18th July 2012
As fast as her government and the Euro zone has tried to solve a problem another one has popped up. Both of course are suffering from trying to kick cans into the future whilst simultaneously catching the ones they had kicked in the past! Not even Lionel Messi has demonstrated such skills and dexterity. Today is an example of this as we get more evidence of the state of Spain's banking industry.
The Bank of Spain reports on Spanish banks bad loans
One of the regular drumbeats of 2012 has been the Bank of Spain informing us that bad loans are an increasing problem for the Spanish banking industry. Today's data tells us that they rose from 8.72% of total lending in April to 8.95% in May.In terms of size this means that the total size of bad debts has risen by 3.1 billion Euros to 155.84 billion.
This number has risen steadily and if we look at the outlook for the Spanish economy then it looks very likely that it will continue to rise. If we look at the Spanish housing market we see that it has fallen in price terms by less than half that of the Irish housing market. Whilst there is no reason for it to have exactly the same fall it is logical to conclude that there are price falls yet to come. It is somewhat chilling to think that they could be as much as has already happened when you consider the impact of the existing price falls.
What about the rest of the Spanish economy?
We have seen this week an update on this front and here is the data:
The annual rate of the Industrial Turnover Index stands at -2.6% in May, two points above than that registered in April.
The average rate of the Industrial Turnover Index stands at -2.3% in the first five months of the year.
So we see that industrial turnover has been falling in 2012. If we allow for the fact that prices are still rising (consumer inflation is increasing at an annual rate of 1.8% and industrial prices are increasing at an annual rate of 3.2%) we see that output will have been doing worse than this. And we can add in that energy as a proportion of turnover has been rising as so far in 2012 it has risen by 19.1% compared to 2011 so other areas must be weaker than the headline numbers. If we look forwards for likely trends then the new orders figures highlighted below offer the prospect of more weakness:
The annual variation rate of New Orders Received in the month of May is -3.7%, more than half point higher than that registered in April.
The average rate of the General Industrial New Orders Received Index stands at -2.5% in the first five months of 2012.
If we look for insight from the underlying numbers we see that they have both fallen below 2005 levels as it is our base and industrial turnover is at 99.6 and new orders are at 97.5.
Construction numbers are unsurprisingly weak too
The European statistics agency has reported on European construction activity and I guess you have already figured which side of the ledger Spain is likely to be on! For the Euro area as a whole construction rose on the month by 0.1% but was 8.4% lower than a year earlier. Breaking it down on a monthly basis we saw:
the largest decreases in Slovenia (-17.5%), Hungary (-4.1%) and Spain (-3.3%).
And on an annual basis:
The largest decreases were registered in Spain (-24.8%), Slovenia (-23.7%) and Portugal (-16.4%),
Spain has seen a fall in every month in 2012 in construction which let's face it is hardly a surprise. I was also interested to see such a large negative annualised number for Portugal the same Portugal which is supposed to be "on track". In fact the International Monetary Fund was praising its again only on Monday although I did note a mention of this:
the daunting challenges that Portugal still faces
The new Governor of the Bank of Spain suggests a change of plan
Senor Luis Maria Linde has told a Spanish parliamentary committee that a change of tack will be needed from the previous bail out strategy which involved mergers some relatively minor capital increases and crossed fingers for the future:
If an entity is not strong enough to ensure its future, it will have to face an orderly process of resolution or liquidation
Senor Linde is of course in the position of trying to catch the cans kicked forwards into the future by his predecessor. This is not an easy task as the anticipated strengthening (official forecasts more than a year ahead are invariably rose-tinted) of the Spanish economy has been replaced by weakening as discussed above. So he faces an ever weaker housing market, banks with increasing amounts of bad debts and an economy on a trajectory into an economic depression. No wonder he wants a change of tack!
What about the bailout of Spain's banks?
As ever with the Euro area there is a flurry of announcements but much less action. However there is one piece of good news as it looks as though the money will be lent to Spain more cheaply than previous loans. And as the vehicle likely to be used the EFSF (European Financial Stability Facility) joined a club I mentioned on Monday there could be relative gains for her. From Bloomberg:
The facility auctioned 1.49 billion euros ($1.8 billion) of six-month bills at a yield of minus 0.0113 percent today
Although before hopes are raised of Spain being able to borrow from the EFSF at such interest rates let me remind everyone of this:
(Spanish) Loan maturities will be up to 15 years with an average of 12½ years
So maybe if the EFSF could manage to borrow this money another thirty times! As possible hopes are dashed let me remind you that this borrowing short and lending long strategy is one of the reasons I christened the EFSF as an unstable lifeboat. Another reason for such a description is of course the fact that Spain is borrowing from an institution in which it has a 12.75% shareholding.
Finland asks for collateral in return for its share of EFSF/ESM lending to Spain
Nothing that unusual in this as Finland asked for the same from Greece. But the detail is a mixture of the sensible and the surprising. Let us start with the latter:
s between Finland and the Spanish Deposit Guarantee Fund, which is financed by Spanish banks
Yes, Spanish banks are indeed providing collateral against a loan to Spanish banks. What could go wrong? And:
The amount is put in an escrow account and invested in highly-rated euro area Member States' bonds
How long ago was it that Spanish government and indeed bank bonds were highly rated? And what if bond prices fall? After all we have a 15 year term. What goes up can come down.
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