2012 has seen the development of the financial crisis in Spain as her economy has weakened. Back at the opening of the year on January 3rd I warned of the dangers of an economic depression there. Not only was she then in an apparent recession but her fiscal deficit had just been announced as 8.2% of her Gross Domestic Product or GDP as opposed to the 6% promised by the outgoing administration. The standard Euro area “cure” of austerity was about to be turned one notch tighter in response.
The government now plans a 14.9 billion Euro austerity package which combines some 8.9 billion Euros of spending cuts with 6 billion of tax rises ( income tax, capital-gains tax, and property tax). The tax increases will be “temporary” in what is another entry for my lexicon ( for newer readers official uses of the word temporary usually explain something which turns out to be anything but).
If we assume that the plan above is actually enacted we see moves which will reduce Spain’s fiscal deficit by 1% of GDP.
As you can see this was yet another brake being applied to the Spanish economy and trimming it off the previous years deficit still left it a long way from where her government planned to be.
Austerity became a theme
As 2012 developed we saw that more and more of this was applied to Spain. For example another 40 billion Euros worth for 2013 was applied on September 27th. This of course was yet another an example of a country in denial as by then it was even more apparent that the Spanish economy was in trouble.
Banking and Housing problems merge
The amount of loans declared sour by Spain’s banks has risen steadily in 2012 and become something of a metaphor for her underlying problems. This is because they show signs of the crisis in both her property and banking sectors. At the end of 2011 doubtful loans totalled 139.76 billion Euros according to the Bank of Spain and by October which are the latest numbers we have they had reached 189.62 billion giving an increase of just under 36% in the year up to then. Worryingly the figures for October did show an acceleration in the rise as an extra 7.4 billion Euros worth of loans went sour.
Banks cut credit too
The Bank of Spain numbers tell us that Spain’s banks had advanced some 1782.55 billion Euros of loans at the end of 2011. If we compare that to the 1688.72 billion Euros of October we see that this number had contracted by some 5%. So yet another brake was being applied to the Spanish economy in 2012.
One particular area where we have seen a credit supply squeeze has been in trade credit advanced by Spain’s banks. At the end of 2011 this totalled 49.94 billion Euros but by October it had fallen to 37.81 billion Euros. Not only are Spanish businesses not finding support here quite a downwards squeeze has been applied which is the sort of thing that turns a recession into a depression.
Perhaps the symbol of all of this has been Bankia and there was more bad news on this front released on Boxing Day – reviving the “good day to bury bad news” theme- as this was released by Spain’s bad bank or FROB.
- The economic valuation of the BFA Group is -€10.44 billion.
- The economic valuation of the listed bank Bankia is -€4.15 billion.
This should not really have had the shock effect that it did but Bankia’s share price fell another 20% to 55 Euro cents,and it has fallen further to 42 Euro cents as I type this. According to Bloomberg the one-year return is now -88%.
To my mind the problems are not over as the FROB plans to do this.
The capital increase at BFA amounting to €13.46 billion.
All well and good you might think but if you look at the negative valuation before it you see that the new Bankia will have quite a thin capital base compared to the loans it has advanced. Accordingly,I do not think that this is the last capital injection that she will receive. Just like Anglo-Irish Bank in Ireland we seem to be on a drip-feed of bad news like a rope being pulled out notch by notch.
What is the latest news on the Spanish economy?
Spain’s statistics institute has told us this today.
Sales in retail trade at constant prices (that is, after eliminating the prices effect) showed an annual variation of –7.8% in November
If we look into the detail we see that food sales are holding up to some extent as they only fell by 2.2% but of course that means that non-food sales were down more substantially. Also monthly retail sales numbers can be erratic but I am afraid that these fit the pattern for the year so far.
The average rate of the General Retail Trade Index during the first eleven months of the year presented a variation of –6.4% as compared with the same period last year.
If we look at the chart presented we see that retail sales in Spain have fallen in every month since January 2011. This has led the underlying index to now be 73.6 where 2005=100. Plainly this part of Spain’s economy is in a depression and we are also in lost decade territory.
Unfortunately there is a consequence of this for another of Spain’s problems as shown below.
The employment index in the Retail Trade sector in November presented an annual rate of –1.6%, four tenths below that registered in October.
Spain’s housing and mortgage market
We get an insight into this too from the latest figures for October. We see that the average mortgage value for house purchase continues to fall.
In the case of mortgages constituted for dwellings, the average amount was 100,665 euros, 4.9% less than October 2011 and 1.7% lower than September 2012.
We also see yet more evidence of a continuing credit squeeeze.
The value of the mortgages constituted on urban properties was 3,088 million euros, indicating an annual decrease of 27.5%. In dwellings, the capital loaned exceeded 1,923 million euros, 18.6% less.
These declines come on the back of substantial previous falls since 2008.
Those interested in the structure of the Spanish mortgage market will find some food for thought in this.
mortgages at a variable interest increased from 95.0% to 96.7%.
2011 wasn’t all it was made out to be either
Today has seen the release of updated regional accounts for Spain which tell us this via Google Translate.
As a result of this update, the real growth of GDP national in 2011 was revised down three tenths (from 0.7% to 0.4%).
So the past is no longer what it was thought to be.
It is plain that the beat goes on in Spain and that the drums are beating a depressionary rhythm. So far the official numbers have not fully encapsulated this but perhaps todays downwards revision for 2011 will be followed by others for 2012. The downwards spiral was caused by a boom and then bust in both her housing and banking markets which if the latest data is any guide are still developing. It appears that credit to other parts of the economy are being reduced too which is not a good sign either.
One bright spot is her balance of payments performance which has improved through this crisis and in July was positive for the first time in the Euro era. The trouble is that whilst there has been an export improvement this also represents a fall in imports due to economic weakness.
Also we see that in terms of bond yields they have retreated from the highs of the middle of this year and her benchmark ten-year is now far from where it began 2012 at 5.28%. The problem is that as problems and debts continue to build this is still much too high.
So we see that the problems of 2012 for Spain’s economy look set to carry on into 2013 with no respite in sight. In a country with an unemployment rate already at 25.02% as of the official numbers for the third quarter that is a prospect beyond chilling which sends a shiver down the spine. Unemployment of 5,778,100 is already far too high.