14th June 2012
The announcement is shown below:
"Moody's Investors Service has today downgraded Spain's government bond rating to Baa3 from A3, and has also placed it on review for possible further downgrade."
You might reasonably ask where they have been the last few weeks?! But as we have learnt from the credit crunch ratings agencies are regularly the johnny come lately to the reality party. In general they respond to what has happened rather than perform the role of forecasting what is likely to happen. So they are a perversion of what they should be. As so often these days we see the fact that a blatant issue/problem is mostly ignored.
For Once This May Matter
Regular readers will be aware that as ratings agencies invariable act ex post rather than ex ante that I am often scornful of the media's attempts to represent them as market moving events. However as three of the main ratings agencies have acted on Spain there are possible genuine consequences.
Some funds have strict criteria as to the credit rating level of the bonds they invest in. Others work off bond indices which also depend on a combination of the ratings of the main agencies. Whilst Spain has not dropped a level yet in these terms as the three main agencies have her on "negative outlook" she is now on the edge.
The European Central Bank
I have described many times on this blog how the ECB has helped support the Spanish government bond market. Partly explicitly via outright purchases (Securities Markets Programme) but also implicitly. It's three-year liquidity operation in effect gave Spanish banks cheap funding (currently 1% and more likely to fall than rise) which they invested much of in Spanish government bonds.
The "rub" is that the banks have to provide collateral to the ECB in return for the funds. The rules state that if Spain falls below A grade status then an extra 5% of collateral has to be provided and she has now done so with 3 of the 4 agencies used as she is on negative outlook with the other one Canada's DBRS. Now 5% extra may not seem much but when your banking system is near to breaking point finding it is easier said than done.
Actually when this happens the ECB may abandon this rule like it did for Portugal but actually the loss of credibility tends then to make everything worse anyway.
Back to Moody's Statement
Here is the vital part and they have come round to my point of view which put simply and with apologies to ex-President Clinton is, it's the economy stupid!
"3. The Spanish economy's continued weakness makes the government's weakening financial strength and its increased vulnerability to a sudden stop in funding a much more serious concern than would be the case if there was a reasonable expectation of vigorous economic growth within the next few years."
Okay so nice of them to join the party but it makes me think that we should take the advice of the Spanish singer Julio Iglesias:
"Begin the Beguine"
If we think like that the beginning or cause of all of this is clearly the Spanish housing market so let us examine today's evidence on this front.
House Prices in Spain Are Accelerating Downwards
The Spanish statistics institute has told us this:
"The annual variation rate of the HPI is -12.6% in the first quarter of 2012, almost one-and-a-half points lower than that registered the previous quarter.
The quarterly variation of the general index is -5.0%."
Something troubling here
If we look at the figures we see that the rate of fall of the house price index has been accelerating. We have a hint of this in the way that they have fallen 5% in the first quarter of 2012 which is a lot faster rate than a 12.6% year on year one. If we look back we see that the acceleration of the fall has been building. The numbers below represent annual falls and are quarterly figures beginning from the first quarter of 2011.
-4.1%; -6.8%; -7.4%; -11.2%; and now -12.6%
You do not need a degree in statistics to spot the trend in play here! But here we have something which official views/forecasts will never give you. If we look at "ground zero" for the Spanish crisis then according to the latest data it is not only getting worse but it is doing so at an accelerating rate.
If we examine the underlying index we see that one bench-marked at 2007=100 is now at 75.4 and quite obviously falling. I would be interested in readers thoughts as to the difference between the underlying index for new housing, 83.9, and the one for existing housing of 68.6.
One rather revealing change is that the weighting of new housing in the index has fallen from 49.08% last year to 40.3% this. And as the method they use is a lagging indicator we can expect further falls to come.
The Spanish Banks
Once you come to the view that the housing market in Spain is deteriorating then her banks will see that part of their balance sheet deteriorate too.
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