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Weekly Report (21.01.12)

By Per Svensson

miércoles 22 de octubre de 2014, 11:21h

Spain downgraded again, to A
Rating agency Standard & Poor's has downgraded the solvency of Spain to A from AA- at the same time as France and Austria both fell from AAA to AA. The agency warns of “financial risks in the private sector which may limit growth and complicate the Government’s struggle to reduce the public deficit.” Also agency Fitch has warned that a downgrade is imminent.
The Agency also warns against euphoria on the results of the EU summit of 9th December.
The Spanish Government has declared that it takes note of the rebate but insists the present situation is an inheritance from the past.

Interest on public bonds eases
In the first bond offer of the year, the new Spanish government managed to sell 9.900 million euros worth,  almost double that offered. The interest on 3 years bonds fell to 3.576% from 4.058% in the last sale.  This week the Treasury also managed to place 4,880 million euros over 1 year on low interest rates and thus the country risk fell to 350 points.
One of the reasons for the success may have been the half a billion euros which the European Central Bank injected into the banking system at the end of December, over 3 years at 1% interest; Spanish banks got the lions part of this ‘Christmas Present’.
Prices for dwellings down 6.8% in 2011
The government reports a 6.8% fall in the price of dwellings in 2011, bringing them down to 1,702 euros per m2. However, we remind our readers of the lack of reliability in official statistics. The prices used to determine figures, are those declared in escrituras, at the moment of registration in the Property Registery.
Catalonia blackmailing national government
Artur Mas, President of the Regional Government in Catalonia, in an interview with Financial Times said that the region may ‘divorce’ Spain if the national government refuses his demand for a financial pact to considerably reduce the fiscal deficit of the region. He added, ‘Our short term project is financial sovereignty and for the longer term, we shall see…’
Car sales down 17-7% in 2011
Sales of new cars fell 17.7% in Spain during 2011; 10.9% in Italy, but increased 8.8% in Germany, bringing the European total up 1.4% on 2010, with 13.5 million units sold.
Volkswagen was the European leader with 1.68 million units sold on the continent, an increase of 9% on last year. Ford took second place with 1.07 million, and Renault was third with 1.04, that was 9% down on last year.
567.8 € banking charges
The Association of Banking Clients, in a study which it has published, shows that the average client with a current account in a Spanish bank pays 567.8 euros per year in charges; 265.57% more than in 2004, for services which have not improved, and at a time when the banks have computerised all their functions.
The Association has proposed that the Government should in future control bank charges-
Motorways going broke……..
Concessionaries of several toll roads are heading for bankruptcy, due to less drivers being willing to pay their high fees, thus congesting other roads. The new government is studying how to solve a problem involving 3,000 million euros, several big road builders and banks.
Amongst the toll roads with financial problems is the concessionary for the motorway between Cartagena (Murcia) and Vera (Almeria) which failed to pay 11 million euros interest to the lending banks in December. Another is the motorway between Madrid and terminal 4 at the Barajas airport. Only 8,000 cars are using the road daily, 10 to 15% of what was initially foreseen.
.......and private schools
A number of private schools in the Valencia Region, with agreements for financial support from the regional government, are in danger of closing due to non payment of the money promised. The Institute of Jorge Juan in Alicante cannot pay Iberdrola for electricity. In the Instituto Vila-Roja in Almassora pupils go to school with blankets because there is no money for heating. The leaders of ‘Ramiro Izquerdo’ in Castellon have warned parents that they must close if the regional administration does not pay what they owe.
The regional government has not paid since June and 50 million euros is now pending to 450 schools.

Ryanair most passengers in Spain
The Irish low cost carrier Ryanair is now transporting the most passengers to and from Spanish airports. In 2011 it carried 32.3 million people, an increase of 21.2% on the previous year. The company carried 10 million more passengers last year than Iberia.

Diesel price record high
The price of diesel this month marked an historical high, at 1.336 euro per litre, up 4% from December.  Petrol now costs 1.358 euros, up 4.8% from last month. Diesel is now 8% more expensive than at the same time last year, petrol has increased 12.5%.
The political differences between Iran and the Western World may dramatically augment oil prices in the coming weeks. There is an agreement in principle in the EU to boycott Iranian oil, but that will hit Spain especially hard, since it is the biggest European importer of Iranian oil.
Foreigners leave Spain
In 2011 just over half a million foreigners left Spain and 417,523 arrived. This is the first year in this decade with more emigrants than immigrants.  62,611 of those leaving, were Spanish citizens. The immigrants came mostly from Romania.

The crisis continues:
The President of the European Central Bank has warned that the debt crisis has worsened over the past months and that the situation is ‘very grave’
Some of the regions in Spain have warned the government that they will not be able to meet their financial payments in 2012. Finance Minister Montoro has promised to help those regions complying with their obligations
The negotiation about the private ‘haircut’ on Greek debt is stalled. Greece  has bond payments of 20 billion euros due on 20thMarch
Non payments of bills in Spain increased in 2011 from 5.1 to 7.1% (the European average is 2. 6%). The average payment time is now 98 days in the private sector and 162 days in public administration
The World Bank has revised the perspective of economic growth for the world in 2012 to 2.5% and 2013 to 3.1

Changes in the Income Tax
By Per Svensson
The new Government has decided to extend the budget for 2011 into 2012, and is now making important changes in tax legislation in order to achieve a higher level of income and thus to reduce the serious deficit.
On 30th December a new law modifying the basic income tax law (35/2006) on several points. The limit of 24,107.20 euros net tax income, in order to qualify for deductions in purchase and renovation of a permanent dwelling, has been abolished and thus those on higher incomes can also benefit from the deductions.
For tax years 2012 and 2013 the tax rates, for the state part of the income tax, have been increased by:-
0.75% for taxable income of up to 17,707 euros,
2% for income between 17,707 and 33,007,
3% from 33,007 to 53,407,
4% from 53,407 to 120,000,
5% from 120,000 to 175,000,
6% from 175,000 to 300,000 and
7% for incomes above 300,000 euros.
For income received after 1st January 2012,  a top tax rate limit of 52% has been introduced.   On property rental income the rate will go from 19 to 21%.
The super reduced tax on the purchase of a dwelling (4%) is extended to the end of this year.
Regional differences
Regional governments have certain possibilities when deciding on the regional part of income tax. The regions with the greatest deficits will have to go to the upper limits, and together with the increases in the state part of the tax, they will reach impressive levels. If one also adds the reintroduced Wealth Tax (Patrimonio) some contributors will pay more in their region than what they would in the northern ‘high tax’ countries like Sweden.   Spain, as a tax paradise, is ‘over and out’ for the coming years.
A fiscal expert calculates that a person earning 300,000 euros per year, living in Barcelona, will have to pay 145,231 euros in tax (excluded Patrimonio).  If you earn more than 300,000, you should avoid Catalonia, Andalusia, Extremadura, Asturias and Cantabria.
If you earn 25,000 euros and live in Canarias, Baleares, Murcia, Catalonia, Andalusia or Extremadura, you will pay 6,570 euros, plus the taxes for Patrimonio.
In the regions which implement all the possibilities to get tax income,  Income Tax and Patrimonio taxes may be 60% on your income, and even higher for upper incomes and wealth in regions as Catalonia and Asturias.
Take advice!
With the complicated tax situation and the great differences between regions, we recommend all tax paying readers to discuss their fiscal situation with a tax advisor, able to reckon out in euro and pence how much the Rajoy government want you to pay for the mismanagement of Spanish finances over the 10 past years.
The Decree to regularize houses in Andalucia – Don’t be dazzled by the fireworks
AUAN, 10 January 2011
Maura Hillen, President of AUAN has described the decree to regularise houses on non urban land, approved today by the regional government, as ‘very disappointing’.
According to Hillen, “It’s possible that this fireworks display will dazzle some but if you look at the detail of the Decree you will see that it does not help those with ongoing court proceedings, where perhaps the majority could face the chop”.
“If what the Junta wants is more cases like the Priors, the decree certainly does nothing to prevent that” she added. “Actually, I sometimes despair at how little the Administration is in contact with the real problems of its citizens. They must know that what looks nice on paper is not always workable in practice. It appears that they don’t and all they want to do is inundate us with a byzantine tangle of laws and, whilst they are about it, completely destroy foreign investment in Spain”.
Hillen asks, “What shall I tell elderly retirees who have demolition orders against their homes? Can I tell them that the Decree will save them? I can’t because it doesn’t.”   “What can I say to hundreds of retired couples who live on irregular urbanisations without an escritura for their land? Can I tell them that the Decree will give them their escritura?  No I can’t, and indeed some of those who currently have escrituras are at risk because, according to the Decree, escrituras can be annulled because of the possible illegal segregation of land.”
“On the other hand, the regularisation of these developments still has to go through an unrealistic, expensive, arduous and painful process which will take a very long time” she added.
Regarding the new provisions for isolated houses, she states, “I regret to say that these houses are relatively blighted, since according to the Decree they are not entitled to a licence of occupation or use; are subject to yet to be defined future regulations and some theoretical minimum standard of habitability; Furthermore, the Decree states that these houses can only be repaired and preserved; that they should have self sufficient supplies of water, electricity and waste treatment and that only in exceptional circumstances, can they be connected to mains services; In other words they are of dubious legality”
That is to say that the Junta, instead of making an important legal change, and by that I mean changing the LOUA, to resolve a major problem, it has instead only created more confusion in addition to creating a category of second class housing.”
She concluded by saying, “I hope that not too many people are lured by this bait because I think that it doesn’t fix very much. In fact among our members we think that only 16% of them will benefit in any way from this Decree.”

Edu Bayer for The Wall Street Journal
Many Spanish banks are building housing despite a home glut.
"Spain's strategy has been 'wait and see. We'll inject money but little by little,'" said Mr. García Montalvo. "We are no longer in 'wait and see.' Now we are in 'wait and pray.'"
The same drawn-out approach to bank woes has been seen elsewhere in Europe. French banks fought for several years to avoid shoring up their loss-absorbing buffers. But worries about their health have persisted, hitting their share prices hard and restricting their access to funds.
Even if the Spanish government wanted to intervene, it has become very expensive to do so. Spain has been paying a record premium on its debt and would have much more difficulty raising needed funds that it would have had even six months ago. The interest rate it must pay its borrowers has hovered between 5% and more than 6% in recent months, close to an unsustainable level of payments for the government in the long term.
Problems with property exposure have plagued Spain's banks since its housing boom began to collapse in 2007. The year before, Spain built more housing units than Germany, the U.K. and Italy combined, according to data from the European Mortgage Federation.
Especially hard-hit were Spain's regional savings banks, known as cajas de ahorro—or savings boxes. Local lenders often controlled by regional politicians or even the Catholic Church, they lent heavily to local construction firms and projects.
When the market crashed, the banking sector acquired €60 billion in properties, either through repossession or assets required in exchange for debt forgiveness. Savings banks were particularly saddled with these assets: They own €40 billion of the total, according to government and bank data.
In the past two years, the former government of Prime Minister José Luis Rodríguez Zapatero made strides in addressing the issues through broad reforms in Spain's financial sector. The government shepherded the consolidation and strengthened the savings banks, shrinking the number of players as stronger ones merged with weaker ones.
Some investors remain skeptical. Graham Neilson, chief investment strategist at Cairn Capital Ltd., a London-based fixed-income asset manager, said many banks still are carrying real estate at unrealistic valuations on their books. "Some of these assets are close to worthless but have not been marked as anywhere near to that," he said.
Problems have continued to emerge. The Bank of Spain took over troubled lender Caja de Ahorros del Mediterraneo in July, and in December the government decided to inject several billion euros from the Spanish bank insurance fund to help ease its sale for a single euro to Banco de Sabadell SA. In early December, it nationalized Banco de Valencia, infusing a lifeline of €1 billion.
Analysts and investors say that the practice of building on empty lots is one among several moves that have helped banks obscure the size of inevitable losses. They say that banks also have been refinancing loans to developers that in many cases have little hope of paying them back.
Spain's banks have €338 billion in exposure to the real-estate sector, mostly through loans to developers, according to Bank of Spain data. This number has hardly budged in the past three years, despite a wave of developer bankruptcies following the property market decline.
Joaquín Maudos, a professor of economics at the University of Valencia, said that statistic indicates banks are continuing to refinance loans, instead of writing them off. "They are putting makeup on these bad loans," he said.
A division of Sergesprom 2000, a struggling midsize developer in Catalonia, is one example. It received about a €30 million loan from a local savings bank to build 200 homes during the property boom. But the market collapsed, and Francisco Gómez, the building firm's chief executive, said he hasn't been able to sell the homes, or even pay interest on the loan, for the past three years.
Instead of foreclosing, he said the bank—which he won't name—has been lending him more money to cover the interest payments, adding an extra €3 million to the total debt. Mr. Gómez isn't confident he can pay it off. He has said he has been "on my hands and knees to ask the banks to please give me work" completing unfinished homes the banks have repossessed.
A spokesman for CECA, Spain's savings-bank association, said that some developers still have some ability to pay. "We're in a down cycle right now," he said. "These things take time."
A Bank of Spain spokesman said it doesn't permit banks to disguise bad loans in any way, and has strict rules that require disclosure and funds to be set aside cover such loans.
Things were looking up at the beginning of last year, with a 32% increase in foreign investment in Spanish property. But now euro-zone fears have taken a deeper hold on the continent, and buyers have pulled back. Home sales were 81,310 units in the third quarter, down 2.6% from the previous quarter, and down 34% from a year earlier, according to Spain's national institute of statistics. The situation is growing still worse, as cash-strapped Spaniards have trouble paying their mortgages.
Home repossessions totaled 10,869 in the third quarter, up 14.2% from the period a year earlier, according to data from Spain's courts.
Selling down banks' housing inventory "is like bailing out a boat as more water is coming in," said Robert Evans, a real-estate agent for several Spanish banks.
Yet banks are building in strategic spots, where they say there is more demand. Banco de Sabadell, a midsize lender based in Barcelona, is building or planning to build 50 new construction projects, and also funding the completion of 150 projects that developers wouldn't have otherwise finished because of slack demand, said Salvador Grané, director of the bank's real-estate division. Meanwhile smaller Banco Pastor is working on five new apartment buildings around Madrid and the northwest.
Mr. Cabal, the real-estate broker, is pitching properties for the Bankia project in central Madrid. The bus-station location sits near the intersection of two freeways, and homes will have features like floorboard heating systems and a device that can automatically draw the blinds, start the clothes washer or call the fire department. The bank is selling them for about €4,500 a square meter and sharing the proceeds with the developer.
"People are hiding their money under the floor boards, and they won't take it out until things are better," Mr. Cabal said. "With the euro fears, we're all scared stiff" about whether the homes will sell.
In some instances, banks are waiting until they have lined up buyers before starting construction. Banco Pastor took possession of a parcel in one of Madrid's upscale districts in 2008. It is now continuing to round up home buyers for Mindanao House, with 104 of its 130 apartments spoken for. It started construction early last year, when about 50 units were already spoken for.
In all, Banco Pastor is involved in building or completing 10 projects assessed at €160 million. The bank and clients are putting up an additional €35 million to build and finish the structures.
This year, Pablo Rodríguez-Losada, Banco Pastor's director of real estate, says the bank plans to put into motion another €150 million worth of its land portfolio.
Mr. Rodríguez-Losada says market studies have shown there is a demand from well-off buyers for high-end new housing in and around big cities.
As the new homes go up, older developments languish. The Valcastillo development in Pioz, northeast of Madrid, comprises about 500 homes on the outskirts of town that were built by a developer at the height of the boom. Yards in the developments are overgrown with weeds, metal sockets have been torn out, and plaster is crumbling off brick walls.
About half of the Valcastillo homes are occupied. For two years, Manuel García of real-estate agent Básico Homes has been trying to sell 108 of the rest.
The bank that owns them, Grupo Caixa Catalunya, contracted Mr. García's company to help sell the empty homes. The initial developer had been pitching them for €169,000, but Básico thought they would move if priced under €120,000. The plan at first was to sell the homes at around that price and then slowly raise it as demand grew, unloading all the property in two years, he says.
"It was optimistic," says Mr. García. So far, he has only sold 27 homes.

Greek settlement in danger
Back in October, at one of the many euro summits, the European government leaders persuaded the Institute of International Finance, representing large banks and insurers holding Greek debt, to accept a 50% “voluntary” haircut on their holdings. ISDA’s credit event determination committee fell into line and ruled that since it was “voluntary” the writedown did not constitute a credit event that would trigger CDS payouts.
Germany was the main country pushing for these haircuts, euphemistically termed “Private Sector Involvement” (PSI). There have been stories in the past week that Germany is pushing for even bigger haircuts – in the order of 75%. Not to be outdone, a member of the council of the European Central Bank – which has always been twitchy about PSI – has mooted a counterproposal: 0%.
Glad to see that the bargaining range is narrowing! Pretty soon Germany will be demanding that the bondholders pay the Greeks and the bondholders will be demanding that the Greeks pay the banks double what they owe.
Germany’s insistence on PSI is strange in many ways. The conventional rationale is that it is necessary to punish – and hence deter – morally hazardous risk taking, but given that the whole pretense of the eurozone was that all government debts were created equal, and given that Basel treated Greek debt as riskless as Germany’s, any moral hazard is ultimately traceable to European governments and regulators. How dare those banks do what they were told to?
Moreover, the Greek PSI had to walk a thin line. The story was that only Greek debt would get a haircut: This was necessary to prevent disastrous runs on Portuguese, Italian and Spanish debt, but it is hard to give a coherent rationale for that: Investing in Greek debt was morally hazardous, but investing in Portuguese debt wasn’t? Really.
No political promise is credible – especially in Europe right now, and especially given that the logical basis of the promise is dubious at best. Pushing for a bigger haircut on Greek debt is bad news for Portuguese, Italian and Spanish debt because bigger haircuts on Greek debt raises the expected haircut on the debt of these other countries. It raises both the size of the haircut, conditional on one occurring, and the probability that the haircut will actually be applied to these other countries (i.e., that the promise will be broken). If Germany is so insistent on haircuts for Greece today, why won’t they be just as insistent for Portugal tomorrow, despite their fine words to the contrary. (This is the essence of the ECB councilor’s argument.)
Finally, the big problem with a Greek default has always been that banks and insurers would suffer huge losses that would jeopardise their solvency. That is, a Greek default that led to big writedowns would impose big losses on German, French, Dutch, etc. banks. These losses could be big enough to require some taxpayer bailouts, but a big “voluntary” haircut would do the same thing. Thus, Germany’s insistence on a big PSI always seemed like financial S&M.
One last thing about this divergence of views. It makes it clear that despite all of the stirring pronouncements, nothing is settled in Europe. Nothing. Everything is still up for negotiation and the parties are moving apart on key issues, not closer.  Friday’s surge in Italian and Spanish yields and subsequent ECB intervention is in part a manifestation of the realisation that that we are not even at the middle of the beginning.

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