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Spain's Looming Bust |
HenryTo
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 Posted: Wed Jun 21, 2006 8:08 am Post subject: Spain's Looming Bust |
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Spain is a country we have been warning about for the last few months. Unlike the United States, Spain cannot sustain its current account deficit, given that the appreciation in asset prices have mainly come from a real estate boom. Unlike shares of Google and new businesses being created in the U.S., there are only so many beachside resorts one can build and there is only a finite amount one will pay for them.
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Spain's Looming Bust Will Hurt the Rest of Europe: Matthew Lynn
June 21 (Bloomberg) -- Getting worried about global imbalances?
Then turn your eyes away from the U.S. It is Spain you should be worrying about.
For a decade, the Spanish have been riding a rising tide of cheap money, fuelling a construction, property and now a mergers and acquisitions boom. It can't be long before this tide turns. When it does, it is likely to be messy -- not just for Spain but for the whole of Europe as well.
``Spain will boom ahead until it collapses under its own weight,'' warned Charles Dumas, head of international research at the London-based consulting firm Lombard Street Research at a seminar last week. ``When it will happen I don't know, but it will be pretty unpleasant when it does.''
On the surface, the Spanish economy is robust, certainly compared with its neighbors. According to International Monetary Fund estimates, its economy will expand 3.3 percent in 2006, compared with 3.4 percent last year. Over the last decade, the Spanish economy has almost doubled in size, and it has beaten the euro area's average growth rate for 11 straight years. From a relative backwater, Spain has fast closed the gap on the rest of western Europe.
Dig a little deeper and the picture is not quite so rosy. The fuel for Spain's rapid growth has mainly been the massive monetary stimulus from joining the euro. The European Central Bank sets interest rates mainly for the depressed German and French economies, not for booming Spain. Interest rates have been held down, allowing the Spanish to load up on debt.
Spanish inflation is now 4 percent, while interest rates are 2.75 percent. Given that the interest rate is below the inflation rate, borrowing money in Spain is effectively free.
Real-Estate Boom
The Spanish haven't been slow on the uptake, and have been sinking money into real estate. Property prices rose more than 12 percent in 2005, and more than 16 percent in 2004, according to Bank of Spain figures. The first thing any visitor to the country is likely to notice is the forest of cranes, and deafening chorus of jackhammers.
Short-term, that's great. In the medium-term, it is more troubling.
``Spanish economic performance is unsustainable,'' Angus McCrone, an economist with the London-based Centre for Economics and Business Research, wrote in a note to investors.
The strain can be seen in a trade deficit that is spiraling out of control. From a deficit of 3.6 percent of gross domestic product in 2003, according to calculations by the Paris-based Organization for Economic Co-Operation and Development, the deficit this year will hit 8.9 percent of GDP. Next year it will rise to 9.8 percent. Because Spain can't produce as much as it consumes it closes the gap by importing more and more.
Taking Action
Without the euro, the markets would start taking action to correct the imbalance. Investors would sell off the currency, making imports more expensive and exports cheaper -- something along the lines of what has been happening with the U.S., which has a smaller relative deficit than Spain.
In Spain, that isn't happening. Inside the euro zone, currencies can't revalue. Externally, the euro has been rising, not falling. The only way for Spain to get its economy back in balance is through a long period of slow growth, rising unemployment, and depressed demand. The most likely trigger? A crash in the property market.
If that happens, it isn't just the Spanish who will feel the pain.
Europe's Engine
In decades past, Spain might have been peripheral to the European economy. France, Germany and Italy were the countries that mattered. Not any more. According to Lombard Street calculations, between 2003 and 2005 39 percent of the growth in the euro-area economy came from Spain. Without it, the euro region would scarcely have expanded at all.
When Spain does turn down, much of the growth in the euro area is going to disappear at a stroke.
Worse, cheap Spanish money has been fanning out across the rest of Europe. Grupo Ferrovial SA has just agreed to pay slightly more than 10 billion pounds ($18.3 billion) for BAA Plc, the U.K. operator of airports such as Heathrow. Grupo Ferrovial is now the biggest building company in the world.
Abertis Infraestructuras SA plans to buy Italy's largest road operator Autostrade SpA for 12.7 billion euros ($16 billion). Indeed, of the five largest deals in Europe this year, a Spanish company was involved in three of them. At this rate, much of Europe's infrastructure is going to end up in Spanish hands.
When the inevitable downturn arrives, the Spanish companies are not going to be in such great shape. With their domestic economy slipping into recession, money will be tight. A few won't survive. When that happens, the companies they bought will be squeezed just as hard. Some may not survive.
It is now probably too late to hope for a soft landing in Spain. The trouble is, very soon Spain's problems are going to be the rest of Europe's problems as well -- and clearing up the mess may take years.
(Matthew Lynn is a Bloomberg News columnist. The opinions expressed are his own.) |
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Spain's Looming Bust Replies |
rffrydr
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| Posted: Fri May 18, 2012 11:23 am Post subject: |
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Moody's downgrade of spanish banking good for STD.
http://online.wsj.com/mdc/public/page/2_3024-Preferreds.html
Buying STD preferreds these last three years, contrary to the name, has worked out great three times, and good once,... so far so good. Probably early here but prepared to average. Not looking for par, but cap gains of 20% on top of ~8% for waiting (and probably another 10% drawdown).
Certainly have been way off my prognostications that last year's World Cup marked the end of the slide here--but that's the beauty of bonds. They keep paying through thick and thin--'til they don't 
Risks: State money grab, S. American falloff.
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HenryTo
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rffrydr
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| Posted: Wed May 16, 2012 3:39 pm Post subject: |
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STD "yielding" 20%...not touching that; STD dollar preferred finally getting interesting again. Under $15 I'm a dip buyer
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rffrydr
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| Posted: Fri May 11, 2012 9:44 pm Post subject: |
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Really, "reform" is what investors want? Really?!
Spanish banks: time runs out on reforms
| Quote: | Basta! The sorry saga of Spain’s wayward banks has gone on long enough now. But it is little closer to its denouement after Friday’s (fourth) round of sector reforms. Madrid urgently needs to draw a line under the country’s property lending crisis – three-fifths of banks’ €310bn exposure is “problematic” – to restore confidence in lenders, and the sovereign. Finance minister Luis de Guindos told banks to raise provisioning on loans to developers from 7 per cent to 30 per cent, as expected. He said coverage of developer loans would rise to 45 per cent. Investors will say, with property values still falling, prepare for reform number five. He also told lenders to put property loans into separate bad bank-like companies. Progress of sorts, then.
But none of this amounts to much if the suspicion (so far fully justified) persists that Spanish banks are the masters of obfuscation. Mr de Guindos has thought of that: two independent experts will do a deep dive into banks’ lending books. That may begin to restore confidence. But only to a point. Banks have until the end of the year to take provisions through their profit and loss accounts, so putting off their day of reckoning – and the upfront clean-up and recapitalisation investors expect.
Spanish bank P&L accounts are already under pressure as rapid deleveraging to meet European and global capital rules limits their ability to generate capital from profits. Bigger banks such as BBVA and Santander should be fine. Some banks will need capital. To avoid using taxpayers’ money, Mr de Guindos will use convertible bonds – the non-core things regulators hate.
Spain’s reforms are more about covering itself than putting bank balance sheets out in the open. The country has missed a chance to reveal all. Gradualism has got it nowhere. Until it gets serious about reform, investors will stay away. |
--FT
The days of this kind of market-faith hubris are declining.
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rffrydr
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rffrydr
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| Posted: Thu Apr 26, 2012 11:27 am Post subject: |
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STD actually doing alright at home:
| Quote: | By business units:
· Spain. Operationally it was better than expected supported by strong pre-provision profit and lower impairments. NPL ratio went up from 8.5% to 8.9% and coverage was flattish for SAN network. COR up from 180bp to 190bp as we believe SAN was not very aggressive in the booking of the new provision requirements (RDL 2/2012).
· UK was one of the misses in our numbers, NII was below our estimates (-7% QoQ), impairments and the other results item was worse than expected. This weak performance was offset somewhat by strong fee income (+10% QoQ)
· US was one of the positive surprises of the quarter supported by strong “other operating income”, although no detail has been provided probably some extraordinaries. Bottom line was up +82% QoQ.
· Latam performed better than our expectations, with a very strong pre-provision profit. A. Brazil. Bottom line was in line with our estimates. The strong performance of the operating income was offset by larger loan impairments in line with other domestic peers. Lending volumes were relatively flattish. B. Mexico. This business unit was one of the positive surprises of the results, with a strong operating performance above our estimates. |
--via alphaville
Picking up some the ADRs today. Dividend will stand sans Depreession. Good money flow buying on the backside.
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rffrydr
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| Posted: Tue Apr 10, 2012 8:05 am Post subject: |
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....lookie thar', Banco Santander rounding up in top 30 "buying on weakness" today. 
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rffrydr
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| Posted: Tue Apr 10, 2012 7:18 am Post subject: |
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What they are missing is that this is a real country with a manufacturing base and everything. In short the economy. Too much of analysis now is financial panic analysis. yes they are in recession--not unlike a lot of recessions. Wages and and biz costs are adjusting rapidly, mortgage arrears tied to the actual spanish population continues to defy default rates elsewhere owing to the family connection and the sky-high unemployment levels apply more to the sky-high number of immigrants.
If you believe in china reprieve, which means brazil et al reprieve you buy interest bearing Santander again here.
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HenryTo
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| Posted: Mon Apr 09, 2012 9:58 pm Post subject: |
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Bridgewater on Spain's funding needs.
| Quote: | The Battle of Spain
Summary
Though it was never certain, it was always likely that the defining moment of the European debt crisis would come in the form of the battle of Spain because of the size and seriousness of their debt crisis. When the ECB did its LTRO, we thought it likely that this battle probably wouldn’t happen for quite some time – for 6-18 months. However, over the past several weeks it became clear that foreign investors have continued to liquidate their positions in Spanish government bonds in amounts which were greater than the amounts banks are buying, that the LTRO-infused bank buying is ebbing and, as a result, the government’s funding gap is not being filled. Further, as the LTRO-financed bank purchases fade, the portion of the gaps that is not filled is likely to increase. The fragile relationship in which troubled banks support a troubled sovereign which supports both troubled autonomous regions and troubled banks appears to now be failing and there are no clear paths to either fill or shrink the gap. While we certainly could be missing something, it appears to us that conditions in Spain are now worse than they were before the LTRO, especially now that the LTRO is behind us. That is because it appears likely that the funding gaps will force the government of Spain, the ECB and/or the EU to make extraordinary moves that they haven’t made before that will make it clear that Spain is in trouble and that the size of the problem is large relative to the resources to deal with it. |
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rffrydr
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| Posted: Thu Apr 05, 2012 8:11 am Post subject: |
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This is where I normally step up for my plateful of STDs (preferreds). It's worked every time....and come unworked for anybody hanging on. I'm just tired.
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rffrydr
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| Posted: Fri Mar 02, 2012 7:54 am Post subject: |
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This gloomy article concerning foreclosures seems all-too-happy to ignore that stubborn fact that current defaults remain below 2009. Indeed one analyst just won't believe it:
http://www.irs.gov/app/picklist/list/formsInstructions.html
Note the "divine intervention"....culture comes first. Note also that the boom wasn't pitched to the mass of immigrant labor.
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HenryTo
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| Posted: Wed Feb 15, 2012 4:05 pm Post subject: |
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Stratfor's latest on Spain.
| Quote: | The Limits of Europe's Response to Falsified Finances
February 15, 2012
According to a Feb. 14 Reuters report, the European Commission is considering action against Spain for overstating its 2011 deficit figures. Unnamed sources confirmed that the Spanish government, led by Prime Minister Mariano Rajoy, who came to power in late December 2011, exaggerated the country’s deficit. The sources said Rajoy intended to blame the previous Socialist government for its failure to reduce spending, to play up the achievements of the current conservative administration, and to ask for more flexibility in the application of economic reforms.
If true, this accusation would put the European Union in a dilemma. Brussels does not want to appear weak, especially since forging national accounts helped lead to the current European crisis. If the charges prove true, the European Commission could apply a fine equal to 0.1 percent of Spain's gross domestic product. However, Brussels knows that Spain and its fledgling government are not in a position to endure more instability and uncertainty. Moreover, Spain's financial future is tied to other countries such as Portugal. Therefore, while Brussels might be tempted to implement a punishment that would send a political message to the rest of the eurozone countries, it cannot afford to take steps that would put the Spanish government at risk.
This is not the first time that the European Union has faced a dilemma of this nature -- several states lied about their financial status to gain entry into the eurozone. Greece is the most notable example; Brussels knew that Athens had falsified its economic numbers in order to meet the requirements to join the first group of nations that adopted the euro, but Greece's admission was a political decision. As paradoxical as it may seem now, the European Union saw the adoption of the common currency as a way to end Greece’s traditional mismanagement of economic and monetary policy. Similarly, while Italy was able to straighten out its finances to a certain extent in the mid-1990s, it was no secret that Rome used "creative accounting" to join the euro.
The creation of the single currency was to a great extent an example of political will taking precedence over economic reality. Fundamental issues and incompatibilities were not addressed either before the launch of the euro or after its adoption. Even now, when these same problems are coming to light, they are being dealt with in a similar manner.
The inability of Brussels to punish offending countries is also seen in the weak enforcement of the Stability and Growth Pact, which sets limits on EU countries' debt and deficit levels and determines penalties for countries that do not comply. In the last 10 years Portugal, Greece and most notably France and Germany were spared sanctions despite having violated the pact. This is why the so-called Six Pack, which was approved in December 2011, and the Fiscal Compact scheduled for March -- both of which are intended to strengthen the Stability and Growth Pact requirements -- were received with skepticism by European elites. The institutional structure of the European Union, within which countries vote on their own sanctions, has made the application of penalties almost impossible.
If spending and debt limits were difficult to enforce before the current crisis, it is unlikely that the European Union would decide to restrain member countries now. This revives the traditional conflict between what Brussels desires and what it can do. If the European Commission discovers that Madrid lied about its deficit, the European Union would be forced to take action against Spain. After all, episodes such as this reveal the weakness of the European Union and demonstrate the difficulty it has in imposing credible enforcement mechanisms.
But while Brussels would have to respond, it cannot afford to apply an exemplary punishment that would further weaken Spain, whose economy is larger and more integrated with Europe than Greece's. Consequently, Brussels could use stronger rhetoric against Madrid and threaten it with legal action (as it did with Hungary last month), but fines are unlikely. The European Union has realized that the costs of punishing transgressors may outweigh the benefits, given how severe the crisis has become. Moreover, Brussels has to deal with markets' perceptions, since both the European Union and its member states are interested in making national finances look better than they really are. This dilemma may benefit Madrid in the short term, but it will weaken the European Union in the long term. |
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rffrydr
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| Posted: Mon Nov 21, 2011 1:00 pm Post subject: |
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Bank Of Spain Takes Over Banco De Valencia....new govt. putting stamp on its inaugural. BION this is a positive. Anything assertive at this point in europe will be rewarded--as it is today (ever so slightly).
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HenryTo
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rffrydr
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| Posted: Tue Jul 19, 2011 6:46 am Post subject: |
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Bankia (conglomeratized cajas) is out there. Yeah, 39% TE, but out there nonetheless. Press mocking but, in this environment, that's a home run!
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