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Weekly Report (09.06.12)

By Per Svensson

miércoles 22 de octubre de 2014, 11:21h

S.O.S.   Spain

The question is no longer whether Spain needs a European financial intervention or not. It is now clear to all that a rescue of the Spanish banks are needed. The question is if the Spanish government has made a request for assistance in the required form, forgetting its formidable, but misplaced sense of pride. In the meantime the European leaders are searching for ways of giving assistance that satisfies Spanish feelings, without loosing control over the formidable sums involved (estimated 260 billion euros).

A model discussed at the moment is that the money needed goes from the European Rescue Fund EFSF to the Spanish government agency FROB (Fund for banking reorganization), that then transfers the capital to the banks. At the moment (Wednesday afternoon) this proposal, and other options, are being discussed in the European capitals, while the Spanish Titanic is sinking from gaping holes in its economy, provoked by an unsustainable property speculation during the Period of Greed

 

Will rescue come in time?. Time is running out for Rajoy

Time is running out for Prime Minister Mariano Rajoy in his desperate Quixotic manoeuvres to avoid having formally to ask for a rescue, and thereby damaging Spanish pride.  Almost all financial and political commentators are now considering a rescue as being impossible to avoid, and are recommending Spain to formulate the necessary request.

Spain is shambles, and has been for the last 5 years since the deflation of an enormous property bubble signalled the end of a Decennium of Greed.  The short-sighted property promoters still continued to plan and build, the incompetent bankers continued to finance new projects and the corrupt politicians mounted a huge cover-up to make the world believe ‘there is no property bubble’  ‘the Spanish banking system is solid’  ‘the Spanish property market will recover …. next month…. next quarter…. next year…’

 

This is what the world thinks:

* The European Central Bank said on Wednesday that private individuals and companies are withdrawing their money from Spanish Banks.
Data shows private deposits with Spain's financial institutions fell by more than 30 percent in April.
* Eduardo Segovia in El Confidencial wrote:   The question everyone is asking right now is not if more money will be needed to recapitalise the Spanish banking sector, but where the money will come from, with rumours circulating that an international rescue is around the corner. 

Suspicion increased with the visit to Washington on Thursday by Deputy Prime Minister Soraya Sáenz de Santamaría to meet with the head of the International Monetary Fund, Christine Lagarde.

* msnbc.com  reported:

Spain warned Tuesday that it could lose access to credit markets, the lifeblood of its economy.  Spain said its borrowing costs have been driven high by credit markets that are effectively closing the door on the nation's struggling  banks.  Cristobal Montoro, Spain's Budget Minister, urged the country's eurozone partners to act quickly before its access to credit markets is totally choked off. 

" On Onda Cero radio,  Montoro said,  "The risk premium says Spain doesn't have the market door open and that as a State we have a problem in accessing markets, when we need to refinance our debt."

* Spain's Central Bank said, “Capital flight in March surged to 66 billion euros, double the previous record set in December 2011, before the worst of the country’s economic problems were exposed.”

* The EU Observer commented:

While the punters speculate on the outcome of the Greek election on 17th June, in truth ‘Grexit’ is already happening.  As a result of massive withdrawals from the Greek banking system, the country is on emergency life support from the ECB.   First, following the inconclusive May elections, the ‘troika’ decided that it would postpone the €48bn recapitalisation payment until after the June election. Then, a fortnight ago, the ECB stopped accepting collateral from the Central Bank of Greece (BoG) for several of Greece’s major banks. This collateral is required for weekly refinance operations required to keep the country’s private banks liquid.

* Sources in German’s Ministry of Finance:

Well placed sources in German’s Ministry of Finance said that in discussions among the G-7 on the situation in Spain, it was believed  ‘They do not want it (a rescue). They are too proud. It is a fatal arrogance.’

* The Financial Times wrote:   On Wednesday, Spain's debt risk premium smashed euro-era records after the central bank chief quit early and Madrid scrambled to finance a major banking rescue. The borrowing rate on Spain's 10-year bonds shot to the danger level of 6.703 percent -- unsustainable over the longer term -- as Spain battled to avoid becoming the next nation to fall to the Eurozone crisis.
When compared to safe German debt, investors in Spanish bonds were demanding an additional 5.39 percentage points:  which easily crashed through euro-era records set each day of this week.

* Spanish Finance Minister Luis de Guindos warned: “I don’t know if we are on the edge of a cliff, but we are in a very, very difficult position. The future of the Euro is going to play out in the next few weeks in Spain and Italy.”
* Deutsche Welle reports that doubts are increasing over Spain's ability to lift itself out of its debt situation, despite EU economics commissioner Olli Rehn promising Madrid an extra year to reduce its budget deficit below the three percent mark.

The paper says, with several national banks requiring recapitalisation, experts fear another bailout programme could tear the European Rescue Fund apart.

* Former Prime Minister Felipe Gonzalez said:  “We are in a situation of total emergency, the worst crisis we have ever lived through.”

The warning came as yields on Spanish 10-year bonds spiked to 6.7pc, pushing the “risk premium” over that of German Bonds to a post-euro high of 540 basis points. The IBEX index of stocks in Madrid fell 2.6pc, to the lowest since the dotcom bust in 2003.

Chaos over the €23.5bn rescue of crippled lender Bankia has led to the abrupt resignation of central bank governor Miguel Ángel Fernández Ordóñez, who testified to the senate that he had been muzzled to avoid enflaming events as confidence in the country drains away.

* Financial Times also wrote:

Spain called on Saturday for a new fiscal eurozone authority which would harmonise national budgets and manage the block’s debts.

It is not the first time a European leader has proposed creating such an authority but the woes and the size of Spain - a country deemed too big to fail - may now accelerate talks ahead of an EU summit on June 28-29.

The prospect of a Greek euro exit and Spain’s parlous finances have prompted EU policymakers to hurriedly consider measures such as a “banking union.”

Germany, the paymaster of the eurozone, and others insist such a move can only happen as part of a drive to much closer fiscal union and relinquishing of national sovereignty.

Overspending in the regions and troubles with a banking sector badly hit by a property crash four years ago have sent Spain’s borrowing costs to record highs and pushed the country closer to seeking an international bailout.

The risk premium investors demand to hold Spanish 10-year debt, but German bonds rose to their highest since the launch of the euro - 548 basis points - on Friday.

* Jose Maria Beneyto, spokesman for PP on foreign affairs in the Parliament:

‘an intervention in Spain is not to be excluded…. and will not mean an apocalypse for the country…’

* The president of Mercadona, Juan Roig, said, ‘if the Spanish do not charge their batteries and start working  more, Spain will be intervened..’

* Welt am Sonntag reported:   The European Commission, the EU Council and the European Central Bank are working on a new concept to restructure the rescue fund.

* The Economist wrote:    GREEK politics may determine the Euro’s short-term future but it is Spain that poses the single currency’s most difficult problem. The euro zone’s fourth-biggest economy is caught in an increasingly desperate spiral of deepening recession, drowning banks and soaring borrowing costs.

Spanish firms and banks are all but cut off from foreign funds. On May 30th yields on ten-year sovereign bonds rose above 6.6%, close to the level at which Greece, Ireland and Portugal had to seek a bail-out. After the government’s botched nationalisation of Bankia, a troubled savings bank, Spanish depositors are jittery. A bank run is all too plausible—especially if Greece, which is bracing itself for a fresh election on June 17th, is forced out of the euro soon. Even if that calamity is avoided, Spain’s slump will drag the country inexorably towards insolvency.

* Der Spiegel:  German Chancellor Angela Merkel and Minister of Finance Wolfgang Schauble do not believe that Spain’s efforts are sufficient to resolve the banking crisis…. and she has recommended the Spanish government to apply to the European rescue fund to acquire funds for its banks....

* Wall Street Journal insisted that even though both the Fund and the EU want at all costs to avoid a rescue, the International Monetary Fund has started to prepare a plan for the rescue of Spain, that may consist in a loan of 300.000 million euros over 3 years. 

* Representatives of both the German and Finnish governments have stressed that their position on a rescue of the Spanish banks has not changed, that any direct assistance must be given by the national government

* Nobel prize winner Paul Krugmann  has written that Spain is, “the emblematic euro crisis economy” where huge inflows of easy money fed an unprecedented housing bubble aimed significantly at British tourists and retirees.  It tasted good, pushing more euros into workers’ pockets and booming tapas bars – until the global collapse. That’s when Spaniards discovered how the artificial boom had made their country uncompetitive. Trapped in a currency they could not devalue, they had no easy way to cut their prices and make their products, workers and vacation spots more attractive.” 

The web newspaper ‘El Confidencial’  has asked its readers if they support an intervention of Spain now. The result was 56% yes and 44 no.

 

Any good news during the week?

Unemployment fell

The number of unemployed fell by 30,113  in May, or 0.63%, leaving the total at 4,714,122.    However, the normal Spring up-swing in employment (start of tourist season) is smaller this year than last; May 2011 saw 79,701 more in employment.

 

159 evictions per day

159 families, unable to meet their mortgage repayments or their rent, are being evicted from their homes every day; 82% of the families have young children.

At the same time, 5.6 million properties are standing empty, 20% of the total number of dwellings.

 

23.5% of all evictions are in the Valencia region.

2 million new cars in stock

Spain has also a ‘car bubble’.   Two million new cars are waiting to be sold. They were produced on the assumptions of a normal market, but sales are falling fast.  Last year only 800,000 vehicles were sold.  This year sales are expected to reach 750,000.

 

No public works

The Vice President of the Valencia Region, Jose Ciscar, has openly told building companies in the province of Alicante, that there will be no money for public works this year.

The builders in the province (with 20,000 employees) are now living on income from work in other countries.

 

Capital fleeing Spain

In the three first months of this year, there was a net outflow of 97,090 million euros capital from Spain, compared with a net inflow of 20,887 million during the same period last year.

 

Amnesty for illegal dwellings?

To avoid the demolition of illegal dwellings, where someone who bought in good faith and are now living, the Ministry of Development is studying an amnesty. This could affect tens of thousands of properties throughout Spain, but mainly on the coast: in Marbella, Cantabria, Axarquia in Malaga and several municipalities in Almeria.

The proposal is now being studied in the regions and municipalities mostly affected.

 

No investigation of royal family

Parliament has refused the proposal from some of the smaller parties to constitute a Commission of Investigation into the royal family. The call comes following the hunting trip of the king and the sordid financial manipulations of Inaki Urdangarin, married to Princess Cristina.

The Guardian wrote:  The once squeaky-clean Spanish royal family has become immersed in a growing fraud scandal, which is revealing how members of King Juan Carlos' family may have cashed in on the monarchy's good name.

At the centre of the scandal is the King's son-in-law Iñaki Urdangarin, a former Olympic medal winning handball player who became the Duke of Palma upon marrying Juan Carlos' sporty daughter, the Infanta Cristina.

As Spain's royal family struggles to hold on to its popularity, Urdangarin and his business partners are the subjects of daily leaks from fraud investigations involving millions of euros of public money.   Police have raided the offices of his private companies and of a foundation he once presided over, seizing documents.

El País newspaper reported this week that prosecutors believe Urdangarin, who has not been charged with any wrongdoing, will be named as a formal suspect in the case within two months. That could be a first step towards formal charges being brought.

 

20 million in pension

The anti-fraud office in Catalonia has opened an investigation to ascertain if Isidro Faine received a pension of 20 million euros when he stepped down as Director General of La Caixa to become its President.

 

Liquidity problems in Social Security

Social Security Secretary of State, Tomas Burgos, has recently admitted

that  ‘important tensions in the liquidity’ in the Social Security System may take place in the coming months. Delays in the payments by companies have ‘caused problems for the system’.

 

More holes in Bankia?

The 19,000 million euros Bankia got as share capital from the State in the nationalisation may, due to new losses found, be insufficient.  One of them is the devaluation of Torre Foster in Castellana, which may amount to more than 400 million euros. Several other holes may be found when the new leaders examine the 380 property companies owned by the bank.

The Government has not yet paid the share capital promised; there are indications now that it may be reduced.

 

More banks down rated

Standard & Poor’s has reduced the ratings of Bankia, Banco Popular and Bankinter to BB+, meaning ‘rubbish’.  Banca Civica was also revised from BB+ to BB.

 

New taxes flourishing

Andalucia, Catalonia and Murcia are the regions which have introduced the most taxes, trying to fill their empty accounts.  In 2011 they created 6 new taxes and revamped 19 existing ones. However, the Canary Region will surpass them all when a new tax law takes effect.

In the EU tax pressure is increasing most in Spain.  In 2010 from it rose from 30.7% to 31.9% of Gross Domestic Product.

 

Polaris projects returns to desert

The Polaris World model, with hundreds of houses jammed together around a golf course, erected on dry land in a far inland area of Murcia Province, is returning to desert.  A slick marketing campaign on television in the UK lured many foreigners to pay top prices for one or more properties, financed up to 115%.  Two years ago Polaris World had to relinquish ownership of golf courses and most of the unsold properties to a consortium of banks, led by the Alicante saving bank CAM. Owners are now trying to get rid of their houses (at prices of 50,000 euro on 200,000 euro purchases). The golf courses are idle and the desert is creeping in.

 

CAM bank was sold to Banco Sabadell for just 1 euro. Was it too expensive?

Andalucía and Valencia under investigation

The International Monetary Fund is preparing the rescue of Spain by sending a team of investigators to the country. They are scrutinising especially the regions of Andalucía and Valencia.

 

Ibex fell 28.9%

During the 5 first months of this year, the Ibex, the Spanish stock exchange index, fell 28.9%.    In May the fall was 13.14%.

The share value of the few big promoters still remaining, has fallen an average of 39% so far this year. Sacyr Vallehermoso is down 67.53%.  Among the real estate sales companies, the  bloodletting is also intense, with Metrovacesa falling 64.4%, Reyal Urbis 54.2, Realia 49.8 and Colonial 48.5……..

 

Europe is at the abyss

By Robert J. Samuelson, Monday, June 4, 3:09 AM

Europe is at the abyss — again. Its turmoil is rattling global stock markets and stoking fear and bewilderment. The obvious question is, what’s the solution? The answer is, there is no solution. Europe faces choices, some bad and others worse. Unfortunately, it’s unclear which are which. The best that can be imagined is that Europe lurches from crisis to crisis and that its slumping economy weakens the already fragile global recovery. The worst is a massive flight from the euro and an economic free fall that resurrects the dark days of 2008 and 2009.

Can anyone doubt that the euro’s creation in 1999 was a huge blunder? It aimed to promote European prosperity and unity, but it’s doing just the opposite. The very belief in its early success reduced interest rates in Europe’s periphery (Greece, Portugal, Spain, Ireland, Italy). Low rates fed credit booms and housing bubbles that, once burst, caused recessions and swollen budget deficits.

A blot on Britain’s jubilee

As for unity — the political dividend of economic success — the euro now sows rancor. Germans, Italians, Greeks and the others quarrel over who’s to blame and who should bear the cost. The single currency actually hinders economic revival. One way countries cushion austerity — the spending cuts and tax increases designed to cut budget deficits — is currency depreciation. This makes their prices more competitive, boosting exports and tourism. But euro countries lack this choice, because they’re yoked to the euro. The human costs are immense. Unemployment is 14.2 percent in Ireland, 21.7 percent in Greece and 24.3 percent in Spain. How much suffering can societies tolerate without profound upheaval?

Two events underlie the new euro fears.

The first is Greece’s June 17 election, because it might result in the country’s quitting the euro. One leading party — Syriza — promises to repudiate the austerity agreement with other euro-zone countries, the International Monetary Fund and European Central Bank (ECB). If that happened, the loans contingent on austerity would probably stop. Lacking euros to pay its bills, Greece would adopt a national currency that, almost certainly, would lose value against the euro, perhaps 50 percent or more. (Note: Polls show Syriza trailing slightly.)

The second event involves Spain, whose government shored up Bankia, a major lender, with 19 billion euros ($24 billion) to offset loan losses. It’s feared that other banks harbor more losses and that these, piled atop existing budget deficits, will so scare investors that Spain would face much higher interest rates. (On 10-year bonds, rates rose a percentage point last week to 6.7 percent.) Spain would need bailing out, a huge task. Its economy is five times larger than Greece’s.

Broadly speaking, the 17-member euro zone faces two choices.

One is to defend the euro at all costs. The immediate consequences for Greece — or other countries — of leaving the euro would be dire. Some companies, unable to repay euro-denominated debts, would go bankrupt. Inflation would shoot up. Banks might suffer large withdrawals. Worse, if Greece dropped the euro, it might trigger a chain reaction. Depositors in Spain, Italy or Ireland might stage runs on their banks, trying to withdraw euros before they were replaced by less valuable national currencies.

Preserving the single currency could cost trillions of euros, says Douglas Elliott of the Brookings Institution. The ECB might have to guarantee bank deposits or provide vast advances to banks to offset withdrawals. Softening today’s austerity would require more borrowing. Who would lend? The ECB? Historically, excessive lending by central banks risks high inflation, though many economists discount that now. What about “eurobonds” — bonds issued for individual nations but backed by all? This would make Germany, with its strong credit rating, the ultimate guarantor. Naturally, the Germans resist.

The other possibility is to admit that defending the euro is self-defeating, argues economist Desmond Lachman of the American Enterprise Institute. Imposing big spending cuts and tax increases on economies in recession worsens the recessions. Spain is supposed to cut its deficit by more than 3 percent of its economy in 2012, even though retail sales are down 11 percent from year-earlier levels. Budget targets won’t be met, he says. The only hope for these countries is to jettison the euro and benefit from a cheaper currency.

Aside from the initial economic costs, the blow to Europe’s political cohesion would be enormous. Europeans would debate: Who killed the euro? Germany would be a big loser.

Europe is a fifth of the world economy. Its multinational firms span the globe. What happens in Europe does not stay in Europe but affects markets and confidence everywhere. Europe’s slackening export demand already hurts other economies. The great lesson here is that bad ideas, once embraced, become entrenched. The euro was a monstrously bad idea from which there is no easy escape.

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