Today sees the Spring Meetings for both the World Bank and the International Monetary Fund. One of the lessons of these times is that there has been an extraordinary inflation in the number of meetings between world leaders. Sadly there has also been a corresponding drop in anything useful coming from them! A major topic will be the Iberian Peninsula and in particular Spain.
This morning has seen Spain’s ten-year bond yield rise to 6% again which is a level she cannot afford to sustain for any great period of time. Also her equity market is having a poor run and has plunged to multi-year lows. If we look for context we can see that the Ibex 35 equity index reached a peak of just under 16,000 back in late 2007. Most main equity markets have marched back towards such highs over the past couple of years but the Ibex 35 is down 18% in 2012 and fell to 6858 yesterday. So it has more than halved and yet again we are reminded of the Athens stock index’s performance as her economy turned downwards.
The Influence of equity markets
The mainstream media likes to present such move as billions or more realistically tens of billions of Euros being wiped off values. This is always something of a misrepresentation as they are comparing a marginal price- the price at which you could sell some shares now- with an average price- the one you could sell all of them at-. However there are issues to be faced which are relevant right now.
1. Equity price falls increase the cost of raising new equity. This is happening at a time when some sections of the economy most need new equity. If we think of the Spanish banking sector for example much of which is in dire need of new cash we see that it will now be more expensive to raise it. For example Santander’s share price is 38% below what it was a year ago and CaixaBank is down 48%. If we consider how much money has been spent supporting them as well this is a really poor performance and I am reminded of another failure for the kicking the can into the future strategy as it has landed in a weaker future.
In addition we may see that with confidence lower the amount of funds that can be raised will be reduced. Investors may be unwilling to put good money in after “bad”.
2. Whilst it is simplistic to talk of x losses it is also true that those who invest in shares are poorer. At the individual level there are wealth effects on consumption and if we add in falling house prices they will be at play. Just at the moment Spain does not need them! It was ever thus! Also pension funds who do need to take valuations will have to face lower ones and maybe re-plan.
Didn’t Spain’s bond auctions go well?
The achieved the basic objective which was to issue the required amount of bonds. But as the bond trader Pawelmorski put it before the event.
If they can’t stage-manage a decent Spanish auction, we’re really in the sh*t. Expect something comfortable-looking, irrelevant.
But as I pointed out to him a ten year yield of 5.74% is not comfortable for Spain and furthermore over a ten-year period it is not irrelevant especially if you combine it with recent more expensive bond auctions. This is a drip-drip factor where any one auction has a small effect on future borrowing costs but once you begin to get a sequence of them you begin to face a snowball rolling downhill effect.
So there you have it. This manifested itself in the mainstream media which put up it’s Spanish auction a “success” headlines just in time for the Ibex 35 to drop 2% and for bond yields to rise again. If they wished to use the word success they needed to put the word relative before it.
Bond auctions are often a type of game theory where market-makers and the issuing debt agency battling it out. The market-makers like to sing the children’s nursery rhyme “The Grand Old Duke of York” as they mark bond yields up ahead of the event and then down afterwards to make a profit. As you can see from the yields quoted such a plan is not currently going well.
These days there is the background influence of central bank interference. They rarely interfere in the issue itself but will intervene in the secondary market (issuance is called the primary market) which gives investors the money to buy the primary issue. Sneaky eh?
Currently the European Central Bank seems very unsure about its attitude to new Spanish bond purchases -if you think you know please tell them as they appear to need help- with Governing Council members bickering amongst themselves. So we probably had a relatively clean auction.
Latest Economic data
On first reading there were possible signs of improvement but as I checked the detail I was reminded that this is of course a leap year and that February numbers would benefit from the extra day.
Services turnover index
The interannual rate of turnover for the Market services sector stands at -1.9% in February, eight tenths lower than that registered in January
However if we take the trouble to look further down the report
After eliminating the calendar effect, that is, the difference between the number of working days in a given month in different years, the interannual variation of the General Index of
Services sector turnover stood at –4.4 in February, more than two points below that registered the previous month.
So the report from thr largest part of the economy is yet again grim if we allow for the extra day. And frankly even if we ignored the extra day’s effect output was lower than a year ago. If we look at the underlying index it is at 85.1 compared to a base of 2005=100.
Also if we recall Spain’s severe unemployment problem there is little solace and more worries to be found in this.
Employment in the Services sector experienced an interannual decrease of –2.2% in February Industrial Turnover
Industrial Turnover Index and New Orders
This initially shows signs of improvement as the headline year on year number is 1.2%. But if we make the same calendar adjustment we see this.
the interannual variation of the ITI in the month of February was –2.3%, more than one point lower than that registered in January.
The headline industrial new orders index failed to make positive territory as it fell by 0.3% if we look at year on year figures and with the leap year effect removed we see.
the interannual variation of the INORI in the month
of February was -1.1%, more than one point higher than that registered in January.
I am reminded of the view I expressed yesterday on the UK where I ruefully reflected on two issues.
1. Monetary stimulus has been extended and expanded ignoring the potential risks.
2. The real economy has been much relatively ignored.
In essence this period has been a failure for those who felt that by a grand twiddling of economic knobs they could emerge as heroes who have saved the world. It simply has not worked. Although readers of the London Evening Standard may think that it has.
Economic Analysis: Bank’s ‘fireman’ who quelled the flames of crisis.
Although of course when they return to a reality of disappointing economic output and over target inflation they may wonder exactly what crisis has been quelled! The reply to the article is me. For now I will leave you to guess the identity of the supposed fireman.
But I suppose at least the knobs that were twiddled were for the UK whereas poor Spain has seen them twiddled mostly to benefit Germany and that is a big reason why she is in a worse mess right now.
Songs to be sung by Spain
We haven’t done this for a while so let me open with
Help by the Beatles
Or perhaps a even more appropriately from the same source
With a little help from my friends
As ever, all suggestions welcome.