4,750,867 unemployed
March unemployment increased by 0.82%, to the staggering figure of 4,750,867, just less than equitant the entire population of Norway (4,885,240....). The biggest increases were in the service sector, industry, farming and construction. The regions hardest hit being Andalusia, Valencia and the Canary islands.
Budget for 2012 presented
Following substantial pressure from the European Commission, the new Government has finally presented the state budget for 2012. It contains a long list of cuts, including a reduction in spending of 16.9% by all Ministries, intended to save 27,300 million euros. Support for housing is down 31.7%, health services spending down 6.8%, funding for research is reduced by 25%, support for education slashed, the Foreign Ministry will have 54.4% less, investment in infrastructure is down 25%, the King must do with 2% less and foreign aid is reduced by 71.2%.
Further cuts, especially in health and education, are anticipated.
13 out of every 100 euros, interest payment
Thirteen percent of the budget will go to pay the interest on the country’s formidable debts that all the money saved on the cuts and 5% more than last year. Debts are now 79.8% of the Gross Domestic Product, and the Government must raise a further 186,100 million euro in bonds over this year.
Parliament is expected to approve the budget proposals in June.
“Markets” not impressed
- The country risk for Spain again rose above 400 points.
The Financial Times has reported that in spite of the strong budget cuts, Spain “must put the brakes on the deficits of the 17 regional governments... which were responsible for the last year’s deficit ...”
Regions, the hole in Spain’s pocket
In spite of the action by central government to pay off the huge unpaid debts of the regions and town halls (the money is supposed to be paid back, ha ha..) the regions are continuing to accumulate new debts and are `finding´ old bills in their desk drawers. Their debts increased 16% last year and some of the unpaid bills are 743 days old. The record for the length of time for not paying their debts is held by the Valencia Region’s health sector, 841 days.
Where are the foreign property buyers ?????
The property promoters, real estate agents, banks and politicians are scratching their heads and wondering where are the foreign property buyers who, together with tourism and transfers from Brussels, have kept the country afloat for the past 50 years. The property Registry informs us that only 307,931 dwellings were sold in 2011, down 37.5% on the bad year of 2010. In the last quarter of 2011, the fall was 11%.
Government push down property prices
In February the Government ordered the banks to set aside an additional 50 billion euros as additional provisions and capital charges for expected losses on their real estate portfolios. Experts are expecting a fall in property values of 12 to 14% this year. The banks are scurrying to get rid of as many dwellings as possible, hoping to leave the losses in value to private buyers. Many owners with high mortgages on their homes are now facing a situation where the loans are higher than the market value (so called “negative equity”) and owners are at risk the mortgage providers repossessing. The group “Plataforma de los Afectados por la Hipoteca” estimate banks have foreclosed on 328,720 homes since 2007 and that figures may balloon to 600,000.
Less homes in construction
The Government says the number of new homes started during 2011 fell 17.6%, that’s just 51,956 units, compared to the already bad year of 2010. In the last quarter of the year only 10,286 dwellings were started, 25.7% less than in the same quarter last year.
Completion of homes fell 44.6% to 121,043 units.
Historical record in bankruptcies
There were 1,775 bankruptcies in the first quarter of this year, an increase of 28.25 on the same period of last year and the highest number ever recorded. In March 704 companies and individuals gave up and declared insolvency, 31% more than the same month in 2011. Andalusia saw an increase of 66% in insolvencies over the quarter, Valencia 34.1 and Catalonia 24.82.
Ibex below 8,000 points
Over the 10 past days the Spanish share index has been falling and at Easter was 7,911 points. Hardest hit were the banks.
On 10th April, foreign and Spanish investors demonstrated against the failure to pay compensation for the investments in so called investments certificates “preferentes” in front the building of the now bust saving bank CAM in Alicante
Older cars
New cars Registration fell 1.9% compared with the same quarter in 2011, to 204,119 units. 61,163 of them were company cars, 55,315 bought by car rental companies. This means the average Spanish car is getting older.
Moreover, cars bought are getting smaller; 27.8% of cars sold are “micros” and 67.4% of new cars are diesel fuelled.
Crisis continues
More and more voices are warning that Greece will need further help to survive in the Euro Zone, the latest being the new president of the International Monetary Fund, Lagarde, who said in an interview, that it cannot be ignored that the country may go bust and as a consequence must leave the Euro and the EU.
The financial situation in Portugal is worsening and it is becoming more and more probable they will need fresh money after the rescue package granted.
The US rating agency Egan-Jones has predicted Spain and Italy will fall into the same situation as Portugal when the debt crisis in Europe reaches its boiling point.
The weakest link in the eurozone
Spain – more so than Italy – has always been the major fault-line in the eurozone.
Sure, Greece causes a lot of noise and commotion. There was always the chance that Greece would throw a hissy fit and pull out of the euro unilaterally. Better-behaved small countries like Portugal and Ireland barely warrant a mention in the papers these days.
Even so, people always knew that in terms of size, Greece by itself didn’t matter. It was the knock-on impact that everyone worried about. The big fear was always that the market would say to itself, “If Greece can go bust, maybe it will be someone who matters next time.”
So the point of all the bail-out packages wasn’t so much to save the smaller countries. It was to prevent fears about the small countries from spreading to the “too big to fail” ones.
For a short while, it seemed as if the European Central Bank’s LTRO (Long-Term Refinancing Operation) had done the job on that score. Now it’s starting to look as though that was over-optimistic.
Investors are fretting about Spain again. The government’s cost of borrowing over ten years has risen by around 0.5 percentage points since the start of this month.
The trouble is, Spain missed its 2011 budget deficit target (in other words, it ended up overspending by even more than expected). As a result, it set itself a softer target for 2012.
Markets don’t like to see this sort of target slippage. For now, they don’t care so much when it’s the US or the UK. Those countries have their own currencies and central banks who are prepared to print as much money as it takes to pay off their creditors.
Europe isn’t prepared to do that (although it might be getting closer to doing so). And as private investors in Greek debt have discovered to their cost, there’s no guarantee that a eurozone country with problems will make good on its debts. So naturally, investors are warier of European government debt than perhaps they once were.
Spain’s big problems – debt and unemployment
Spain’s big problem is private sector debt, which might end up on the government’s balance sheet. Spain had a massive property bubble. The fall-out from that bubble continues. Prices haven’t been allowed to fall as far as they really need to. And that means no one can be sure just how much bad debt is still sitting on the banks’ books.
As we’ve been experiencing in the UK for a while, when banks don’t know just how bad a state their balance sheets are in, they stop lending. That makes it even harder to dig an economy out of trouble.
Spain also has the usual European problem of overly restrictive labour laws that discourage hiring. This is something the government is trying to tackle. The general strike today is partly about an overhaul of labour rules. A new bill passed in February makes it easier to cut wages, reduces the power of the unions, and could cut the cost of firing staff.
Given that unemployment is standing at 23%, and an incredible 50% among young people, you have to wonder who’s left to go on strike. As one Spanish political communications professor tells Bloomberg, the unions “have a lot at stake as Spanish society is very much questioning their role… [They] don’t represent the unemployed”.
This is one of the rarely-appreciated benefits of having a ‘hard currency’ like the euro. When it’s harder to take the easy way out (allowing your currency to weaken) then sometimes you are forced to take genuinely tough measures to change the way your economy works.
Of course, the trouble is that it takes a strong government to cope with the resulting social upheaval. And if your economy is in such a deep hole that people don’t get to see the benefits of reforms, only the pain, then it’s even harder to push reform through.
So what happens next?
Spain can’t be allowed to go bust. And it won’t be. We’re going to see the usual back and forth about bail-out funds and arguing between the Germans and the rest of Europe. But the most likely outcome still seems to be some form of European quantitative easing. The ECB has already taken a pretty big step in that direction with the LTRO.
But what does all this mean? The short answer is that the future for Europe holds continued loose monetary policy, and a banking system in many countries that’s largely reluctant to lend.
That sounds grim. But one economy will benefit – in the short term at least. Europe got into this mess in the first place because ten or so years ago, monetary policy was right for a weak German economy. But it was too loose for the likes of Ireland, Spain and Greece.
Now it’s the other way around. A strong Germany could do with higher rates, but the ECB needs to prop up the periphery. So we’re seeing talk of a German property bubble – German house prices have been rising since 2009, after being moribund for years.
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