One of the reasons for reviewing yesterday the economic chaos that has been inflicted on Greece is to make it clear that the policies that were imposed on her have failed. Unfortunately those in charge in the Euro zone have seen fit to apply these failed policies in other countries. Instead of learning from their failures they have repeated them which means that we can expect economic chaos to spread to other parts of Europe. Often markets take the blame for contagion but the truth is that this contagion has been spread by those in charge in the Euro zone and should be forever a stain on their reputation.
The same tactics are well on their way to achieving the same result in Spain. We have different circumstances as a housing boom and bust has led to a banking boom and bust. But we have the regular themes of denial, an insufficient response and austerity applied to economic weakness. No doubt we will soon be told that Spain is “on track” which are two words in combination which should send a chill down the spine of any recipients and send them scuttling to the nearest bunker.
How are Spain’s banks doing?
Yesterday the Bank of Spain told us that bad loans at Spanish banks rose by 4.7 billion Euros between March and April. This meant that they had risen from 8.37% of their loan book to 8.72%. Put another way the total amount of domestic bad loans is now 153.78 billion Euros and rising.
If you compare that to the 100 billion Euro bailout package for Spain you see why I believe if it will not be enough. Indeed if you consider the rate of increase in these bad debts over the past year which is 38.18 billion Euros you start to see that it will have to be increased.
Indeed perhaps the authorities in Spain are coming to the same conclusion because the bank audit that they have trumpeted has this morning seen a delay until September in the publication of its results. Strange that you delay something which was going to prove your case! I think that we know the real reason and that is that the even a company such as Oliver Wyman ( who pre credit crunch declared Anglo-Irish Bank to be the best bank in the world in an effort almost beyond parody and satire) find rose-tinting the Spanish banking situation to be a problem. And we see yet another example of delay and obfuscation or if you prefer one more kick being applied to that poor battered can.
The real cost of this to Spain
Spanish government bond prices fell in response to the news and yields rose. Her ten-year yield rose above 7% to a Euro era high and her two-year rose from 5% to 5.5%%. The two-year yield is more significant at this point because it indicates a loss of control if you consider that the recent three-year European Central Bank liquidity operation deployed over a trillion Euros to help reduce it to 2.2%. Even worse the Spanish banks which took the money and invested in short-dated Spanish bonds are making considerable losses. Yes yet again a support operation has contributed to yet another problem as weak banks lose money again. We have found yet another vicious circle which again is exactly what happened in Greece. You support the banks in such a way that they lose money and then they need more support! Sometimes you simply could not make it up.
Today there has been a real cost of this to Spain as she has had to issue some 12 and 18 month debt at an interest rate some 2% higher than when she last issued such paper in May. She cannot afford to sustain that when she comes to issue longer-dated debt as she would look insolvent.
And if you would like a comparison from the bi-polar world in which we now live Denmark borrowed for two years this morning at -0.08%. Yes I do mean that investors paid it a small amount to hold their money. In some ways the implications of that are as chilling than the Spanish numbers although they will be welcome to the Danish taxpayer.
What about Spain’s economy?
It looks as though it is still marching to the same drumbeat.
The annual rate of the Industrial Turnover Index stands at –4.5% in April, almost two points higher than that registered in March.
The annual variation rate of New Orders Received in the month of April is –4.7%, almost one point lower than that registered in March.
If we compare these to the averages for 2012 so far we see that the latest numbers exceed them. In other words the decline appears to be accelerating which backs up the survey results we had previously received. If you look at the accompanying chart both indices turned down in August 2011. And compared to a base where 2005=100 we see underlying indices of 89.7 and 89.3 respectively.
The Services Sector
Unfortunately the hits keep coming here.
The interannual rate of turnover for the Market services sector stands at -8.3% in April, almost three points below that registered in March.
It is happening everywhere too.
In April, turnover for the Services sector registers negative interannual rates in all Autonomous Communities
And in a country where the unemployment rate is already 24.44% this bit shows that there is little hope of any improvement.
Employed personnel decreases 2.9%, as compared with April 2011
Looking at the back data gives the same pattern as for the industry numbers above as we see a turn downwards in the late summer of 2011. Interestingly the underlying index is at 85.7 where 2005=100 so services appear to have been hit harder than industry.
Unfortunately competitiveness is not improving either
The austerity mantra relies on what is called an “internal devlauation” where an economy becomes more price competitive. In essence this means lower labour costs which directly implies lower wages although it is rarely officially put like that.
How is it going?
The labour cost per effective hour worked increases 1.4% (in the first quarter of 2012 compared with a year before).
So a disappointing result as the pain from the policy mounts. But a similar pattern to what we saw in Greece.
This came from the French yoghurt and food group Danone today which issued a profit warning including this bit.
the economic climate in Southern Europe, notably in Spain, was deteriorating faster than expected
As I review the situation in Spain I see that everywhere you look you see signs of weakness. Today’s update has further weakness in the industrial and service sectors to add to more bank bad debts. If we then consider what will change this pattern we come to the nub of the problem for Spain and why since 2012 started I have feared that depression is more of a danger than recession. If you expect these trends to remain in place and you add the the plans for austerity- Spain’s budget deficit is supposed to fall from last year’s 8.9% of GDP to 5.3% this- then the Euro austerity mantra looks likely to have exactly the same effect in Spain that it had in Greece. Economic chaos and collapse.
The Federal Open Markets Committee
Today the FOMC which is the US Central Bank starts its two day meeting and there is a reasonable chance that we will see more monetary easing from it. So just to mark your card early there may be some news at or after (it is not especially punctual) 7:15 pm tomorrow.