Spain is repeating Greece’s economic experience with all that is implied by that

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.

More Evidence?

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.

This entry was posted in Euro zone Crisis, General Economics, Greek Financial Crisis, Interest rates, Quantitative Easing and Extraordinary Monetary Measures, The US Economy, Yield. Bookmark the permalink.
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  • Ian_jones

    So the alternative is to print money to transfer wealth from creditors to debtors? How does this fix things as long term rates will rise to offset once the panic subsides meaning no growth for a very very long time.

  • Nemesisforpredators

    “If it’s not too late for collective action to halt the systemic runs, time is certainly running out. The question is whether the euro’s members are up to the task.”
    Anyone wanna bet on who’ll be the first to jump ship?
    It won’t be the crew – they were never on board – it’s a drone remote-controlled from Wall Street and the City. In view of its years of exquisite failure you could even imagine they programmed it to crash. 

  • Andy Zarse

    Hi Shaun

    So much for Spain, I’ve just got back from five days in France spent at the Le Mans 24 hour car race which I’ve attended for many years. It’s almost become an economic ”barometer” for me. All totally unscientific but a few things I noted:

    1. Fuel costs in France vary considerably, with some well above the UK price and some below.
    2. I have never seen the roads in NW France so quiet, the cost of using the payeage is really pretty high and more French were taking the backroads. I think the French are really feeling the pinch. The 120 mile drive from Le Mans to Rouen we literally didn’t see a French car, it was extraordinary.
    3. Local visitor numbers to the race seemed to be well down though not so much from the usual 80,000 British who annually attend. The French generally seemed much more low key this year.

    I don’t remember you doing very much on France’s economy, now may be a good time to examine her figures.



  • Anonymous

    Hi Shaun Re : blame on those in charge ” in the Euro zone”. Having read the staff reports of the IMF for Greece which actively dissuade Greece from default and exit and ENCOURAGE deflationary internal devaluation notwithstanding known societal inflexibilities, I would ask some pointed questions of Lagarde and crew.

  • JW

     Hi Andy
    Our part of France, next to Switzerland is still doing well, as I believe are most south eastern regions. I think if you look at which regions had a majority voting for Sarkozy its a pretty good correlation to economic activity. Le Mans and most north western France is Hollande territory.

  • JW

    Hi Shaun
    As you have pointed out many times this cannot be solved by replacing old debt with more new debt. The banking sector in the northern countries have to be made solvent by recapitalisation and bankrupcy where necessary. Bad loans have to written off and then money has to be GIVEN not LOANED to the southern countries to repair their economies. The German ‘mantra’ of ‘we did it the hard way so you have to’ will not work across sovereign boundaries. All we get is perpetual crisis and zombie households, banks and countries.
    Will the German’s do it? I think there is less chance than England winning the Euros. So we have years and years of this, until the ‘drip drip’ effect on Germany itself becomes too much and she decides to take her ball home. The external factor that could well accelerate this process is a fall in activity in the States coupled with a China hard landing. This will hurt in Germany and could prompt them to de-couple quickly. 

  • William

    “the total amount of domestic bad loans is now 153.78 billion Euros and rising.” – yikes!

    It looks like the Fed are gonna announce Operation Twist 2.0. It won’t help Obama win reelection tho, because whatever the Fed does, the economy will still sink come November.  I guess that’s the thanks you get for halting the Great Recession in its tracks. Just ask Gordon Brown!

    P.S. I almost enjoy reading the titles of your blog posts as much as i enjoy reading the articles themselves.

  • Dave S

    Precisely – you can’t fix the unfixable. The Spanish so-called economy pre-crash was almost entirely based on a ponzi property market fuelled by cheap debt. 

    Without these ponzi gains there is no growth in domestic consumption and no growth in tourism as that was largely funded by the proceeds of other European ponzi property markets..

    If you print you will get inflationary growth with real incomes still dropping (as in the UK) – how can you get a service economy to grow with real-incomes dropping ? It won’t come from service exports – even the UK with its premium service sectors ran massive trade deficits in the boom years.

    So what can you do ? Try to get the ponzi scheme going again or except that the West has irretrievably damaged their economies. We will pay the price with much lower living standards

  • JW

     Thanks Shaun for that brilliant Python link yesterday.
    I came across the attached yesterday courtesy of Richter , its an amusing sketch by two Australian comedians on the EZ.

  • James

    Shaun excellent as ever. I think that you may have missed M Barroso’ s speech yeseterday in which he said that:
    1. Europe is not compacent
    2. The European solution is working just fine
    3. He doesn’t need lessons from anyone.
    When a towering democratically elected leader such as Barroso tells us it’s ok, we are in safe hands, as I am sure that you will agree. He says it’s all under control, so who are we peasants to query the great man?

  • Robert S


    We’ve all been hearing in the last few days that the length of time that Ireland & Greece have to pay back the bailout money, maybe lengthened.  Can you, or anyone else, explain how increasing the time to pay back the money will help the two countries?  I presume it means that their “monthly payments” will decrease which I’m guessing helps.  However, I can imagine that by extending the time period that today’s youngsters will possibly be paying for the current problems way in to the future.Thank you.


  • James

    I think that this is one of those questions that assumes that the structure is well thought through and designed to see all the debt paid off. As far as I know, all countries are still running deficits, so will not be able to pay off debt except by refinancing through further bond issues or borrowing from IMF/ECB/ troika etc. I assume that, by the troika setting longer time frames for being repaid, there is a longer window before more bonds have to be issued. Of course, like everything else here, this is just another attempt to kick the can down the road, as we wil end up owning this long dated debt, which will never be repaid.

  • The_forbin_project

     unfixable ?  maybe  but here’s one answer

    the whole of the Euro zone to default – yes that includes Germany!

    well the Germans wouldn’t  have it  I know  but the rest  could and as they are  majority voting block …..

    there may be a few “Argentitian ” problems with markets and other countries but once all the debt has been eradicated  then in 10 years time it will be all forgotten

    the second plan would be a Marshall plan mkII  for southern Europe  with the proviso that Germany sets up their fiscal policies and polices them for them

    naw, they’re not going to accept that either

    third way – a really BIG boot to kick the can…..


  • Anonymous

    Agreed about living standards, they are going to fall all around. Not such a disaster though, as we managed quite well a decade ago and it’s that kind of adjustment that’s needed. As for the famous ponzi scheme, just watch southern Europe. One false move and they will be at it again, ‘it’ being the construction of unnecessary housing stock. Even before the present stock is sold. It’s all that they can do, just about everything else is done better by competitors.

  • Dave S

    Well I think the adjustment might be more like several decades worth of “growth” and with our demographics I’m not sure it won’t just keep on falling.

    Ok – our parents/grandparents survived but the problem is society expects living standards to improve not go backwards. I think the younger and future generations might not be so understanding.

  • Anonymous

    To revert to musical themes, can I suggest ‘to our
    childrens, childrens children’.

    Unlike most of the musical references this is a LP, not a
    single, so it lasts much longer.  Even
    the group, the Moody Blues, have a name well in keeping …..


    Joking apart (?), many thanks for the effort Shaun.  Very much appreciated.

  • Phwill77

    would it ever be possible for the euro and world governments to pass a law that banks (given that they are so interlinked already by selling so much to each other) to be responsible to each other in terms of their debt, ie they would be completely self funding and not require any external support.
    Just a mad thought

  • James

    you have out your finger exactly on the problem. An economy that stays the same size with an ageing population with vast debt is not an appetising prospect. By the time that you have taken out all those extra health care costs for the elderly and retirement incomes, the effect on youth could be very severe (they might, for example, have to pay Uni fees and get into debt or be unable to afford houses and that list is going to get longer).

  • Dave S

    Debtors default, spose they will anyway even if its called inflation. Will serve the stupid creditors right – teach them a lesson – but our own banks and our pension funds and in places like Italy, their own citizens hold the govt debt and I spose the stupid foreigners won’t lend to us for a while. Guess in the meantime we just print  but then thats what we are doing now…………….

  • Rods

    Hi JW,

    The video was a good find. Many a true word said in jest :-) )

  • Rods

    Hi Shaun,

    Another really excellent blog.

    I see the rise in Spanish sovereign debt interest rates is now also affecting borrowing rates for Spain’s blue chip companies. So how long will it be before there are fire sales of Spanish companies and industrial assets at bargain basement prices to companies or countries that have lots of money like Germany and China? I think Spain is going to be a classic example for Economists on the dangers of asset bubbles and their subsequent deflation when coupled to a fixed exchange rate mechanism of the Euro which is directly linked to Germany productivity.

    The Euro situation seems to be following very much the Gold standard problem of the 1930′s. The US was blamed then because of the wall street crash and are being blamed now because of the sub-prime crisis. I think then as now the US were the instrument that lanced the boil, but they aren’t responsible for the contents within! The Euro coupled with excessive Government spending building deficits, sovereign debt, asset bubbles and very poor central bank performance coupled with poor bank regulation.

    Now I think the EU commission will totally crash and burn Southern Europe economically, by continuing to kick the can down the road, for as long as possible, so they can keep their jobs, perks and pensions for as long as possible.

    Part of the reform of banks and their bonuses is bonuses being paid in shares and placed into a escrow account with claw back rules. There is talk of this being extended to all public companies, so pay is really performance related and with greater share holder powers on executive try and re-couple it with the real world where it has become totally decoupled.

    Now, personally I think the same has happened with Western democracy and where politicians try to outbid each other by bribing the electorate with their own money (taxation) and other peoples (deficit spending) (Emperor spending in this way was also a major cause of the fall of the Roman empire, so nothing new). To re-couple democracy and politicians with the electorate, then part of their salaries and pensions should also be held in an escrow account with claw back facilities. Performance would be based upon PPP, liquid assets (savings and pensions), Government deficits and debt per person, Inflation targets, Educational qualifications (with international comparison, to stop mark inflation), crime rates, lifespan and health markers. So if the electorate gain during Governments duration and up to 5 years afterwards, the politician gains, if not they lose along with the population. The economic performance would obviously apply to senior central bank officials, so no more big inflation proofed pension pots as a reward for bad performance. Other elements would apply to individual ministers and their portfolios.

    Another disconnect are their sheets of lies, sorry manifestos, at election time, again pay should be dependent upon them implementing what they are promising, with a Force Majeure safety net.

    These comments are not meant to be political, but how senior officials performance should be directly coupled to rewards with no more reward for failure.

  • Anonymous

    Hi James

    Population structure is an expanding section/concept in economics for obvious reasons. Edward Hugh who has done much good work in this area put it like this.

    “It is by now well known that the main hope for developed societies subject to rapid population ageing who wish to maintain their relative standard of living lies in increasing their collective productivity more rapidly than they increase their dependency ratio via-a-vis the older age groups.”

    Now we are seeing dependency rising with production and productivity falling. So a “lost decade” type scenario poses lots of problems for any countries which get stuck in it.

  • Anonymous

    Hi Nemesis

    What do you think they would have gained out of programming the Euro to crash?

  • Anonymous

    Hi Andy

    Whilst France has rarely crept to the top of the list -there is so much competition these days- she has done so once or twice. Here is a link for you.

    The Le Mans numbers are interesting. It used to be a type of weekend out for many in the City (like the Monaco Grand Prix) so perhaps there has been some reining back. Although these days in perhaps something of an irony there are plenty of French in the City….

  • Anonymous

    Hi Shire

    Well the Head of the IMF  Christine Lagarde is of course French and I was reading a report by its Chief Economist the Frenchman Olivier Blanchard on Latvia earlier today. So perhaps a rather similar crew are at the top of the IMF!

    The previous head of the IMF was Dominique Strauss-Khan….

    A Euro takeover?

  • Anonymous

    Hi JW

    Well there is now a little more chance of England winning than when you typed that :)

    More seriously it is often ignored that Germany has its issues with its own Landesbanken and has done its own can kicking in this area. They could have set a much better example than they have and it is my opinion that fears for what they may have to pay towards their own banks have coloured their views on other countries. Or to put it another way Germany has her weaknesses too.

  • Anonymous

    I did enjoy Nietszche being booked for dissent ”thats 3 out of 4 games now”….

  • Anonymous

    Hi William and welcome to my part of the blogosphere.

    Financial markets have convinced themselves that the FOMC will dish them up a tasty morsel tomorrow.  If so I suspect it will be a type of QE3 and new outright asset purchases rather than Operation Twist 2. There is now a shortage of short dated bonds to sell to purchase longer dated ones meaning that at current rates only an extra 3 months or so is possible before they run out. Oh and does anyone really believe that Operation Twist has achieved much?

  • Anonymous

    I guess here I live up to my trade name or non de plume of notayesman and point out he is wrong on all 3 counts!

  • Anonymous

    Hi Robert

    In essence here the Euro area is adopting the model of Ocean Finance! Have they also said “one simple monthly repayment” ? Things look more affordable when you extend a loan as monthly repayments fall but the total amount you have to pay rises.

    So this is another example of can kicking where they are hoping for economic growth and progress to help them out. Also they are hoping for inflation to reduce the debt in real terms whilst the relevant populations will be hoping for real wage growth to make it genuinely more affordable..

  • Anonymous

    Hi Phwill77

    I think the catch here is that the banks then would only be beholden to themselves and they would demonstrate how quickly money could be debased. Who would trust them?

  • Nemesisforpredators

    If they always perceived the european economy as a threat to the hegemony of the US dollar and Wall Street and the City (which would be consistent with their history), that would be sufficient to motivate the creation of a trojan horse to crash the Euro since its beginning.

  • Nemesisforpredators


    - Remember their collective and individual incompetence defies belief, stumbling as they are from crisis to crisis.

    - Remember they’re desperately out of their depth in debt themselves.

    - Remember they’re experts at offshore, off-the-books, over-the-counter, derivative and otherwise hidden or over-sophisticatedly incomprehensible operations.

    - Remember they’re losing the financial accumulation initiative to the asian economies.

    - Remember they’re shamelessly unscrupulous speculators on the backs of rest of the world.

    - Remember they’ve locked themselves in to a watertight pressurized financial cocoon and think they have no need to listen to anyone, that their own individual interests are the only sacred thing.

    - Remember they have a long long record of insatiable misbehavior since Andrew Jackson said in 1834:

    “…you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the Bank. … You are a den of vipers and thieves.”

    - Count the number of ex- Washington, Wall Street and the City personnel involved in leading roles in the present debacle.

    - Remember their lobbies pour billions into corruption of the democratic system and dilution of regulation which anyway always tries to shut the gate after the horse has bolted due to deliberately inadequate resources.

    - Remember they create wars and debt out of lies, thin air and the blood and labour of their children just to finance their military-political-financial network just to finance their bloated gated communities life-style. They have “failed to pay their workmen…lived on earth in luxury and self-indulgence, fattening themselves in the day of slaughter”.

    Can you be surprised that they would seek over the long term to crash any and every obstacle to their global domination? Rather, based on their past behavior, would you not expect it to be their norm?

  • Andy Zarse

    I’m assuming the Latvia report shows they’re “on track” once again, just like Portugal the other week? I similarly assume the track is the AC/DC one again…