Spain’s latest economic data shows us that her leaders were “Too Blind To See It”

One of the ironies of the crisis which has engulfed the Euro is that summits which are presented as solutions to the crisis in fact have become triggers for it getting worse! Unfortunately Europe’s leaders have not figured out this basic fact yet and have given us another example of inflation by increasing the number of summits. The latest which has already been christened Homer was between the new President of France Monsieur Hollande and the German Chancellor Angela Merkel and yes it has had the same effect. Government bond yields in the peripheral Euro nations are falling and we may yet see a crossover in two of the main Euro exchange rates as the US Dollar strengthens into the 1.26s and the UK pound rises into the mid 1.25s.

Spain is being hit hard

Ironically much of the impact is happening in Spain and she was not even present! Indeed this morning her Prime Minister Mr.Rajoy has said that she faces the danger of “astronomical” borrowing costs as her government bonds continue their recent price falls. Her ten-year bond yield has nudged above 6.5% today but in volatile trading has then retreated to 6.4%. Actually she can afford to sustain neither rate for any great period of time particularly as the financial world has been reminded both of the weakness of her banking system and the weakness of Spain’s response to it.

Spain’s equity market is also taking a pounding and is down a further 1% as I type this with the Ibex 35 index at 6610. If we look for some perspective we see that it was at 10,226 a year ago and that the main fall has come since mid-March of this year where it was just below 8600 for an approximately 22% fall in two months. Something of a chill for Spanish equity investors and pension funds and of course pension funds are taking losses too in their government bond holdings in what must be a grim period for them.

Spain’s banks are leading the falls with my subject of last Tuesday Bankia (2.26 Euros then)  being 9% down today alone at 1.66 Euros.

Why are Spain’s banks being hit again?

I have discussed the underlying problem of Spain’s housing boom and bust being accompanied by a bust in Spain’s banks which the Spanish authorities have done their best to ignore. El Commercial has summed it up thus below and the emphasis is theirs.

In 2008 we were told that the maximum exposure to troubled real estate loans of the banking system in Spain was €25 billion. Today, four years later, the figure many of us had in mind is now official.Nearly €184 billion in troubled non-performing loans.

Indeed El Commercial points out a particular Spanish issue.

no less than €73 billion of the total €184 billion in toxic loans correspond to “land”. This is important because one of the things that separates Spain’s real estate bubble from others in the OECD is that some banks and cajas (savings banks) had the brilliant idea of ​​giving loans to land before urbanization. This has to be completely written-off.

And we get an estimate of the scale of the problem for Spain.

between 20% and 40% of GDP

The Official Response

Last week Spain’s government admitted to some of the problems but the response repeated past mistakes. For example she proposed merging four cajas or savings banks to create a “stronger” one. This is a policy I have criticised since the beginning on the lines of “bad money drives out good” since the beginning but now we have the evidence of what has happened at Bankia which was the result of merging 7 cajas.

Such plans also involve what is considered to be “high finance” and step forward some 30 billion Euros of what are called Co-Cos or convertible bonds to help clean up the mess.This has two main problems firstly the use of “high finance” in Ireland combined with denials of the underlying problem made things worse and not better. Secondly 30 billion Euros is nowhere near enough to cope with a banking system dealing with a housing market which is still falling.

What about lending to the rest of the economy?

Whilst Spain’s banks are in such disarray how much lending will they be making to her economy? I think we know the answer to that and she will suffer because of it. This is one of the strongest arguments for my suggestion that we needed to fully clean up the banking sectors affected by the credit crunch as “zombie” banks affect the economy in a drip-drip manner in subsequent years just like they did in Japan’s lost decade.

If we look at credit to Spain’s smaller and medium sized businesses ( one million Euros and under) we see that it is still falling.

What is happening in her economy?

The Service sector

As the largest part of any modern economy such numbers are eagerly awaited as a signal and her are the numbers from Spain’s statistics agency.

The interannual rate of turnover for the Market services sector stands at -5.3% in March, more than three points below that registered in February.

Ouch! That is quite a rate of decline and when we recall Spain’s already high rate of unemployment (24.4%) we see that it comes with an unpleasant chaser too.

Employed personnel decreases 2.3% , as compared with March 2011

If we look for deeper analysis of this we see that the underlying index is now at 93.5 where 2005=100.

And her industry?

Again from Spain’s statistics agency.

The annual rate of the Industrial Turnover Index stands at –6.7% in March, almost eight points lower than that registered in February.

The average rate of the Industrial Turnover Index stands at –1.6% in the first quarter of the year.

The annual variation rate of New Orders Received in the month of March is –4.1% more than three-and-a-half points lower than that registered in February.

So we see a severe fall in the industrial turnover index in March which unfortunately looks likely to continue as we peruse the news orders situation. The underlying situation for these numbers looks remarkably optimistic when we consider what has happened in Spain in the last six months as the Industrial Turnover Index stands at 101.4 and the New Orders Index at 103.1 where 2005=100. Indeed over the past few months the Industrial Turnover Index has been improving! It was 91.1 at the end of 2011.


We see that the official figures produced today show us that the Spanish economy was shrinking fast in March. If we add in the Markit purchasing managers report which read a further fall to 42 (where 50 equals unchanged) for April we see that this got worse in April. So yet again we see an official response to a banking crisis that due to the strategy of kicking the can down the road has led to delays has resulted in yet another country’s response being when they are at their weakest in economic terms. Which of course is exactly the time you do not want to be doing this!

If we go back to the opening of the credit crunch and the way that Euro zone politician’s rushed to call it an Anglo-Saxon issue we can see that Kim Sims song describes their hubris,schadenfreude and mistakes well.

Too blind to see it
Too blind to see what you were doing
Too blind to see it
Too blind to see what you were doing

The Real Wages Problem in the UK

Today’s figures show that the most serious economic problem facing the UK has just got worse.

For January-March 2012, total pay (including bonuses) rose by 0.6 per cent on a year earlier

So real wages are falling at a rate of 2.9% which shows the depth of the squeeze.

What does that mean if the UK  borrows in real terms as suggested by Jonathan Portes? Well we would be less able to repay it than a year ago….

This entry was posted in Euro zone Crisis, General Economics, Interest rates, Stagflation, UK Inflation Prospects and Issues, Yield. Bookmark the permalink.
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  • The_forbin_project

    so far as the real wages in the UK , please note that the rise has been in the Boss’s income not the working or middle classes  – who actually but most things and therefore contribute to GDP/GNP.

    the rich are getting richer , Shaun, and  theres where the the “growth” is !

    So how do we fix this?   no there’s going to be no growth  thats not on the cards – so can we fix this ?  

    all 0.1-3 %  growth  is not growth really  – is it?


  • JW

    Hi Shaun
    ‘Unless you think that we will be in this mess for thirty years’
    Part of your response to my comment yesterday.
    Zombie banks, zombie households, zombie nations.
    ‘Turning Japanese, yes I think so’; coincidentally just over 30 years old performed by the Vapors (disease), an archaic term for certain mental and/or physical illnesses.
    Life copying art?

  • Anonymous

    Hi Shaun,
    Thanks for inserting the SME credit report. I hope it becomes a permanent feature of your daily output. Congratulations on your Twitter following, of which I am one. Oxford Economics point out that SME access to finance in the Eurozone worsened considerably between Oct 2011 – Mar 2012. SMEs account for 60% of European GDP and two thirds of overall employment. I believe that when we look back at the policy responses during this crisis we will conclude that allowing SME finance to go to the wind was one of the worst errors. The mistake compounds itself when I hear Hollande talking about ‘growth’ as if it is conjured by governments.

  • Anonymous

    Shaun – another good article. Reverting to your headline, I think what we are seeing in Spain is what I can describe best as “the effects of seduction have profound impacts – often not seen for some time”. Yes, politicians of all stripes as well as a mass of the general public were seduced by not just cheap money but also what they could do/buy with this windfall. Now the wheel has turned full circle and the effects are now being felt by all. I cannot see how, in such a decentralised state, the central government can hope to pull in the spending horns of the regions….

  • The_forbin_project

     replying to myself – well I found this whilst googling  some other work related stuff

    Spain and the Euro zone come to mind –

    Stages of Collapse
    Stage 1: Financial collapse. Faith in “business as usual” is lost.
    The future is no longer assumed resemble the past in any way that allows
    risk to be assessed and financial assets to be guaranteed. Financial
    institutions become insolvent; savings are wiped out, and access to
    capital is lost.
    Stage 2: Commercial collapse. Faith that “the market shall provide”
    is lost. Money is devalued and/or becomes scarce, commodities are
    hoarded, import and retail chains break down, and widespread shortages
    of survival necessities become the norm.
    Stage 3: Political collapse. Faith that “the government will
    take care of you” is lost. As official attempts to mitigate widespread
    loss of access to commercial sources of survival necessities fail to
    make a difference, the political establishment loses legitimacy and

    ~ Dmitry Orlov I dont think we’re at stage 3 yet………..

  • Spacemanc

    Real wages may be falling, but it’s making us more competitive which is vital for the recovery. This chart doesn’t show the UK, but I’m pretty sure that we would be closer to Spain than Germany if the UK was shown:'s other news is that UK unemployment has fallen by 45000, which is pretty good in the current climate and even better when you consider that the public sector cuts are actually happening at the moment (whereas they were just talk a year or two ago)

  • JW

    UK unemployment headline number has fallen because the UK economy is following the US towards a ‘part-time’ future.
    Germany needs to increase its wages for there to be any chance of a EZ solution.
    An economy is run on behalf of its citizens, to enhance their standards of living, not to ‘win’ some arbitrary race with other nations. Without real increases in wages the economy and the citizens standard of living will flounder. The trick is to to encourage real increases at a sustainable rate.
    Even the Germans are realising this, belatedly.

  • Spacemanc

    The Germans have known the ‘trick of sustainability’ since the beginning, as shown by the chart that I posted!  

    Increases in wages are great if you can afford them, but if you can’t then it’s suicide to increase them, as we are seeing throughout Southern Europe.

    In the UK we are nearly the highest paid workers on the planet – why do you expect real increases in our wages, during one of the biggest financial crises of all time? We need to adjust to be competitive (so that we actually have jobs in the first place!) and then have neither falls or rises in real wages just as Germany has done.

  • Anonymous

    The ‘fusion’ of the four cajas serves several purposes. The main immediate one is to confuse prior year comparisons of their results and reduce transparency. It’s very hard to understand what is happening when you mix up several similar entities. Others include severing the local political and religious links that tend to distort the cajas’ priorities, dumping excess management and duplicated branches and maybe, possibly, strengthening the final balance sheet. But I agree, the end result will not be a huge improvement.

  • JW

    Germany entered into its latest ‘mercantile’ phase about 14 years ago, is this what you mean by ‘the beginning’? It was initially designed to overcome the problems of reintegration of the east, but became ‘mercantile’ when the planned increases in wealth of all were deliberately restrained.
    If the UK inflation rate reflected a country in ‘depression’, the real increases in wages would be more likely to be positive.
    Easy way to reduce comparitive wages versus ‘the rest of the world’ , crater your currency. Hey presto, competitive wages. Wonderful idea, the way to hope and happiness for all.
    If you are one of the 0.01% Spacemanc I can understand your motives, otherwise, you leave me somewhat confused.

  • DaveInSpain

     During Hollande’s inaugural speech I reached for the remote control just after he uttered the words “Europe needs a project”…

  • Anonymous

    Hi Shire

    It is a common issue these days that so many think that growth only comes from spending. Whilst I take clare’s critique of yesterday that we do need infrastructure spending I worry about the waste that often comes with it..

    As to the lack of SME finance it comes down to banks being able to persist and in many ways being emcouraged to persist with what we know is the wrong business model. We need reform but sadly it looks no nearer.

  • Anonymous

    Wasn’t that the Euro….?

  • Anonymous

    Hi barncactus

    My father is a student of the same school believing that many mergers are enacted with the purpose of muddying the waters for a couple of year or so. Meanwhile those in charge still get paid and often rather well…

    So it’s another form of can kicking.

  • Spacemanc

    You’re confusing ‘mercantilism’ with competitiveness and ’deliberately restrained increases in wealth’ with sustainable increases in wealth.

    I don’t believe that there is much of a case for real growth in wages until you have very close to full employment. What other reason would there be to justify higher wages? Where does the money come from?

    Btw, I’m most certainly not one of the ’0.01%’ 

  • Anonymous

    Hi Ray

    You pose a good question. Is Spain capable of the change required? Her structrue certainly makes it difficult and what if the Catalan region presses for independence as the government is trying to discipline it?

  • Anonymous

    Hi JW

    The more I think of that thirty year timescale the more it troubles me…

    On the happier side were the Vapo(u)rs prescient in their lyrics? In some ways yes and as I remember it well and am humming it as I type, it is also ageing in a way.It is a good way of representing the 30 years of Jonathan Portes plan and if you can come up with as good a way for representing forever then you will be doing well…. :)

  • JW

     Well you appear to be one of their firmest friends!

  • Anonymous

    Hi forbin

    You raise a good point about how much of the income growth we have seen is at the upper end.  The report today only specifies by industry so we get only a little insight as the highest paid group (£601 per week) in business and finance actually saw their income fall by 1.5% in the last month. But we get no breakdown of this.

    As time goes by I suspect that thoughts will turn to how much real growth we had in the run-up to the credit crunch as well as it consequences….

  • Spacemanc

    Don’t dodge the question by getting personal. Justify a rise in real wages. Where does the money come from? Where does the money come from to raise the public sector real wages as well, because they won’t want to be left out.

  • DarkM

    Fair comment – but there seems to be plenty of money around for Politicians, Directors etc to award themselves massive bonuses and huge salary increases. We even managed to “afford” a confilct in Libya last year (for no apparent benefit to the UK)……where did that money come from?

    A genuine question – no rise/falls in real wages, persistent high inflation = lower tax take, less ability to service “the debt” – pretty much a disaster in the making?

  • Spacemanc

    Real wages mean that wages rise at the same rate as inflation, so basically you get paid the same for doing the same job.

    So currently wages are rising, around 1%, but real wages are falling because of the much higher inflation rate.

    Personally I’m happy with the rate of pay that UK politicians  receive as I don’t feel it’s excessive, but there are far too many of them in my opinion.

    Company directors also tend to get a fair rate of pay in my opinion. It’s a tiny number of ‘career’ directors for massive companies who receive the crazy rates that make the headlines.

  • JW

     Spacemanc, there is no shortage of ‘money’, in fact there is far too much of the stuff. The last 30 years has seen capital taking an ever-increasing share of wealth over labour. I have often said on here that I believe that living standards in the ‘west’ are going to decline because of globalisation, automation, and demographics. However I dont believe we should follow economic policies that make this worse than it needs to be for the 99.9%.Chasing wages and labour costs down is a zero sum game. Next time you see a textile product with ‘made in china’ on it, its probably actually made in Bangladesh as vast swathes of Chinese industry relocates because of rising wages in China ( especially east China). Where next, Mars?
    Apologies if my short answer was felt to be personal.

  • JW

     Spacemanc, my response for some reason has popped up at the start of ‘comments’

  • Spacemanc

    Well money is debt, so you’re right, maybe there is far to much of the stuff!

    When I talk about competitiveness, I’m not really thinking of textile workers in the Far East – if they wan’t those jobs, then it isn’t a massive loss to us, and you’re right that chasing the low skilled, low paid jobs around the world is futile. The real game is in hi-tec engineering and manufacturing and financial services (yes I said it!) and our competitor is not China – it’s the USA, Germany and Japan.

    If have full or nearly full employment (very achievable in my opinion, though not for a while in the current climate!), then real wages can rise, basically by pricing out the lower paid and lower skilled industry’s out of our economy.

    Right now we need to adjust our real wages to be competitive, which will bring down unemployment and grow our industries. Then we can achieve sustainable real wage rises. Remember that our current real wages are anything but real  - the bottom line is that they’re currently subsidised by debt which is anything but sustainable, and that’s the reason it would be crazy to be raising them right now.