Sunday, April 15, 2012

Treasures from the threads - Number 75 Spain

On an article in the Telegraph on the growing disaster in Spain came the following comment:

Today 12:54 PM
‘Under Rajoy, Spain has been trying to get its finances in
order, but the challenge just seems too great.’
The task is truly awesome for the decentralized State and banks having gorged upon the cheap money from 1997 to 2007.
In 2006 Spain built more houses than France, the
UK and Germany combined. 760, 179 dwelling starts. In 1990 to 1996 the average number of starts was 240,000. Little wonder Spain now has one million homes unsold. House prices (30% down since peak) and the assets underpinning Spain’s banks are central to Rajoy’s plans. House prices are likely to fall further and its questionable if Spain’s banks have provided enough for the existing falls. Banks delaying foreclosure to prevent further market falls, crystalizing the
losses is certainly an option when unemployment is high and there are few able to buy. Bank assets are however are marked to fantasy rather than to market.
Spain has 17 autonomous regions each with politicians
pursuing their own agendas exerting considerable spending power. Health and welfare make up 80% of the regional budget spending under this devolved system. Property taxes used to be an important revenue source for the free spending regions, as this income has fallen  many have growing deficits. It’s going to be a process of herding cats for Rajoy.
Spain with 24% unemployment (50% youth unemployment) needs considerably more than just labour reforms and cutting public spending. It needs growth, quickly. Poor cash-flow is like a heart attack. So where will growth come from? In the past millions of tourists flocked to Spain to enjoy cheap holidays and many purchased Spanish holiday homes fuelling a property building boom.  Now using the harder currency of the euro Spain for the tourist is not so attractive anymore. Many Brits now enjoy holidays in Turkey.

‘In February, Spanish banks' net ECB borrowing was €169.8bn
– a staggering 47pc of ECB lending to all eurozone banks. In March, that figure surged again, to €316.3bn. Spanish banks are now under intense pressure and that distress, as it bursts into the open, will soon be dumped on the state.’
Indeed. I wish the Spanish people well, they have shown
remarkable fortitude and restraint with 24% unemployment. However there is one crucial difference Spain has with Ireland. Spain now appears to be entering a banking crisis with net public debt of 80 %. Ireland started this process at 25%. One in five Spanish mortgages is now in negative equity with a 30% fall from peak. This is not surprising. In 1997 – 2007 house prices rose by  187%.
In Ireland it’s taken five bank bailouts and the banking stress
tests being independently verified last year to help restore a degree of confidence in Ireland's banking system. There is still a considerable amount to do before Ireland has a banking system fit for purpose. Ireland was the only country in Europe to have its stress tests verified. The model used a 70% fall in house prices based upon the Nevada, Los Vegas house price falls. Spain might have to consider this option if house prices go into free-fall and markets refuse to lend to Spainish banks at a reasonable price . To calm the herd you need to get ahead of it providing accruate data not simply politicians providing
press statements.

Irish Banks had €85.1bn in outstanding loans from the ECB as of March 30, down from a figure of €87.1bn in February, while emergency loans from the Irish Central Bank fell to €45bn from €45.2bn.  Still shockingly high but moving in the tight direction. Overall Irish bank borrowings have fallen by almost a third — from a high of €187bn in February 2011 — as banks began to aggressively shrink their balance sheets.
The euro truly is a currency for the good times.  Just so long as any country which depends upon tourism for a large part of its GDP isn’t using it when there is a recession or depression.
Act II in this euro drama shortly follows. The warm up band
of Greece, Ireland and Portugal are now leaving the stage. The main acts soon to follow are Spain, Italy and possibly France. How will Hollande as the likely French President next month react? 75 % tax on the wealthy and a renegotiated fiscal
pact? Only Portugal has passed Angela’s plan so far so its little more than a photo for the history books.  Will her fiscal toy be thrown out of the euro pram by a new socialist France? How will Germany re-act?
No wonder much of the American money is reaching for the
popcorn rather than the wallet when it comes to parts of Europe. A black comedy indeed of european political errors and 'light touch' eurozone central banking oversight upon bubbles that have now burst. The butchers bill is now being presented to the european taxpayer who has lost a few limbs.



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