Spain is repeating Greece

19th June 2012

One of the reasons for reviewing yesterday the economic chaos that has been inflicted on Greece is to make it clear that the policies that were imposed on her have failed. Unfortunately those in charge in the Euro zone have seen fit to apply these failed policies in other countries. Instead of learning from their failures they have repeated them which means that we can expect economic chaos to spread to other parts of Europe. Often markets take the blame for contagion but the truth is that this contagion has been spread by those in charge in the Euro zone and should be forever a stain on their reputation.


The same tactics are well on their way to achieving the same result in Spain. We have different circumstances as a housing boom and bust has led to a banking boom and bust. But we have the regular themes of denial, an insufficient response and austerity applied to economic weakness. No doubt we will soon be told that Spain is "on track" which are two words in combination which should send a chill down the spine of any recipients and send them scuttling to the nearest bunker.

How are Spain's banks doing?

Yesterday the Bank of Spain told us that bad loans at Spanish banks rose by 4.7 billion Euros between March and April. This meant that they had risen from 8.37% of their loan book to 8.72%. Put another way the total amount of domestic bad loans is now 153.78 billion Euros and rising.

If you compare that to the 100 billion Euro bailout package for Spain you see why I believe if it will not be enough. Indeed if you consider the rate of increase in these bad debts over the past year which is 38.18 billion Euros you start to see that it will have to be increased.

Indeed perhaps the authorities in Spain are coming to the same conclusion because  the bank audit that they have trumpeted has this morning seen a delay until September in the publication of its results. Strange that you delay something which was going to prove your case! I think that we know the real reason and that is that the even a company such as Oliver Wyman ( who pre credit crunch declared Anglo-Irish Bank to be the best bank in the world in an effort almost beyond parody and satire) find rose-tinting the Spanish banking situation to be a problem. And we see yet another example of delay and obfuscation or if you prefer one more kick being applied to that poor battered can.

The real cost of this to Spain

Spanish government  bond prices fell in response to the news and yields rose. Her ten-year yield rose above 7% to a Euro era high and her two-year rose from 5% to 5.5%%. The two-year yield is more significant at this point because it indicates a loss of control if you consider that the recent three-year European Central Bank liquidity operation deployed over a trillion Euros to help reduce it to 2.2%. Even worse the Spanish banks which took the money and invested in short-dated Spanish bonds are making considerable losses. Yes yet again a support operation has contributed to yet another problem as weak banks lose money again. We have found yet another vicious circle which again is exactly what happened in Greece. You support the banks in such a way that they lose money and then they need more support! Sometimes you simply could not make it up.

Today there has been a real cost of this to Spain as she has had to issue some 12 and 18 month debt at an interest rate some 2% higher than when she last issued such paper in May. She cannot afford to sustain that when she comes to issue longer-dated debt as she would look insolvent.

And if you would like a comparison from the bi-polar world in which we now live Denmark borrowed for two years this morning at -0.08%. Yes I do mean that investors paid it a small amount to hold their money. In some ways the implications of that are as chilling than the Spanish numbers although they will be welcome to the Danish taxpayer.

What about Spain's economy?

It looks as though it is still marching to the same drumbeat:

"The annual rate of the Industrial Turnover Index stands at -4.5% in April, almost two points higher than that registered in March.

The annual variation rate of New Orders Received in the month of April is -4.7%, almost one point lower than that registered in March."

If we compare these to the averages for 2012 so far we see that the latest numbers exceed them. In other words the decline appears to be accelerating which backs up the survey results we had previously received. If you look at the accompanying chart both indices turned down in August 2011. And compared to a base where 2005=100 we see underlying indices of 89.7 and 89.3 respectively.

Continue reading…


More on Mindful Money:

Is Greece the word? Or should Germany leave the euro?

Is Spain a 'submerging' market

Eurozone: The political cost of a Greek exit

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