One of the themes of this blog has been concern over the economic situation in the Iberian peninsula where both Spain and Portugal have serious problems to address. This is not as clear-cut as you might think as whilst the situation is opaque and apparently not recorded well they seem to trade together less than you might assume. However there has been an increase in trade in the Euro era, which I record as it is rare these days to read of a benefit from the Euro.
I expressed my fears for Portugal back on the 17th of January when I described the decline of her economy thus.
Indeed this reminds me so much of back in 2010 when I was writing that the Greek experience was likely to be much worse than projected. Unless something unexpected happens for the better I expect 2012 and probably 2013 to be dreadful years for Portugal and her economy. I wish that their previous finance minster had taken some note of the alternative strategy that I sent him.
Since then financial markets have begun to catch up with the reality of Portugal’s economic situation. Her ten-year bond yield went above 15% yesterday and even intervention by the European Central Bank has helped little as it has been above 15% again this morning. Even worse she has exhibited one of the signals that Greece exhibited as her spiral downwards accelerated and that is that shorter-dated bond yields rise above (eventually significantly above) the ten-year yield. For example her three year yield has risen above 20%. I fear for her.
Interest rate and mortgage rate rises will not help
Here are the latest figures in this area
The interest rate implicit in all contracts of mortgage loans was 2.720% in December, up by 0.015 percentage points from the rate observed in November. For the contracts signed over the last 3 months, the implicit interest rate was 4.598%, 0.120 p.p. higher than the rate observed in the previous month.
The language is somewhat confusing here as the lower rate is for all mortgages and the higher for recent mortgages. So we immediately get the impression that mortgage rates have been rising in Portugal for a while and scanning the underlying data tells us that from December 2010 to December 2011 they rose from 3.07% to 4.6%. Perhaps there will be a lagged effect from the European Central Banks interest-rate cuts at the end of 2011 and the long-term repo of 489 billion Euros that it enacted was after these figures. But for now there is quite a gap between the official short-term interest rate of 1% and the mortgage rate of 4.6%.
However you choose to interpret the whys and wherefores the average monthly repayment on a Portuguese mortgage rose from 259 Euros a month to 281 in 2011.
And if bank valuations are any guide this is hitting the housing market.
The average value of housing bank appraisals in Portugal stood at €1073/sq meter in December, down by 1.4% from November and by 5.1% from December 2010…….. In the year 2011, the average value of bank evaluation on housing was €1121/sq meter, corresponding to a decrease of 3.0% from 2010.
The official story is that Spain’s government is working hard to reduce her fiscal deficit and that austerity is being applied which means that everything is under control. However this mantra was holed below the waterline by this as I reported on January 3rd.
The previous Spanish government told us that it was on target to hit a fiscal deficit of 6% of Gross Domestic Product in 2011. However a spokeswoman for the new Spanish government Soraya Saenz de Santamaria told us late last week that the deficit would now be 8%.
The oddly familiar tone which of course was repeating what happened in Greece after her election now has a further echo of that experience. As Bloomberg reports.
Spain’s 17 regions owed pharmaceutical companies 6.37 billion euros at the end of 2011, lobby group Farmaindustria said today in a statement. That debt has risen 36 percent from a year earlier as payments were delayed by an average of 525 days, according to the group.
Those who followed my articles on Greece in 2010 will recall how unpaid medical/phamaceutical bills were used as a way of claiming reduced spending when instead it had merely been deferred. This not only weakened the economy as a side-effect but meant that next-year the fiscal position declined again.
Spain’s Unemployment levels continue to rise
This morning Spain’s National Statistics Institute has announced that the unemployment rate rose in the fourth quarter of 2011 from an already very high 21.5% to 22.8%. This means that the number of unemployed has now risen above the 5 million mark to 5,273,600. Adding to the grim picture is that employment fell by 348,700 in the fourth quarter.
The unemployment picture in Spain has become symbolised most by the high rate of youth unemployment which has now risen to 51.4% for the 16 to 24 age group compared to 45.8% before. More than one in two is a chilling statistic which frankly is more akin to an economic depression than a recession.
The way that this has built up is shown by a graph in El Pais today (H/T Alberto Nardelli).
I am not sure I gain much comfort from the fact that the unemployment rate was higher in the early 1990s. Although interestingly the numbers unemployed were much lower for a given rate. I will look into this as her population growth does not justify this change.
Retail Sales are also a problem
As you can see there is little or no solace to be found here.
General Retail Trade Index at constant prices registers an interannual variation of –6.2% in December more than one point above that registered in November.In 2011 as a whole sales in Retail Trade decreased 5.8%
All Autonomous Communities present negative interannual variations in their retail sales in December 2011
As the general retail trade index adjusted for inflation is at 100.3 we can say that Spain’s retail sales have returned to the levels of 2005.
Her housing market
November 2011 was not as bad a month for this as October as there was a small bounce but the year on year decline is still very substantial. And the year on year numbers are based on previously weak ones.
The value of the mortgages constituted on urban properties stood at 5,181 million euros in November, indicating an interannual decrease of 33.0%. In dwellings, the capital loaned exceeded 3,082 million euros, 38.7% less.
And at this point mortgage rates were still rising.
The average interest rate in November 2011 was 4.50%, indicating a 17.8% increase in the interannual rate, and an increase of 3.9%, as compared with October 2011.
The analysis above demonstrates that whilst their economies may be more separate than the geography indicates both Spain and Portugal have serious economic problems. In some ways it also illustrates a weakness in using government bond yields as an indicator. As I type this Spain’s ten-year benchmark yield has dropped back towards 5% this morning which raise two issues. This ignores a rising longer-term solvency problem and also her problems are much more than one-third of Portugal’s.
In my opinion we learn that markets (particularly markets influenced by official manipulation-which used to be called false markets-) can be very myopic about upcoming problems. However when they realise them they react very quickly and sometimes violently meaning that we are yet again reminded of how unstable all this. A bit like a (Black) Swan perhaps, serene on the surface, but paddling hard underneath.
Of course we would probably have a much clearer view and more reliable markets if all the manipulation stopped…