The last few weeks have seen Euro area summit inflation rise to new levels. Not only has summit after summit failed to agree the next stage of the bailout for Greece but now we see that the latest summit was unable to agree on the overall European Union budget too. This gives the image of government by paralysis which these days seems to be increasingly common as if we look at the so-called fiscal cliff in the United States we see a similar theme.
However these delays do have consequences if we move from the refined and expensive air of these summits- the wine was reported at £120 per bottle- to the real economy. In Greece how can anyone be expected to plan ahead in her economy when everything is so uncertain? The latest payout started at 31 billion Euros and is now 44 billion Euros. You might think that there is some hope in her getting this amount of cash but hopes start to get dashed when you see that around 24 billion is for the recapitalisation of her banks. Yes yet again most of it goes to the banks.
But returning to economic matters I feel that factors such as expectations and confidence have played a powerful role in why the credit crunch has gone on and on and may yet see a further lurch downwards. Economies simply cannot run on a timescale that at the moment focuses on the next Greek debt maturity on the 14th of December.
Also what one might call an anti-triumph one piece of good news is now bad news. The Greek government bond market has been rallying recently and her ten-year bond yield is now around 16.5%. Now consider that a bond-buyback is being considered and you see the problem. Now that prices have risen -mostly due to the leaks about such a buyback- Greece will have to pay more and yet again we will have the ugly sight of speculators profiting from official intervention which is operated incompetently.
Euro area economies
We are seeing more and more signs of weakness and today in the Euro area we have seen more of what feels like a very long-running theme and also more of a relatively recent one.
Spain’s mortgage market
This is a matter at the frontline of the Spanish crisis as it was the housing boom that turned to bust which affected her construction sector and her banks severely and then rippled out into the rest of her economy. Unfortunately the Spanish system of deferring many of the problems from this for her banks means that the effects are on-going as in the end they catch-up and we see more signs of this in her latest mortgage numbers.
The average amount of mortgages in September presents an annual fall of 8.0% and amounted to 109,503 euros
The value of mortgages on urban property is 3.631 million euros, representing an annual decline of 35.7%. In homes, borrowed capital exceeds 2,170 million euros, 37.1% less
So we see that if mortgages are any guide house prices in Spain are still falling and on a year on year basis are falling at a substantial rate. Also we see that in volume or quantity terms we are still seeing very large year on year falls in mortgage lending. Indeed we can see the scale of the problem by looking at mortgage lending for dwellings over the past few Septembers in reverse order from 2012 going back to 2007.
2.17 billion Euros; 3.45 billion Euros; 6.35 billion Euros; 7.37 billion Euros; 8.9 billion Euros and 15.4 billion Euros
Whilst the 15.4 billion lending figure in September 2007 was a product of the boom and accordingly in itself cannot be used as a benchmark we see that we have veered to the other extreme now. Compared to the same month in September 2007 we see that mortgage lending for dwellings in September 2012 was 14% of the total then.
So it would appear that for all the claims of the opposite the Spanish mortgage and banking system looks to be still in trouble and is getting worse. If we look for more evidence of this we see that the savings banks or cajas appear to have retrenched even further and the emphasis is mine.
Banks are the institutions that granted greater number of mortgage loans during September (77.2% of total). Savings banks granted 9.1% and Other financial institutions 13.7%
So they are providing a smaller percentage of a much smaller amount. Not much sign of health there! Also their existing loan book must be increasingly underwater. We do not get a breakdown by sub-sectors but we did learn from the Bank of Spain a week ago that provisioning against doubtful loans reached 182.2 billion Euros in September which is up from August’s 178.6 billion. So far in 2012 bank loan books have shrunk by just under 4% whilst doubtful loans have risen by just under 27%. As you read that I suspect that it is not only my imagination which is thinking that the situation at the cajas is probably much worse than that. Something to recall when the bailout of the Spanish banks is announced and claimed to be a smaller amount than expected. A “surprise” will then be along sooner or later with the former more likely than the latter.
Also in an era of supposed ZIRP (Zero Interest Rate Policy) I did wonder about this in the mortgage statistics.
In the case of housing, the average interest rate is 4.12%, the lowest since June 2011
Borrowers will welcome any fall but 4.12% seems a long way from ZIRP and the 0.75% borrowing rate that Spanish banks can get at the ECB does it not? Another hidden subsidy…
This morning we have seen more signs of the economic slowdown which is encircling Italy.
In November, the confidence climate index decreased from 86.2 to 84.8.
Care is needed with the headline as by mistake someone at Istat has put this as an increase. If only! Also if we look at the detail the bad news just keeps coming.
The decrease was notably explained by economic and future climate, that fell from 71.5 to 69.4 and from 78.2 to 75.2.
The balance concerning expectations on unemployment increased from 108 to 114.
As you can see the present climate is not very nice, the future is expected to be worse and the implication of that is higher expected unemployment. As the starting point is now an unemployment rate of 10.8% (September 2012) that has moved higher in 2012 from December 2011′s 9.4% so far we see that Italy is weakening.
So as we go forwards we see that on two of the frontlines of the Euro area crisis there is trouble afoot. Spain has a mortgage market which has been travelling downwards faster than Felix Baumgartner and this is a clear counterpoint to all the official claims about the health of her banking system. Whereas Italy is seeing a more general decline with number after number in 2012 pointing downwards.
Thus I tend to feel that the Euro area is currently in the eye of the storm where it is suddenly eerily quiet but it will soon pass over us and the storm will be back. Because there is delay after delay the problems are always faced when the area is weaker. Can kicking only works if the future is brighter when it is not it fails and that is what it is doing right now. If you are looking for a taste of this in the sporting arena then be an English rugby fan!