year, is not especially large. Yet financial markets fear that its government may, like Ireland’s, have to find enormous sums to support the country’s banks. The funding markets briefly welcomed some Spanish lenders after European stress tests last July. But doubts about the financial system have resurfaced with vehemence. Spanish banks, and their regulator, are feeling hard done by.

Only the strongest banks have access to wholesale markets, and at high cost. This year the system is due to redeem some €90 billion ($116 billion) of debt, 45% of it by the two largest banks, estimates Barclays Capital. Banks continue to reduce their reliance on European Central Bank funds, thanks to improved access to the short-term repurchase (“repo”) market. But tapping stable, longer-term financing is essential.

Perception is much worse than reality, says Miguel Fernández Ordóñez, the governor of the Bank of Spain. He reckons the country’s unlisted savings banks will need no more government-assisted capital this year than the €10.6 billion already committed by the state’s €99 billion Fund for Orderly Bank Restructuring (FROB).

Investors think that looks optimistic. The debate in the market is not about whether Spanish lenders will need more capital, but about how much. The list of worries is long. Concerns about the banks affect sovereign debt, which in turn affects the banks in a vicious circle. Banks’ profitability is sinking, partly because lending margins are being squeezed by a scramble for deposits as a source of stable funding. Savings banks (cajas) are undergoing a thorough restructuring: complex mergers to cut costs have shrunk their number from 45 to 17.

The biggest source of concern remains Spain’s housing bust. Official data show a market deflating lethargically, with prices only 12.8% below their peak. Ireland’s spectacular bail-out of its banks, just months after they passed the stress tests, also rattled investors.

The parallels with Ireland are overdone: Spain’s biggest banks, unlike Ireland’s, are serious businesses. Still, Spanish banks have €323 billion (the equivalent of 31% of GDP) in loans to property developers. Add in construction, and the exposure rises to 42% of GDP. By the end of 2010 Spanish banks had already made €87 billion in provisions for bad loans.

There is no consensus on how much more capital is needed. Moody’s, a ratings agency, estimates that banks may require another €17 billion to push their tier-1 ratio to 8%. UBS says that they could need up to €120 billion to regain the confidence of funding markets.

What would a doomsday scenario look like? Taking the Bank of Spain’s basic “adverse” scenario and adding an Irish-scale calamity from loans to developers and builders, the banking system’s gross losses would be €270 billion, about €60 billion higher than the central bank’s figure. If lenders then made only half of the profits and capital gains in the Bank of Spain’s scenario, they would have to find €140 billion in new capital, or 13% of GDP, to achieve a tier-1 ratio of 10%. Relative to the size of the economy, this is still far less than the cost of the Irish bail-out.

The actual exposure to pure property development is smaller than the official numbers suggest, says Arturo de Frias, an analyst at Evolution Securities, because of the way loans are classified. He thinks the banks can absorb losses through their ongoing profits, while the cajas will need to raise around €50 billion of new capital.

The Bank of Spain has asked lenders to disclose quarterly details on exposure to property, including collateral, starting with their annual results for 2010. Any sign that the cajas can raise money without government support would also help. Bankers are expecting a few more mergers this year. A change in the law has made it easier for outsiders to invest. But with listed Spanish banks already cheap, cajas would have to sell shares for a song to attract interest.

The Bank of Spain says it wants to minimise the use of public money, and the FROB has raised just €12 billion so far. Time may yet prove Mr Ordóñez right. But if doubts persist, for both banks and sovereign, he may not have much time.

 

The Ibex

We regularly refer to the stock index for Spain, the Ibex.  Recently we have stressed that the index is not a true reflection of the Spanish economy, since it only contains 35 companies, many of which have over the past years shifted much of their activity away from Spain. With the assistance of Wikipedia, we shall give our readers a picture of what the Index represents today.

The remaining building companies on the Ibex, in addition to public works in Spain, are also constructing bridges, motorways and industrial plants in South America; and some of them have bought up foreign companies, diversifying even more away from Spain. A good example being ACS  which has more than 30% of the share capital in the largest German construction company, Hochtief, and which recently made an offer for the remainder of the share capital.

The big banks have bought up a number of  larger and smaller banks in several countries ranging from Poland, the UK,  USA and South America.  Maybe the best example of this is Banco Santander, the largest bank in the Euro Zone and one of the largest banks in the world in terms of market capitalisation.  Banco Santander have more than 170,000 employees, 90.1 million customers, 13,390 branches and 2.27 million shareholders. Retail banking - the main aspect of Santander's operations - generates 82% of the group's profit.

Telefónica S.A. is a Spanish broadband and telecommunications provider in Europe and Latin America. Operating globally, it is the third largest provider in the world, behind China Mobile and Vodafone, and was the former public telecommunications monopoly in Spain.

Industria de Diseño Textil S.A. (English: Textile Design Industries, Inc.) more commonly known as Inditex, is a large Spanish corporation and one of the world's largest fashion groups.  It comprises almost a hundred companies; its activities relating to textile design, production and distribution. Amancio Ortega Gaona, Spain's richest man, is the founder and current chairman of Inditex. You will know this group mostly for their Zara shops, which can be found all over the world.

 

Another member of Ibex is Arcelor Mittal, a global steel company headquartered in Luxembourg. It is the largest steel producing company in the world and is the market leader in steel for use in automotive, construction, household appliances and packaging. It holds sizeable captive supplies of raw materials and operates extensive distribution networks. The company was formed in 2006 by the merger of Arcelor and Mittal Steel. It ranks 99th on the 2010 Fortune Global 500 list.

 

The 5 companies we have given as examples here represent more than 50% of the market capitalisation of the Ibex. Other big companies include:

Repsol YPF, oil exploration and production all over the world, 7.12%.

Iberdrola, which is one of the leading private electric utilities worldwide and the largest renewable energy operator in the world, 8.84%, and

BBVA, banking, 9.49%.

 

  1. An interesting and rewarding exercise, even for those of us who do not speculate in the stock market.
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