Spain should be singing “Help” or perhaps “With a little help from my friends!”

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.

This entry was posted in Euro zone Crisis, General Economics, IMF, Quantitative Easing and Extraordinary Monetary Measures, Yield. Bookmark the permalink.
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  • Anonymous

    Songs for Spain’s currency union “Set me free” by Kim Wilde

  • Midge

    Hi Shaun    The Beatles Help is prfect.
    Help me if you can I’m feeling down
    And I do appreciate you being round
    Help me get my feet back on the ground
    W’ont you please help me.
    And now my life has changed in oh so may ways
    My independence seems to vanish in the haze
    But every now and then I feel so insecure
    I know that I just need you like I’ve never done before..

  • JW

    Hi Shaun
    As it stands at the moment, May 6 will signal the start of the end of the EZ as we know it. Spain and the Latins will have a new friend and Germany will look very isolated.

  • James

    great piece again. I believe that there are two worlds out there now in a number of countries, only very loosely connected:
    1. The real world of falling output and rising prices, unemployment, unmanageable debt, complete lack of politiical willpower to get real solutions etc
    2. The world inhabited by world leaders and journalists. In this world, success is defined by the next headline, by joint statements issued after grand meetings, by very large numbers plucked out of the air and handed to a rescue acronym ( a trillion euros from the ECB, $500 billion in the ESF etc). In this world, the Spanish auction WAS a success because the headline said it was.

    When you look at the likes of Cameron, Lagarde, sarkozy, Obama,which one would you pick to make a sensible, economics-based decision?

  • Eurozone crisis live: Spanish bond yields spike above 6% | ccnew

    [...] As Spanish bond yields hover around 6%, the independent economist Shaun Richards blogs here that the Spanish should be singing Help! or With A Little Help From My [...]

  • Jason Aris

    Don’t cry for me Argentina?

  • James

    Crisis what Crisis? supertramp

  • Master Eurozone crisis live: Britain commits extra £10bn to IMF

    [...] As Spanish bond yields hover around 6%, the independent economist Shaun Richards blogs here that the Spanish should be singing Help! or With A Little Help From My [...]

  • Zak.

    “All the monies gone” – Babylon Zoo.


    “Money is not our God” – Killing Joke.

    Then soon after….

    “Did you steal my money?” – The Who

    And then finally….

    “The money will roll right in” – Nirvana.

  • Anonymous

    Hi Jason

    Very apposite with the YPF/Repsol dispute! For those who have not followed this Argentina has nationalised the Argentinian operations of the Spanish oil company Repsol.

    This probably comes as a relief to the Falkland islanders, although perhaps not as much to any oil companies searching for oil their and wondering about their prospects should it become Las Malvinas…

  • Anonymous

    Is there an option for none of the above? :)

  • Anonymous

    Yes I do remember that (giving away my age….) I wonder what it would sound like in Spanish?

  • Anonymous

    Hi Zak

    I think that the Who song could be a theme song for the last five years…

    Along with (hopefully) Won’t get fooled again…

  • Anonymous

    Hi JW

    There is a lot that could happen in the French and Greek elections I agree.

  • Anonymous

    It is a great song too in my opinion,although music is of course a personal taste. I gather John Lennon had gone through what he called his “Fat Elvis” phase and the song was heartfelt…

  • Eurozone crisis live: Britain commits extra £10bn to IMF |

    [...] As Spanish bond yields hover around 6%, the independent economist Shaun Richards blogs here that the Spanish should be singing Help! or With A Little Help From My [...]

  • Eurozone crisis live: Britain commits extra £10bn to IMF | ccnew

    [...] As Spanish bond yields hover around 6%, the independent economist Shaun Richards blogs here that the Spanish should be singing Help! or With A Little Help From My [...]

  • Bill

    For goodness sake why doesn’t someone in the South of Europe suggest chucking Germany out of the Euro?  Then the Euro could sink to its natural level, the PIIGS could survive (fly?) and what’s more the population wouldn’t have to endure the austerity programmes and the existing politicians would stand a vague chance of being re-elected.

    Is there a flaw in this Shaun?  To me it seems an ideal solution…

  • Anonymous

    The southern European nations have no legal basis to kick Germany out. Worse, the European Union is based on treaties where national leaders have vetoes. Any one of 27 can veto a sunsible option – hence why the EU is disfunctional.

    I agree that a German exit would be helpful but it destroys the myth of ever closer union. The Brussels elite will try to prevent this outcome.

  • Jason Aris

    Agree, still gives us (the UK) unexpected friends in Spain and the EU. Also might wake the US up and see what they are really dealign with.

  • Shaun Richards

    Hi Bill

    I dont think that there is any flaw in your logic at all. But the political classes in these countries rely on declaring Euro/EU support such as the Common Agricultural Policy which relies on German cash..

    Germany itself would not be keen on some of the consequences of a new DM as its exchange rate would fly. The Swiss however would be very keen as some of the gloss would be taken off the Swiss Franc. So mortgage holders in Eastern Europe might raise a cheer too.