Spain worse

Overnight Spain released its GDP data and as expected the news wasn’t great. The data showed that the Spanish economy shrunk by 1.3% in Q2 Year-on-Year. This was 0.3% larger than the initial estimate and came on top of this week’s revisions of lower growth in Q1. On a quarterly basis the contraction appears to be speeding up with a 0.4% fall in the June Quarter after a 0.3% fall in the march quarter.

I mentioned here  and here  that there is worse ahead for the Spanish economy as the next tranche of government cuts and tax hikes begins and the GDP numbers showed that both consumers and businesses continue to lower their economic activity in response.  Consumer spending fell by 1% and fixed capital formation fell by 3%.

Although the data was weaker than expected, the Spanish government still managed to have a very successful bond auction in anticipation of coming ECB action on September 6th. Spain sold €1.7bn of 3mth bonds at 0.946%, down from 2.434% and €1.93bn of 6mth bonds at 2.026%, down from 3.69%.

There was also some evidence that the Spanish banking system is destabilising further due to deposit outflows. In July deposits fell by 5% across the Spanish banking system suggesting money is being moved to “safer” destinations. The Spanish government has claimed there is nothing to be concerned about and that this was “seasonal” due to the Spanish holiday season. I personally find it hard to believe that with 24% unemployment Spaniards are rushing off to international destinations to holiday, and previous years figures from July don’t appear to show similarly large changes in deposits. Something to watch closely.

Other dour news the came from the Spanish regions:

Catalonia, which generates around a fifth of Spain’s economic output, will tap a state liquidity line for just over 5 billion euros ($6.26 billion), a spokesman for the north-eastern region’s government said Tuesday.

The facility will cover financing costs linked to plans to cut its public deficit to 1.5 percent of gross domestic product this year, as well as maturing debt costs, the spokesman said.

The region would not accept political conditions for the aid, he added.

Of Spain’s 17 regions, Valencia and Murcia have also said they would need to tap the fund.

The government said in July it was setting up a mechanism to help the regions repay their debts, using funds from the state lottery and bank loans. But the facility is still not up and running.

Until recently it was thought that the Spanish economy was shrinking more slowly and in fact the Italians were leading the race down. The latest revisions in GDP along with the PMI data suggest that both nations are contracting around the same rate and suffering from similar issues of lack of internal and external demand. As I have noted numerous times, under these circumstances additional cuts to the government sector are likely to be met with even greater reversal in economic activity and therefore debt to GDP is likely to get worse, not better.

Mariano Rajoy is still adamant that he will not be seeking any form of bailout until the ECB has clearly stated exactly what support mechanisms it will be providing under any such program. It is becoming increasingly apparent, however, that he has little choice but to take what he is given, but in terms of systemic support whatever Mr Draghi announces on September 6th is becoming increasingly more important by the day.

Italy also had its share of bad news overnight with continuing downgrades to it’s banking system in the light of poor growth which Fitch Ratings stated as -1.9% for 2012 and 0% for 2013. I personally think the 2013 figure is a too optimistic given the long term trend and recent events:

Fitch Ratings has downgraded the Long-term Issuer Default Ratings (IDR) of Banca Popolare di Sondrio (BPSondrio) and Banco di Desio e della Brianza (BDB) to ‘BBB+’ from ‘A-‘, and the Long-term IDR of Banca Popolare di Milano (BPMilano) to ‘BBB-‘ from ‘BBB’.

The agency has also downgraded the Long-term IDRs of Banca Carige, Banca Popolare di Vicenza (BPVicenza), Credito Valtellinese (CreVal) and Veneto Banca to ‘BB+’ from ‘BBB’.

Simultaneously, Fitch has affirmed the Long-term IDRs of Banca Popolare dell’Emilia Romagna (BPER) at ‘BBB’ and of Credito Emiliano (Credem) at ‘BBB+’.

The Outlooks on all the banks’ Long-term IDRs is Negative.

Overnight we also saw the release of the July eurozone monetary aggregates. There was a surprise uptick in M3 which came in at 3.8% annual growth in July up from 3.2% in June. As usual, however, the breakdown of the data was fairly disappointing with annual credit growth private sector lower at -0.6%, consumer credit lower at -2.0%, loans to households steady at 0.3% and loans for home purchases steady at 0.8% growth. The upside of the data was that overall loans to the private sector actually grew by 0.1%, but as you can see from the chart below that rate is still recessionary. Full report is here:

DFM mentioned in his morning piece that Mario Draghi has cancelled his appearance at Jackson hole in order to concentrate on the eurozone and the upcoming September 6th ECB meeting where he is excpected to announce exactly what the ECB will be doing as part of his “believe me it will be enough” plan. As you can see from the data above he has to push against an increasingly strong economic headwind.


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  1. I’m really hanging out to see the Draghi plan. I saw a nice block flow diagram the other day with what it might be. Maybe Mario will surprise even further if all the legal issues can be sorted.

  2. “There was a surprise uptick in M3 which came in at 3.8% annual growth in July up from 3.2% in June.”

    So M3 grew by approx 0.88% in July alone. (approx as i don’t have individual monthly data)
    That could get to be a worry if repeated too many times. It will be

    loans for home purchases steady at 0.8% growth in an environment of declining GDP.
    Doesn’t this tell us that the whole thing is headed in the wrong direction? We are just restoring those things which caused the problems in the first place while the rest of the economy goes to hell as usual?

  3. DE
    (I know we go over this in different forms)

    You mention Debt to GDP ratios a lot in assessing how austerity is working. I know Rogoff and Reinhart showed that as a number there was a high correlation with Debt /GDP ratios with the long-term viability of an economy.

    However i put it to you that this is a bit of a classic case of confusing cause and correlation.
    Further I’d guess the ratio is something of a large ship. The turn of the rudder doesn’t take the ship from the direction you are headed to going in the opposite direction. It may however stop you heading onto the rocks you know are coming up 2 k’s away.

    The past has brought us to the high ratios because we over-consumed and/or produced too little. As such it gives an indication at a point of time of what has happened over a long period…say 20 or 30 years. This doesn’t mean that it is a good measure to assess progress in the short term.

    Cutting Govt excess does not immediately create factories or train people to produce real goods. It does create hardship for some individuals. However not cutting, or indeed expanding the Govt sector a la France, surely ensures that the re-orientation can never happen.

    • @flawse

      That’s yet another variation of sacrificing now for the Kingdom of the Righteous to come, a very Puritan way of thinking. I think that DE’s stance is very clear on that – there is no such Kingdom to come. And I agree with him. Keynes’ famous “In the long run, we are all dead” statement is sadly apt in this case.

      Your opinion seems to be based on this notion that balanced budget in the public sector is the ideal and indeed optimal state. The truth is that there is no evidence for that, except in the mathematical models made up by those neoclassical economists. A national economy is not a household.

      What is the “re-orientation” even supposed to mean? No economy is an island, and it’s not even remotely as easy to assess such things in the big picture of global economy. Someone’s austerity is backed by someone else’s spending, after all.

      I think the problem is this notion that there is such thing as the “ideal” state of economy. And they try to make you suffer now for the sake of that, despite the fact that none of them have the faintest idea on the validity of it.

      You must be reasonably sure of that if you want to bring mass sufferings into the society. And frankly, I have no idea where that confidence comes from. I’ve lost all the faith in the world in those economic models, most of which had dismissed the possibility of the financial crisis that we had in real world, and the whole idea of “re-orientation” and whatnot ONLY comes from those models. Yes, it ONLY comes from them.

      • @pendulum

        This is not about the public sector budget balancing or not – and I am sure that is not the focus of flawse’s concern. The issue is the size of total debt (public and private) and the economy’s capacity to service it. In the short run, or even for quite a long time, a nation can consume more than it produces, allowing foreign lenders to make up the shortfall. At some point, however, the total debt grows to a size where creditors start to become concerned about a nation’s capacity to repay its debt. Normally at this point creditors start to demand higher interest rates and the currency in which the debt is denominated is devalued. This makes the nation’s economy more competitive and allows the nation to export more, while deterring imports because they become more expensive.

        In the case of Spain and the other troubled Euro nations, the devaluation option is not available. First, because Germany would not allow it and second, because it would make comparatively little difference as many of Spain’s major trading partners use the same currency.

        So they are stuck with a high currency and an uncompetitive economy. Where to start? The obvious first step is to stop doing things which, while adding to nominal GDP, do not result in any physical output that can be consumed by the nation’s people (ie axe a few bureaucrats). The next thing is to make your industries more competitive. This usually means lower wages, better use of capital (ie not on building surplus residential property), probably less generous working conditions.

        The point is that after a long period of overconsumption and underproduction, the process needs to be reversed. A long period of underconsumption and overproduction is required to redress the balance. The alternative, which is what happens in a federation which is fiscal as well as monetary (eg the US) is that richer areas subsidise poorer ones. In the EU, this would mean semi-permanent budget transfers from Germany to the poorer southern EU nations. Can’t see it happening myself. Even in the US such fiscal transfers are limited. The south is still poor, the north-east is still rich.

        • “This is not about the public sector budget balancing or not – and I am sure that is not the focus of flawse’s concern.”

          Thank you Alex…it has NOTHING whatsoever to do with public sector balanced budgets. It is as you well point out about the society being balanced between production and consumption.

          Any comments that don’t address this issue have not been reading what we have written.

      • pendulum said:

        That’s yet another variation of sacrificing now for the Kingdom of the Righteous to come, a very Puritan way of thinking.

        Actually its a late-Medieval Roman Catholic way of thinking, which was challenged first by the Renaissance Humanists and then by the early Puritans. After Puritanism transmogrified from being the religion of the ruled (early 16th century) into being the religion of the rulers (as early as the 1650s, when the ruling buromasters and regents, once themselves in industry and trade, now “derived their income from houses, land and money at interest.”), then your characterization of Purantism is probably accurate.

        When the wicked pontiffs and venal cardinals of the late Medieval period spoke of ascetism, what they meant was poverty and austerity for the flock, but magesterial oppulance for themselves. They were, afterall, God’s regents on earth, and came to believe they should live as such. For the helots, they taught the Lucian philosophy that “they will survive death and live forever; in cosequence, they despise death and are willing to sacrifice their lives to that faith.” To true Christians, life on earth was almost irrelevant. The thought of living for the sake of living, celebrating mortal existence before God took them unto his own, was subversive of the entire structure. Yet that was precisely what the prospect of humanism offered. Abandoning the past’s preoccupation with eternity, Humanists preached enrichment of life in the here and now.

        Lutheran and other early Protestants were heavily influenced by the Humanists. Ulrich von Hutten was prominent; he was writing with the slashing, polemical pen of the new Lutherans. Calling for Germans to free themselves from Rome, he published an ancient German manuscript and noted pointedly: “While our forefathers”—-the Goths and Huns—-“thought it unworthy of them to submit to the Romans when Rome was the most martial nation in the world, we not only submit to these effeminate slaves of lust and luxury, but suffer ourselves to be plundered to minister to their sensuality….. How dare you spend the money intended for pious uses in luxury, dissipation, and pomp, while honest men are suffering hunger? The cup is full. See ye not that the breath of liberty is stirring?“

      • pendulum

        You didn’t read what I wrote at all.

        “I’ve lost all the faith in the world in those economic models, most of which had dismissed the possibility of the financial crisis that we had in real world, and the whole idea of “re-orientation” and whatnot ONLY comes from those models. Yes, it ONLY comes from them.”

        That is complete and absolute BS. Again you aren’t reading. My views are entirely the opposite of ‘modern’ economic models or concepts. Essentially they ar only monetary modles which misunderstand what an ‘economy’ is. I have been one of those who quite clearly saw the GFC coming from many years ago. It just took longer to arrive than I thought and in the process i’ve learned that insanity can go on much longer than I had previously believed.

        So please before you head off on your MMT hobby horse please think about the sort of things re production and consumption that people like Alex, I, and for that matter DE write. We are talking about real things not shifting momeny around to restore some impossible status quo.
        I don’t suppose you bothered reading DE’s posts on the structure of the Australian economy?

        The reckless stupid ideas have already condemned people to ‘suffering’ It’s just a matter of how and when. What needs to be worked out is how to spread the ‘suffering’ Some of us need to take a fair dent in our lifestyles and workstyles in order to reduce the suffering. Propping up out of control governments, excessive private consumption and associated debts, etc does exactly the opposite. it ensures a privileged few will be not have to reduce their standard of living and working while a portion are made destitute.
        The longer we fiddle around this propping up the old structure the greater the destitute portion will become.

  4. Although the image of briefcases stuffed with money crossing the border on their way to Germany/Austria/Switzerland is a popular one , a lot more money has moved from banks to mattresses than people may imagine. Laughably low deposit rates, a swelling submerged economy (doesn´t use the banking system does it and constant mentions of “corralitos” in the media and that old sock starts looking mighty attractive. Of course sock economy falls under microeconomy.

  5. “There was also some evidence that the Spanish banking system is destabilising further due to deposit outflows. In July deposits fell by 5% across the Spanish banking system suggesting money is being moved to ‘safer’ destinations.”

    I’ll advance an alternative explanation: the fiscal amnesty decree Rajoy approved last June requires fiscal fraudsters to repatriate gains before November 30. People could be withdrawing their balances in Spanish banks in preparation to returning them (if the situation in Spanish improves enough to make this a good deal).

    Just saying…

    • If you swindle the tax man you don´t deposit it in its banks. All banks report movements of more than 1000Eur including cash deposits (accompanied by proof of ID). Socks don´t talk.

      • I don’t know.

        Say, I withdraw the money I have in my bank account, give it to you in exchange for your house, and you take the bag full of notes and deposit it just across the border in Portugal or Andorra or France?

        Or, if you so prefer, you just leave the bag in a safety box, that you just rented, inside the a French bank? 😉

        • In Roman-based-law countries the deed reflects the owners name and it is registered as such in the land registry. The only way to guarantee that the participants in such a scheme remain honest is for one side to actually buy the others´property (and in this way change ownership). Apart from the problem of finding a willing buyer in this market, this would incur the following costs on the transaction: 7% stamp duty (buyer) + notary expenses (usually 0,5% of property value) + income tax on property appreciation corrected for inflation (seller). It is just too expensive (and obvious). The point I was trying to make is that the submerged economy is massive and growing and it is slowly siphoning money from the general economy. The tax system actually encourages this: i.e. tradies are taxed not on actual income but on a statistical income as determined by the government (the so called “modules”). When things were good they paid less tax but now they pay more so they prefer to drop out and continue trading.

          • “In Roman-based-law countries the deed reflects the owners name and it is registered as such in the land registry.”

            Probably, I am not explaining myself.

            In Spain, as everywhere else, you pay income taxes on your net income.

            The decree grants a tax amnesty on undeclared net incomes earned before 31/12/2010 (I’m not sure about the correct date, but off the top of my head, I believe it’s that one).

            Anyway. You won’t register the house’s ownership transfer as a sale done in the present: if you do, and the taxman checks the paperwork, the seller won’t qualify for the amnesty. And if the seller doesn’t get any discount on his taxes, he can’t split the gains with you.

            Note that I am talking about ownership transfer allegedly done before the 31/12/2010.

            Regarding the rates you mentioned. I’m not quite sure they are correct for Spain. Are you sure about that?

            Normally, in Spain, large net incomes (personal or corporate) pay something like 30%-35% taxes (top marginal). The legalization fee is a flat 10%. That should leave plenty elbow room.