As mortgage interest rates continue their rise in Spain what happens next?

It was only yesterday that Prime Minister Rajoy stood up in the Spanish Parliament and told them that her fiscal or budget deficit would be 6.7% of her Gross Domestic Product or GDP. Only a week before he had told them it would be 7% so it was taken as good news. Unfortunately they seem to have forgotten that the latest target set for this number by the European Commission was 6.3% or that until recently Prime Minister Rajoy’s government had been promising it would be 6%. And lest we forget the original target for 2012 was in fact 4.3% of GDP!

Unfortunately these numbers are an example of reality was once a friend of mine as they exclude the costs of the bailout of Spain’s banks which add another 3.2% of GDP to the numbers. So 6.7% becomes 9.9% as we add it back in. Also we know that last year the fiscal deficit was originally announced at 8.5% of GDP but as time went by (and perhaps there were hopes that no-one was looking) it rose to 9.4%. If you look at how much debt Spain issued in 2012 and then compare it to the claimed fiscal deficit you might well have fears that such events are likely to recur for the 2012 numbers too.

Anyway apparently all these shenanigans will do this.

There is no doubt this increases confidence in Spain

What about economic growth in Spain?

Prime Minister Rajoy also told us this.

The most important of Spain’s goals are economic growth and creating jobs

An excellent idea so how is this going?

The past just got worse

This morning the Spanish statistics institute has told us this.

The Spanish economy registered a quarterly change in volume of -0.8%……..The annual GDP growth in the fourth quarter of 2012 is -1.9%

So both have been revised down by 0.1% as the last quarter of 2012 now looks even weaker than before. Overall in 2012 Spain is now estimated to have had an economic output of 1.051 billion Euros. We also see how the jobs issue went in 2012.

The use of the economy down to a rate of 4.7%, one tenth more than in the third quarter, representing a net reduction of approximately 805 000 jobs working full time in a year. For its part, the hours actually worked decrease at a rate of 3.9%.

The Bank of Spain looks forwards

In a section curiously omitted from the English version we are told this via Google Translate.

Limited information relating to the first quarter of 2013 points, in general, to contractionary tone prolongation of the activity, in a context of marked weakness domestic demand….The latest information on investment in capital goods points to a continuation the weakness of this component of demand at the beginning of the year.

This backs up the business surveys which have so far signalled a  weak start to 2013 for Spain. as whilst 46.5 on the composite Markit index was better it was still well shy of the unchanged benchmark of 50.

What about Spain’s banks?


We have got used to continual falls in this series and the latest numbers carry on with the trend.

In the case of mortgages constituted for dwellings, the average amount was 101,460 euros,  3.0% less than December 2011 and 3.6% lower than November 2012.

The value of the mortgages constituted on urban properties was almost 2,888 million euros in December, indicating an annual decrease of 27.3%, as compared to the same month of 2011. In dwellings, the capital loaned exceeded 1,783 million euros, 29.9% less

So we see that our price measure or mortgage value is falling as well as our quantity measure or mortgage volume.

Mortgage Rates continue their rise

Regular readers may recall that. I discussed on the release of the last set of such figures a RISE in mortgage interest rates which is the reverse of a supposed low interest rate era. Well it is continuing.

The average interest rate for the total of mortgage loans was 4.43%, 1.8% higher than December 2011. Regarding dwellings, the average interest rate was 4.45%, 4.7% higher than December 2011.

What about other measures?

There was some cheer when it was announced that bad loans at Spanish banks had fallen from 11.4% to 10.4% in December although such cheer was unlikely to be from Spanish  and indeed Euro area taxpayers. You see the other bad debts had been transferred to the vehicle called SAREB created by the Spanish government and backed by loans from the European Stability Mechanism. So in fact we saw privatisation of profits and socialisation of losses one more time as Spanish and Euro area taxpayers found an explicit liability on their books as opposed to an implicit one.

Yesterday we saw that the recently improving trend for Spanish deposits has ended. The “Bin Lardens” (500 Euro notes) which had flowed into the system via a tax amnesty seem to have stopped flowing as deposits fell by 0.5% in January. If we look back for perspective they seem to be on their way to 2007 like numbers.

The problem that is Bankia

This is the totem pole for the problems with Spanish banking as it is all there. We saw lending to the housing sector followed by mergers (7) which were designed to hide the truth badged as strengthening  followed by denials and then collapse. Here is the latest from Bloomberg.

BFA-Bankia whose collapse last May helped push Spain into a European banking bailout, posted a record after-tax loss of 21.2 billion euros ($27.6 billion) as it cleansed soured assets from its balance sheet.

The already embattled Bankia share price has fallen another 4% this morning to 29 Euro cents which means that the private investors who were missold its debt instruments as “safe and secure” are even further away from any sort of return on what has become a national scandal.

It was only last May that Spanish Finance Minister Luis de Guindos told us this.

Bankia is solvent, the state is fully behind it

Er actually the Euro area is behind it now too. But there was more.

[The bailout] will not cost anything to the taxpayers…………the minister said that the state will actually make a profit

Echoes of Anglo-Irish Bank and indeed Royal Bank of Scotland is there not?

In the end Spain will have to admit that the problems in her banking system are worse than she has owned up to so far and the size of the bailout is something I expect to inexorably rise. Meanwhile Bankia will cut 6000 jobs which unless I am very mistaken means that Prime Minister Rajoy’s job creation programme is starting at -6000.

An economic oddity

With apologies to David Bowie for partly pinching one of his most famous song titles there is something odd about this.

According to the flash estimate issued by the INE, the annual inflation of the CPI in February 2013 was expected to be 2.7%. >

Such economic collapse would not in pre credit crunch times be expected to have been combined with inflation at all let alone such levels. Of course rises in indirect taxes are playing their part here.

But in an example of oh what a tangled web we weave I noted this in the annual accounts today.

Unit labor costs recorded an annual rate of -5.8%

So a broad hint of falling wages whilst inflation is continuing which sets a trend for real wages. Whilst this may well help exports (although a strong Euro may well have neutered it as we stand) if we project the impact of this on domestic demand the result is not pretty. Let us hope for Spain’s sake that there are some productivity gains in there although falling investment poses a question there too.


Earlier this month I was interviewed by the Spanish newspaper SUR and a link to the interview is below.

In it I suggested that austerity in Spain’s circumstances is a type of economic self-harming and since then we have seen more evidence of this. I am afraid to have to tell you that none of the possible sources of good news for the Spanish economy I discussed have taken place but some of the bad ones have.

Number Crunching

The news wires are reporting that a Spanish official has just stated that the 2012 fiscal deficit was 9.99% thus directly contradicting the Prime Minister only 24 hours later (h/t Darlington Dick).

Meanwhile RBS in the UK is at a similar game.

Operating profit of £3,462 million, the largest operating profit since the turnaround began – up 90% from 2011 and £11.7 billion higher than when we made a loss in 2008.

Emerges from its chrysalis and somehow becomes this.

Overall loss before tax was £5,165 million

I am glad that is clear aren’t you?

This entry was posted in Banks, Euro zone Crisis, GDP, General Economics, Recession, Stagflation and tagged , , , , . Bookmark the permalink.
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  • Anonymous

    The Spanish are past masters at disguising their financial woes. The cajas de ahorro in particular are still holding some pretty serious amounts of doubtful housing debt, no doubt encouraged by the government and its wish for future growth. If they are very lucky, this matter will remain under the counter until the economy improves, when it can gradually be filtered out. If not, they will have to reveal all in one go, which will be painful for all concerned (not just the Spanish, but other EZ countries, too) and will hit credibility once again.

  • forbin

    Hello Shaun,

    a by note : I have notice that the current todays post has been disappearing lately – past few days its there for a while then when I reload ( and from two completely different machines, locations and architecture for that matter ) later that day the current post has gone and allI can see is the yesterday post !

    web gripes perhaps ?

    Later in the evening I may the todays post back ,


  • DaveS

    Agreed, austerity doesn’t work in our broken consumer economies – that is what Ed Balls is arguing now.

    But then what is the alternative ?

    You can try “demand stimulus” i.e. the government can spend more, run a bigger deficit in the supposedly short term. Of course the central bank will have to monetise it because letting interest rates rise will kill mortgage holders and consumer spending. You can build “infrastructure” -. lots of houses, roads, airports and whilst you spend GDP will go up. If you stop spending you have lots of houses and roads but GDP growth stops – so you can’t stop. Keynes doesn’t work in our unbalanced economies because we don’t produce enough – you are stimulating either foreign production or domestic non-exportable services. This wasn’t the case in the 30′s – anyway we will find out soon enough in the UK.

    You can try devaluation in the hope of boosting exports. But what are you hoping to export if you have decimated your manufacturing base ? You can’t compete with developing world wages for low end manufacturing – you probably don’t have the intellectual or financial capital to compete in high end manufacturing. Devaluing doesn’t help much if you have to import energy, raw materials and components. And if you devalue, then likely all your competitors will too. Still Mervyn seems to think its worth a shot,

    And if you devalue by printing or by other means. you will get inflation. Real incomes drop, consumer spending drops, confidence drops. You decimate savers who should be providing the capital to restructure and if you artificially keep interest rates low then foreigners won’t invest either. That means no capital – just QE..

    Finally you can default on the debt – both government and bank debt – although their is almost no distinction any longer. If we have a domino chain of bank defaults then more than likely we will have a domino chain of sovereign defaults. And remember we aren’t just defaulting on the foolish foreigners – the majority of that debt is owned by us – we are defaulting on ourselves too – that means massive wealth destruction.

    Part of me thinks we should default and be done with it. The ensuing crisis is perhaps the only chance we have to reset the global economy. However none of us can predict what would happen if much of the West defaulted. We have no idea what the world would look like afterwards and whether the West would ever be able to recover. It would be a massive gamble.

    Of course I believe, default in inevitable, they are just stalling by choosing inflationary soft default. I don’t have kids so maybe I just have to hope they can stall as long as possible…..

  • Anonymous

    Hi Forbin
    Apologies to you and anybody else affected as there has been an issue over the past day or so. I did put a quick note on my Italy post which seemed to be solid. There are improvements being made to the IT basis of the site and to its presentation and as ever they have come with a glitch or two. So far today it is working fine and long may that continue!

  • Anonymous

    The UK should sell RBS to the highest bidder, as Maggie once said “it’s losing money, any price is good”. Failing that just make RBS insolvent, and cut the taxpayer’s losses ….

    Copy Iceland, it’s a more successful approach than the Eurozone bank rescue plan.

  • Justathought

    Hi Dave S,

    This is maybe the real issue behind all the actual events,if it is the case we are going for a real and long bumpy road…

  • Jim Manning

    Hi Shaun…

    Might I propose that “cleansed soured assets from its balance sheet.” is worthy of a place in your ever-expanding Lexicon.

    It sounds so much nicer than an after-tax loss of 20 odd billions!*

    *Sterling, Euros, Dollars… does it much matter anymore?

  • Anonymous

    Bonuses still being paid at RBS on basis of higher operating profit – just those pesky fines obliterating it ?

  • DaveS

    Hi Justathought

    Well – I listened to a bit of that – I agree that oil will be the problem – in my view it will be an oil shock that will derail the central bankers and their inflation plans.

    I am afraid I don’t believe in any market conspiracy theories and I certainly don’t believe in abiotic oil. We are not awash with oil – its severely constained – if you look at EIA stats here then its obvious

    Crude oil production has gone up by just 2% since 2005 from around 74M barrels to 76M barrels. The growth has been in natural gas liquids and “other” – these are more expensive to produce and have lower energy density (so you can’t just look at volume numbers). That is why prices have gone up even in the midst of recession.

    In my view this is the elephant in the room that central bankers certainly don’t understand.

  • forbin

    Hello DaveS.

    Yup oil is the issue and as an Oil hand said – “OK, I’ll beleive in your abiotic oil – where do I drill for it ? ”

    Doesn’t matter how you think oil is produced – you need traps for it to collect in – I believe that much oil produced in the earth has escaped ( heck think of braer tar pits or beverly hill-billies if yer like ) or been partially oxidized to make tar pits or whats called “heavy oil ” or not cooked enough to make oil and called kerogen.

    there’s been an inflection point around 2002-2005 – much of today’s financial woes are due to this ….


  • James

    Great post as always. In looking at the RBS results, I did try to understand the credit adjustment (amounting to a cost of £4.6 billion). I am a qualified accountant and am therefore used to bonkers rules affecting results, but this really takes the biscuit.

    As I understand it, the mark to market rule for assets (ie the rule that you take the listed value of a share/bond etc on the balance sheet date and take the gain as a profit or loss) is extraordinarily applied to the bank’s own debt instruments. Instead, therefore, of just recording a bond at par as it will have to be repaid at par, you look at the quoted value and take the difference from last year as a gain or loss through the profit and loss account.

    This means that:

    1. When your credit rating gets better, you take a loss, as the bonds of a given yield are quoted higher, which means a bigger liability on a mark to market basis

    2. When your credit rating gets worse, you make a profit.

    You could not invent it…please tell me that I have missed something here!

  • DaveS

    Yes, in truth I believe we are in an energy crisis.

    The history of capitalism is a progression of financial bubbles and busts but always in the context of ever increasing energy supplies. I think that is about to change and that is why this time it really will be different.

    They can inflate debt away but they can’t create energy and our wealth is really a function of surplus energy.

    Anyway its a religious debate – you either believe it will get solved or you don’t – I’ll resist polluting Shaun’s economics blog with an energy debate !

  • pavlo

    I have just returned from a couple of weeks in Tenerife and during this time I met up with a local friend who is a fairly senior banker and one who is not afraid to ‘tell it as it is’ – in private. If half of what he has told me is true (and I have no reason to doubt that 100% is true) then Spanish banks are sitting on really serious problems and as you say ‘disguising them’. I am convinced that the reason Spain does not want a bail out is that, in Greek style, they do not want auditors sniffing out the true position.

  • Paul C

    Hi Guys, as Shaun points out there’s little truth in the numbers from Spanish Government or Banks.

    I note the thread turns towards energy and oil, I’ve watched enough “end of the world is nigh” youtubes but if you want some thought provoking economic forecasting read the tullet prebon “perfect storm” forecast. It floats the concept of EROEI or energy return on energy invested and that curve is unavoidably DOWN which means it does much matter what kinds of “new fossil fuels” are discovered, their EROEI is too high (including shale).

    It puts our current bursting bubble in context and can let your mind soar above the media reporting of Spanish Economic reporting.


    Paul Chadwick BSc Econ

  • forbin

    perhaps just not oil either – copper ,steel ,concrete, all being sucked up by the 600lb gorillla in the room – China

    then there’s the low wages work force

    frankly add that to the debt bubble and we’re really stuffed in the west – unless you’re Canada and Australia – but do they realize they are selling their inheritance ?

    all quite “interesting times”

  • Andy Zarse

    “(and perhaps there were hopes that no-one was looking)”

    Shaun, you owe me for a dry cleaning bill, I spat seafood linguini all over my trousers when I read that.

  • Anonymous

    Hi DaveS
    It is a big question and its a shame it gets so polarised. But in many ways our future will be decided by what happens on the energy front. I ‘ve always thought it a shame that we use oil for energy when it has plenty of other uses so I hope that something like thorium or cold fusion comes up trumps and soon.

  • Anonymous

    Hi ExpatInBG
    If we go back to the beginning I would have started that policy with Northern Rock and often wonder if its position as a major employer in the North East helped save it. However we are where we are and the UK taxpayer has wrapped an implicit guarantee around it so rather than the current messing around where we have 83% of the capital and 68% of the votes it would be preferable to nationalise it and then break it up.
    The catch is the price as I think that there is a danger of the taxpayer again over paying for RBS shares.
    Meanwhile in faraway fantasyland places like the Sunday Times are talking of selling it off which means taking a loss (they fantasise a profit) and the threat of being sued for misselling as the truth about its position emerges. I still fear it has no value….

  • Anonymous

    Hi Jim
    I do agree that it evokes images of emerging from the shower feeling refresh after have had a good wash. Sadly it has a misselling scandal to come after the sale of its bonds to retail investors and maybe on its rights issue too and of course it is locked into a still falling property market. What could go wrong?

  • Anonymous

    Hi Chris
    The fines and other issues took RBS into negative territory which is bad enough. But the major issue or -£4.65 billion was something I have discussed on here before as being one of the alchemies of alchemies and I discussed it in relation to Barclays making profits from it.
    Banks issue bonds so lets say bond one at 100. If it falls to 60 in price because they are doing badly they can book the 40 (100-60) as a profit. Except as things are less bad for RBS this acted the other way and created a loss. This sort of thing should not be in the profit and loss in my view and belongs on the balance sheet.
    Or as perception improves you make less profits. Hmm I would bin that!

  • Anonymous

    Hi James

    No and I had just given that as an answer to Chris and now wish I had read yours first and simply referred to your reply.

    As you know I like to use music. So let me hand over to the nutty boys

    “Madness, madness, they call it madness
    Madness, madness, they call it madness
    I’m about to explain
    A-That someone is losing their brain”

  • Anonymous

    Oh dear,my apologies to your trousers.

  • Anonymous

    Hi Guys
    Yes I agree that there is plenty more to come from the Spanish banking sector. It is copying the tactic of the Irish banking sector which released bad news like notches on a rope.

  • Doubting Dick

    I read it – frightening stuff, decided to continue burying my head in the sand. The alternative would be to buy a small holding in mid-wales and a gun!

  • Anonymous

    Hi Shaun,

    Another facet of an energy crisis is the electrical generating infrastructure. for example France gets 70% power from nuclear and the average reactor age is approaching 40 years. The decommissioning costs and replacement costs are huge and the French govt financial position is dubious without this extra burden. the same can be said for British reactors, whether we can convince private investors to build them and supply affordable electricity is an open question. We’ve previously discussed an impending energy crunch in Germany – 2023 when they complete their nuclear shutdown.

    This will have knock on affects in these economies.

  • PT73

    It is an interesting and troubling Article. They have an office in the same building, but I haven’t heard any glass breaking as they take to the windows.

    I heard the term Abiotic Oil for the first time the other day – and while I’ve read very little about it so far, my initial reaction was that it sounded both too good to be true, and more than a little like crackpot science.

    Anybody here have any opinions on its credibility?

  • Patrick

    If you then figure in that the ‘showerer’ was standing in 2 feet of dirty water, full of drain backup due to being clogged with all the bad stuff…

    (Sorry about that image!)

  • Patrick

    Isn’t India sitting pretty, on top of the earth largest Thorium deposits? (With the research well under way to exploit it…)