More evidence emerges that Spain and Portugal may bypass recession and go straight to depression

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…



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  • JW

    Hi Shaun
    No chance of manipulation stopping.
    I think the Spanish unemployment numbers difference is explained by the increase in females now in the workforce.
    As I mentioned before, the majority of Portugese Bonds are written under English Law, so even if the Greek situation is somehow fudged, the same deal cannot be applied to Portugal. Depression, default and exit looks likely.

  • Drf

    “Of course we would probably have a much clearer view and more reliable markets if all the manipulation stopped…”  Here, here, Shaun.  We would have a much clearer view of most things if all manipulation stopped!

  • Eurozone crisis live: Spanish unemployment tops 5m | Business Blogs and News

    [...] Shaun Richards, a City analyst, thinks that Portugal ands Spain could skip recession and go straight into depression, such is the dire state of their economies. He points out that Portuguese three-year bond yields are now much higher than the 10-year at 20%+, a situation seen in Greece during its spiral into chaos. Any, for his less than cheery thoughts click here. [...]

  • Xavier

    The graph and the numbers are right. Have a look at 2002: “cambio metodológico”, that is, change of method. That year, the way the stats are calculated was changed: see “Modificación de la EPA del ano 2002″ (Spanish).

    To sum it up:

    - Inmigration was taken into account.
    - New methods of calculation and ponderation of the results were introduced.
    - The definition of “unemployed” was changed according to the new European legislation.

  • Jeremiah


    I see your economic acumen is as good as your golf (better maybe!). Given The Fed has stated the US interest rate will stay low for the foreseeable future, what is your view re the UK?


    Young Jeremiah.

  • JW

    Hi Xavier.
    Sorry I can’t read Spanish, but 41% increase in ‘overall workforce’ surely can’t be immigration? Isn’t it part-time workers, mainly female?

  • Anonymous

    Large numbers of cheap foreign builders were involved in the Spanish property boom. Including them in the statistics from a change in methodology would have a significant effect.

  • JW

    Hi Shaun
    You may have already seen this but faced with global economic calamity the ‘great and good’ at Davos are considering 5 major risks , the 3rd most important on the list is ‘increasing greenhouse gas emissions’…..the world’s gone mad!
    But there are some interesting words in their briefing;
    ”Dystopia, the opposite of a utopia, describes a place where life is
    full of hardship and devoid of hope. Analysis of linkages across
    various global risks reveals a constellation of fiscal, demographic
    and societal risks signalling a dystopian future for much of humanity.
    The interplay among these risks could result in a world where a
    large youth population contends with chronic, high levels
    of unemployment, while concurrently, the largest population of
    retirees in history becomes dependent upon already heavily
    indebted governments. Both young and old could face an income gap,
    as well as a skills gap so wide as to threaten social and
    political stability.”

  • Andy Zarse

    Hi Shaun, just to go back on a couple of your themes…

    First, the ECB balance sheet… there is current talk about whether the ECB holdings of Greek bonds should be subject to the 70% haircut. The ECB bods and other Eurowonks seems to be getting a bit prickly on the subject. Surely this is a selective default? What is your take on matters?

    Lastly, looking at the Finland thing, you wondered regarding Nokia. Wekk handily yesterday they reported a £1BN loss for the full year 2011. A bit of research shows that they’re not – as previously suggested here – 1/3 of FInnish GDP (1.6% actually) but they are 1/3 of the market cap of the finnish stock exchange. I guess you wouldn’t want a Finnish tracker fund in that case! Anyway, it seems a lot of eggs to have in one basket if it all goes Motorola shaped (you never see a Motorola anymore do you!)

    Have a great weekend everybody!

  • Ian_jones

    Portugal has horrendous labour laws that make it impossible to get rid of anyone. Spain is a tiny bit better but still hugely expensive to get rid of anyone. These countries still do not get that they need to fundamentally change, they will only do so when they crash and burn because Germany will not bail out anymore.

  • Rods

    Hi Shaun,

    Another excellent blog.

    What is happening within the Eurozone reminds me of the song, 10 (in this case 17) green bottles sitting on the wall and if one green bottle should accidentally fall…

    Where I have been reading about defaulting and how they affect countries, I have found another very interesting paper by the Inter-American Development Bank, who have analysed GDP on a quarterly basis on a cluster of defaulting countries around 2000.

    The paper can be found here: 

    By researching defaults, what have I discovered?

    1. They are a common occurrence, and they tend to happen in clusters. A number occurred around 2000, including Argentina, Uruguay, Ecuador, Russia and the Ukraine. So once Greece defaults, expect a few more.

    2. A countries GDP starts to recover almost immediately and unemployment also starts to drop.

    3. Countries tend to default later than they should do.

    4. Countries tend not to default until their deficit is positive once the cost of their servicing of the debt is removed. This makes sense with markets closed to sovereign borrowing after the default.

    5. All of the examples I have looked at had their own currencies.

    Now these are my questions?

    1. Which countries inside the Eurozone are in danger of defaulting Greece – certainly, Portugal, Spain, Italy, Ireland, plus any others? What about other countries outside of the Eurozone and also outside of Europe?

    2. If a Eurozone country defaults, would they be better off inside or outside of the Euro? If they stay within the constraints of the Euro, will they recover like previously defaulting countries have?

    3. If an EU country defaults would they be better off as an EU member or an associate member like Norway and Switzerland (where according to current EU law, a leaving EU member has to be offered associate membership)?

    4. What effect will the low growth / recession / depression in other countries have on their recovery?

    The answers to all of these questions is beyond my economic knowledge and needs an analytically, economically knowledgeable person to answer like you Shaun.

  • Anonymous

    Rodds, like you the questions you pose are beyond my knowledge. However, on re-reading question3 may I suggest Hungary as a possible model. Inside the EU but with its own currency – better to stay inside EU or become an associate? For them I feel this is between a rock and a hard place as neither would help greatly in my opinion. Which leads on to your question 4; low growth/recession/depression within the greater European arena will help them not one iota. 

  • Space Man

    A large youth and retiree population does not worry me too much in it’s self – but I think that the skills gap and social problems being created by massive youth unemployment is very worrying for the future.

  • Anonymous
  • Anonymous

    Hi Xavier

    Welcome to my part of the blogosphere and thanks for the link.

    Having mentioned many times the (usually but not always adverse) manipulations of statistics in recent years your description of the changes makes me nervous…

    I would be more on the case but Google translate is struggling as I type this.

  • Anonymous

    Hi Jerry

    Welcome to my part of the blogosphere.

    As to the UK Monetary Policy Committee they have already demonstrated what the Fed has only hinted at which is that they are willing to ignore inflation more than double its target. Accordingly they have no intention of raising official interest-rates at all so to my mind their commitment is open-ended.

    Something would have to really force their hand such as a much higher rise in inflation or a considerable drop in the £ (remember they  seem to approve of the 20/25% drop in 2007/08 to give an idea of the scale).

    Of course unofficial or market interest-rates can quite easily rise…..

  • Anonymous

    Hi JW

    ” the 3rd most important on the list is ‘increasing greenhouse gas emissions’..”

    Are those the same greenhouse gas emissions that have just been raised by squadrons of private jets flying into a fragile environment (The Alps)?

  • Anonymous

    Hi Andy
    In my opinion ISDA (the organisation involved in defining default for Credit Default Swaps) have behaved poorly here as if we ignore the details and just look at the timescale why has a “voluntary” agreement taken so long? If you agree to something it plainly does not take this long and as I type this on Saturday morning there is no agreement yet…..
    So late October to now and counting means that these are default negotiations. Of course the irony is that as it stands it does too little to significantly help Greece.

  • Anonymous

    Ah so no pressure there then! Unlike Englands batsmen today…

    1. I will stick to the Euro zone and add France,Belgium and Austria. In essence for these three it is their banking sector which is the main risk and for Austria in particular there are the Swiss Franc and Euro mortgages which its banks wrote in Eastern Europe. How much of a risk will be defined by how much of an economic slowdown we now go into.

    2. i If we see a similar pattern to Greece (which Portugal appears to be repeating as discussed above) then outside the Euro.

    ii. There are very many unknowns here but if the Euro zone behaves in the same manner as it has so far in the crisis then any recovery will take a very long time and be longer maybe much longer than part i.

    3. I think that this one is more of a political choice rather than an economic one so will defer and pass on it.

    4. This is harder as many factors remain unknown such as how far the currency will fall, how foreign currency debt will be treated and how many countries default. But in all scenarios it is better if other countries are growing economically.

  • Anonymous

    Hi Vassilis

    Thanks for the link. I will,as ever,steer clear of the politics but do have a view on the economics finance.

    ” let us then mutualise the debt in the eurozone, in order to enable PIIGS to return to markets at affordable rates. Respecting rules, of course. But benefiting from the triple-A rating that you and a few others still enjoy in the eurozone. Call them Eurobonds, stability bonds or whatever you would like.”

    Those with AAA ratings are thinning out over time and the Eurobonds strategy has to face the fact that with a weakening economy and worsening prospects on the debt front (higher than expected deficits in Spain and Portugal for example) that Eurobonds likely pricing/yield structure is worsening over time

  • William Amofah

    Hi Shaun,

    What’s your view of the argument that we should go back to the gold standard? Because quite frankly the current fiat system is far less stable and not entirely representative of the actual value of an economy. Also what’s going to happen when and if all the loans and securities that central banks hold go bad like the sub prime mortgage crash?

  • Anonymous

    Of course, but anything well above bankrupcy could be good enough for these nations. My impression is that the collective debt is not huge. Even a collective AA- could be fine. And then in a Union you try to become more competitive as a Union. Otherwise breakup. Nothing else makes sense. Germany has to decide.

  • Russell

    Hi Andy,

    when I brought up the subject of Nokia (Shaun’s blog, 10th Jan) , I did actually state as you:

    “Nokia disproportionally dominates the Finnish economy, accounting for about 1/3 of the capitalization value of the Helsinki stock exchange, so its fortunes play a large part in the fortunes of most Finns”

    I also noted that their latest financial reports were poor, as is their declining market share percentages. “Technological Fashion” is a tricky place to be :-)



  • Fletch

    Simple question:What definition of depression are using? What level of cursing by economists does it take until it can be fully declared, if it will?
    I guess here you mean how bad is bad.

  • Assorted links — Marginal Revolution

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  • Merijn Knibbe

    There indeed was a very large and swift increase in female labor market participation in Spain, aside from massive in-migration. By the way – the Spanish labor market was by far the most dynamic labor market of the EU before 2008 – which indicates that if there is demand – employment will follow, whatever the rules of the market are.

  • Anonymous

    Hi Fletch

    As there isnt really one I am going in the other direction these days. If you like I am defining the situation in Greece as a depression and so if you are heading towards that then you are heading for depression.

  • Anonymous

    Hi Merijn and welcome to my part of the blogosphere.

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  • valuethinker


    The actual trade interlinks between Portugese and Spanish economies are, I believe, surprisingly limited.  They are 2 similar economies competing in the same world markets (tourism, olive oil, wine, other soft commodities, footwear and clothing in Portugal) rather than really integrated with each other I believe.

    For example in electric power the interlink is 3GW from memory.  That would be 5% of UK peak demand (to scale it) and I would think Spanish peak demand is similar.  And they both have invested heavily in wind and solar power and so there will be some tendency to bottom and peak together (and so limiting trade opportunities).  That’s not a huge degree of interlinkage compared to the interlinkage of Scotland say with the rest of the UK (the Irish interconnector is less than half that size).

    However as we know when financial ‘contagion’ hits, it does not discriminate in that way.  It just hits.  Which makes me wonder about Morocco (I don’t know much about the Moroccan situation, just that they seem to have missed ‘the Arab Spring’).


  • Geoff

    Shaun  ,,has the can been kicked down the road? What do you think now?

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