Europe has a bad night


Another night of poor European data, firstly with Spanish bank bad loans hitting yet another new record:

Spanish banks, awaiting the first payments from a 100 billion-euro ($127 billion) European credit line, saw bad loans hit a new high in September, new data showed on Monday.


Bank of Spain data showed banks’ bad loans stood at 10.7 percent of their outstanding portfolios in September, the highest level on record and up from 10.5 percent a month earlier.

Loans that fell into arrears increased by 3.5 billion euros from August, reaching 182.2 billion euros in September.

Given that nearly every metric in Spain is going the wrong way at present, including the Tinsa housing index, this really isn’t a surprise and there is no reason to suggest that yet another record won’t be set again when we get the reading for October. In response to the on-going crisis stemming from the collapse of the housing market the Spanish government looks to be coming up with some fairly desperate ideas in order to attempt to generate some demand:
Spain may offer automatic residency to foreigners such as Chinese and Russians who buy homes in the country, aiming to help the ruined housing market, a government official said Monday.

“We have proposed to the other ministries that for residents who acquire a home in Spain for more than 160,000 euros ($205,000), that will automatically entail a residency permit,” said junior trade minister Jaime Garcia-Legaz.

“We are thinking of markets such as the Russian and the Chinese ones,” he added, speaking at an economic gathering in comments broadcast by national television.

What can possibly go wrong?
Italian industrial orders also gave a poor reading, but given the PMI data, again this was no surprise:

Italian seasonally adjusted industrial orders fell 4.0 percent month-on-month in September, after a 0.6 percent increase in August, data showed on Monday.

September’s drop was the steepest since a 7.5 percent monthly decline in January.

Orders were down 12.8 percent in unadjusted year-on-year terms after a 9.0 percent fall the month before, national statistics office ISTAT reported.

Industrial sales fell a seasonally adjusted 4.2 percent month-on-month in September after a rise of 2.7 percent in August, and were down a work-day adjusted 5.4 percent year-on-year.

As the Italian economic data slowly deteriorates it appears that Mario Monti is losing his silver-lining with a recent poll showing his popularity as a technocratic leader has halved in a year and 62% of people polled were against him having a second term as the head of the government. As I stated in back in July, what happens after Mario Monti departs presents political risk to the rest of Europe and this is certainly a story to watch closely as we move into 2013.

Finally on the data front, Euro area production in construction down by 1.4% and down by 1.8% in EU27.

In the meantime the procrastination over Greece, not to mention the EU budget, continues with conflicting reports of what it going to be decided, or not, today coming from the German camp:

German Finance Wolfgang Schaeuble reiterated his opposition to any haircut on Greek debt held by the public sector, speaking during a television interview on Sunday.

Schaeuble told German ARD public television that under national budget rules such a haircut would forbid the government to give any new loans to Greece or sign guarantees for loans given to the country.

“By the way, the European Central Bank, which is [Greece’s] main creditor is also categorically rejecting” a haircut on the Greek debt it is holding, he remarked.

Meanwhile Joerg Asmussen finally broke the truth in an interview on Sunday:
European Central Bank Executive Board member Joerg Asmussen said Sunday that Greece is likely to need a third bailout program, since expectations that the country can regain access to capital markets by 2015/2016 appear unrealistic.

Official creditors should agree next week on funding for Greece for 2013 and 2014 and address follow up funding at a later stage, the German Executive Board member said in an interview with German public broadcaster ZDF.

Both of these positions point to another ‘can kick’ but that is unlikely to satisfy the IMF which has made it clear recently that it wants a credible plan to lower Greece’s debt to something they consider sustainable by 2020. Greece is currently projected to have a debt of 190% of GDP in 2013 which means in order to reach 120% by 2020 they would need to be running high single digit surpluses or the next 8 years. For 2012 the deficit is likely to be around 7% so you can see just how ridiculous the current situation is.
The reality is, and has been for years, that ultimately all Greece’s creditors are going to have to pay more because the current policies of the Eurozone have always failed to address the issue of what to do about existing debts as internal devaluation lowers the nations ability to service them. But we’ve got 10 months until a German election and I am very doubtful that anyone in ruling German politics wants to speak that truth until after September 2013.
In breaking news. Moody’s has downgraded France from the AAA club, personally I’m surprised it took them so long.