Spain has only denial

There seems to be a pattern emerging as stressed Eurozone nations struggle against the austerity based policy that slowly strangles them. The first stage is a denial that anything is wrong, the second is that there is some problems but with renewed vigour the issues will be solved and the third stage is when reality finally begins to sink in that the country is in serious trouble and some form of external “help” is inevitable.

Given the recent denials by the Spanish economics minister I would suggest we are somewhere between stage 2 and 3 for Spain:

A European bailout for Spain is not on the table and would be the worst possible outcome for the country’s debt troubles, Economy Minister Luis de Guindos said in an interview with state radio late on Thursday.

De Guindos blamed the sharp rise in spreads on general market nerves about the lack of growth in European economies and said the issue was not restricted to Spain. Borrowing costs for countries and the private sector were not sustainable at these levels, he said.

“These spread levels are not sustainable for long,” de Guindos said. “It makes it hard for Spain or Italy to finance themselves, it makes it hard for the private sector, namely the banks, to finance themselves. It’s a situation that must be turned around.”

Overnight statements from the Spanish authorities became a bit more direct as they politely asked the rest of  Europe to keep their mouths shut about the country’s economic issues:

Spain urged its EU peers to be “prudent” when making comments about its economic woes on Wednesday following criticism from France and Italy, even as it got praise for its reforms from across the bloc.

“We all have our problems and we are working to find a solution to ours and also to help the eurozone. We expect that other countries should do the same, that they be prudent in their statements,” Prime Minister Mariano Rajoy said.

Rajoy did not specify exactly to whom he was referring in his comments to lawmakers from his conservative Popular Party, saying only that he was talking about “statements made in the European Union on the part of certain leaders”.

I can only assume those words are in response to Mario Monti and Nicolas Sarkozy who in recent weeks have both criticised the Spanish government’s handling of the economic crisis. Although I agree it would be prudent, and possibly a case of rock throwing in glass houses to boot, I do think that this request is far too late.  Although there appears to have been some temporary blindness in Q1, the financial world is now fully aware of the trouble the country is in with much of the focus on the banking system:

Spain’s banks are fast joining the ranks of the most unloved in Europe just as many need to raise capital urgently, deserted by investors who believe the country is on the brink of a recession that many lenders will not survive.

The government has ruled out more state aid for a sector that comprises a motley mix of international lenders and heavily indebted local savings banks. That leaves two options: raising private capital or turning to the EU for bailout funds.

Prospects for a private sector solution are poor. Nothing on the horizon looks likely to persuade foreign fund managers to invest, such is the fear of the banks’ growing bad loans, their holdings of shaky sovereign debt and the worsening economy.

And you only have to look at the Spanish housing market to get an understanding of just how much trouble the country is in:

The General IMIE Index recorded the highest year-on-year decrease in the historical series during the month of March, with a drop of 11.5%, leaving the index at 1631 points. Since peaking in December 2007, house prices have seen a fall in value that now stands at a cumulative figure of exactly 28.6%.

As I have spoken about previously, in the face of mounting balance sheet stress caused by private sector deleveraging, government austerity and pending European capital requirements the Spanish banking system has little choice but to shrink. One of the easiest ways to do that is to simply close up shop and shed staff:

Spain’s banks will have to close another 10,000 to 12,000 branches to adapt to a reduction in demand for loans, Banco Santander SA’s (STD) head of Spanish retail banking said Wednesday, but the country’s top two banks see such a move as an opportunity to boost their market share.

“The banking business just isn’t profitable now,” Enrique Garcia Candelas said at a roundtable meeting during a banking conference in Madrid.

Faced with shrinking demand for credit, difficult financing conditions and a fast-growing pool of bad loans, many of Spain’s lenders have been forced to merge in recent years, and the weakest ones were nationalized. As a result, the number of lenders in the country dropped to 17 from 53 five years ago.

However, banks have so far only closed 5,000 branches–or 12% of their overal capacity–since the financial crisis began in 2008, lowering the total to roughly 40,000.

The big Spanish banks are putting on a brave face due to their non-Eurozone exposure, but 5 years CDS contracts on both BBVA and Santandar are up sharply over the last month showing they are in no way immune to the fallout. The core of the ongoing problem, as we have seen in the case of Greece and Portugal, is that the one-sided austerity becomes counterproductive as it leads to a retrenchment of the private sector’s economic output and therefore national growth. It became more apparent overnight that this is now occurring in Spain:

Spanish industrial output plummeted in February, official data showed Wednesday, as the recession took tighter hold on the unemployment-scarred economy.

Production by Spain’s factories and power generators slumped 5.1 percent in February from a year earlier after smoothing out the impact of seasonal factors, the National Statistics Institute said in a report.

Factories hit the brakes on output of metal parts for making cars, basic iron and steel products and building products such as concrete, cement and plaster.

Overall, it was the steepest fall in industrial production since November last year when Prime Minister Mariano Rajoy’s conservative Popular Party won a landslide election victory promising to fix the economic crisis.

Spain is sliding back into recession this year, with the government forecasting a 1.7-percent contraction in gross domestic production after meagre growth of 0.7 percent in 2011.

Given February’s output numbers and March PMIs those government forecasts are now looking extremely optimistic. That is, I think we are approaching stage 3 rather more quickly than many people recognise.

In other news, just a quick note that after many months of political and economic turmoil Greece appears to be going to the polls shortly:

Greece will call a snap election for May 6 on Wednesday, government officials said, opening a campaign that may produce no clear result and threaten implementation of the international bailout plan that saved Athens from bankruptcy.

Make the date in your calendar, it should be interesting enough.

Finally, before I go today I would like to give a hat tip to Adam Carr who sent a tweet yesterday to remind me about the importance of MacroBusiness:

Latest posts by __ADAM__ (see all)


  1. If there is no fear of contagion why are there increasing reports questioning France’s position? how can he unequivocally say something like that?!

    • I was speaking to a Senior European analyst on teh weekend whose opinion was that France’s position, given its social attitudes etc was worse than Spain! You have to look a little into the future. He thinks France is going to fail as a country. Big call! I doubt he’d go into print with it!

      • Well I can’t really comment on the social side of things, but I have concerns about the country on economic grounds.

        I mentioned them again last week

        Actually , to be honest, I am a little more worried about France than that statement suggests. If you have been following my European posts for a while you may remember my warning on the country back in July last year and my repeat of those concerns again in December. In case you haven’t read those posts my basic premise is that France isn’t that much different from some of the periphery nations in terms of its macro economic statistics

        • Thanks DE I had missed that one. Not that I disagree with much you write. (Not sure I’d be game 🙂 )

          This Analyst agreed with your economic scenario re France. He felt the advantage of their large industrial base would be far outweighed by social attitudes.

          Someone else posted the Irish see the problems as caused by themselves and therefore accept responsibility. As I understand the French are just the opposite. It’s someone else’s fault. They don’t know who but they sure aren’t going to do without anything just because of it!

          Funnily enough this particular bloke felt the Spanish were making real progress and, with the support of the ECB, would muddle through.

          I’m not arguing that and I fundamentally follow your reasoning. It was just an interesting different take on things. However if France fails not much else will matter I imagine?

          • I worked in both France and Spain, and from business colleagues in France they see the problem as the government; there is a lot more compliance in France from my experience, and it takes a long time to get anything done…you have wait. In Spain I saw the country from the first inflow of EU money in the brilliant roads that all of a sudden were being built with the EU signs up. I also agree that Spain is trying to resolve the issue, but it might be a bit late IMO. I’m not hopeful for the EZ in general.

      • Yes, I too was going to raise the question of France. Flawse, may have listened to similar views on the social side – France likely to be far more explosive.

        France and Germany seem to go under the radar a little (not DE’s finely tuned antennae of course!), just as Sarkozy and Merkel would like I guess.

  2. Adam Carr’s bizarre claim reminded me of a line from some b-movie;

    “These are not the droids your looking for. Move along.”.

  3. It seems most people agree on the existence of a deep problem, but let’s have discussion on the alternatives for a real solution, what are the chances of, and likely outcome of measures like:

    a) structural (Gov/Labour/Business) reform in Spain/Italy/Greece
    b) balanced EU Gov budgets for the 1st time in 40 years
    c) let banks or the ECB simply write-off their now heavily depreciated or even worthless (real vs nominal value) assets resulting in (free) money handed out to those banks; and a vapourising ECB capital position
    d) let (some) banks simply go belly-up; resulting partially to c) as well

    Have I forgotten any ? Votes welcome.

    • Your not the London Whale are you? 🙂

      Pretty good, but I’d say EZ for a)

      c) is a really key one IMO as what are the values of the securities the ECB holds for any of this debt in a depreciating environment, and what did they swap with the FED to get the LTRO’s going etc.

      From my work experience in the EU it’s not going to change. They will have to deal with a much bigger problem in the not too distant future. There are huge problems and IMO the EU are incapable of solving them with the nation states.

      • a63 Do you mean that you see that a total fiscal and monetary amalgamation is necessary?

        It might only delay disintegration?

        “but I’d say EZ for a) ” In the famous words ‘please explain!’ EZ? Am uninitiated!

        • I believe that the model the EU has is not workable due to the disconnect between fiscal and monetary policy for a start. For example due to bad memories in Germany they went to this LTRO model rather than allowing the ECB to act as the FED/BoE etc would do. The ECB was buying bonds on the secondary market etc. In all EU countries they need to get their house in order and as I see it they are past a point where that is possible in a pain free way. I know of people working in France e.g. that come to work each day and they tell me that the company is trying to bore them to death, but by the same token they won’t resign, and the company can’t sack them. It’s just one small example of my work life experience in the EU. It’s a very courageous decision to setup a business in the EU from what I saw. The compliance is huge, and we’re getting there here IMO.

          I think in general it’s too hard to employ people, and that is a big issue for the EU IMO. Not the only one, and I should write an essay on my experience I guess.

          Euro Zone (EZ) explained well here:

      • No, I’m a Dutch one 🙂

        a) is necessary, but plenty of vested interests dragging that until eternnity

        Risk needs to priced again correctly, I personally heavily object to Banks/lobbyists successfully collectivising the losses now while enjoying the profits privately previously.

        b) is necessary because if not, in the end we end up with defaulting Govs (the state we’re in now)

        But I fear it will just endup in c) en d) en start-off with a new monetary system.

        Conspiracists sometimes whisper the current crisis had been foreseen by the EURO decision makers in the mid 90’s, but that in a way it is welcome as it is the perfect excuse to enforce a fiscal/political union – something voters have been predominantly opposing.

        • whale I’m a bit of a believer that in the end the rules of the natural world will prevail.
          They might force fiscal union etc…but will that really change the natural instincts of a Greek vs a German? When things are different if you try to force them together it can blow apart.
          I’d think teh short cut would be to dissolve the whole EZ and go back to square one!
          I know it isn’t going to happen for all the good reasons you and a63 elucidate.