Spain's Looming Bust

[HenryTo]

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.)

[rffrydr]

What do you know, Cajas are now part of the solution:

http://ftalphaville.ft.com/blog/2011/06/02/582741/the-spanish-acquisition/
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

February Spanish Housing Permits rose 21.9% m/m. The trend has been flat to higher in recent months. New activity has been stronger than extension or renovation February Spanish mortgage lending rose 1.7% m/m and fell 13.1% y/y. The number of mortgages has been rising in recent months.
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Now just a spread instead of about to be:



Santander prefs barely budged.
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

January Spanish Housing transaction rose 19.6% y/y and 43.1% m/m. The sequential gain has been strong in recent months, and sales are above levels seen in July.
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

European sovereign debt crisis centered in the PIGS countries remains in play:

http://www.bloomberg.com/news/2011-03-10/spain-s-credit-rating-downgraded-by-moody-s-to-aa2-with-negative-outlook.html

[rffrydr]

Not fan of Irriatu but if you wanna know how Spain survives 25% unemployment this film will show you how few of them are actually spanish.

http://www.youtube.com/watch?v=bMP1lKSlQaE

The rest? Diaspora survival tactics.
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

sizzzzz:

http://ftalphaville.ft.com/blog/2011/01/13/458411/the-acrid-smell-of-burnt-fingers/
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Santander starts with dividend, year fully funded. Leading rally today up 12%.

Of course spain, this bank ain't.
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Missed the rally? Spain is cheap:



IBEX dominated by Santander and Telephonica, both stock as dependent on latin america (and UK!) as on their home turf.
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Today is the Tomorrow you worried about Yesterday!

[HenryTo]

Spanish banks remain in focus:
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Moody's warns it could downgrade Spain banks

(AP) – 8 hours ago

MADRID (AP) — Moody's rating agency warned Monday that it could downgrade the debt rating of Spanish banks that might need help from the government to help them weather Europe's debt crisis and the nation's shaky economy.

Moody's Investor Service issued the warning a week after it put Spanish government debt on review for a possible downgrade amid unemployment of nearly 20 percent and grim growth forecasts following rounds of government austerity cutbacks.

Spain's large international banks have been posting profits, but many smaller banks called "cajas" have been hit hard by a building boom that went bust and left them with billions of euros in bad loans. Some are currently undergoing a government-mandated merger process.

The government has vowed to help prop up Spain's banking system, and Moody's said its review of the banks "will assess to what extent a potentially lower-rated government will be able to support its banking system in case of need."

The agency gave a gloomy outlook for Spanish banks, saying their "capitalization, profitability and access to market funding will remain weak, driven by the country's difficult economic conditions, continued asset-quality deterioration and the Spanish government's fiscal austerity plans."

The Spanish government recently approved new austerity measures and a limited economic stimulus package to ease investor fears about its debt — and insists it is taking strong steps to right its ailing economy.
The moves include plans to sell off a 30 percent stake in the government-owned national lottery, the partial privatization of airports, cutbacks to a key jobless benefit, tax cuts for small businesses and an increase in the tobacco tax.

Government officials have brushed off investor fears that Spain could need a bailout like those accepted by Greece and Ireland. Spain has the eurozone's fourth-largest economy and many economists warn that a bailout of the nation could lead to the breakup of the zone itself.

Ahead of the announcement by Moody's, the Organisation for Economic Cooperation and Development said Spain should make tougher pension and labor reforms to revive economic growth and ease the debt load that is putting it at the heart of Europe's debt crisis.

The government says that next month it will approve a highly contested plan to raise the retirement age gradually from 65 to 67, part of a drive to shore up public finances.

But the OECD said in a report that Spain should consider raising the retirement age even further by indexing the age to life expectancy increases.

The government is considering extending the period of a person's working life used to calculate retirement pensions — it is now the last 15 years. The OECD says people's entire working life should be used in the calculation, a move that would reduce the average monthly pension.

The OECD, which represents the world's developed countries, also urged further labor market reforms. It said Spain needs to encourage firms to hire and stimulate an economy struggling to recover from nearly two years of recession triggered by a 2008 property bubble burst.

Measures passed in recent months make it easier and cheaper for companies to lay off workers, doing away with a system that provided some of the most generous severance payments in Europe.
The Paris-based OECD said that if these do not manage to boost hiring, the government should consider broader measures to make the labor market more flexible.

The government said Monday that regional administrations — whose finances are a worry as Spain struggles to reduce its deficit from 11.2 percent of GDP last year to the EU limit of 3 percent in 2013 — are set to meet their targeted cuts this year.

Through the third quarter, their combined deficit was 1.24 percent of Spain's GDP while the forecast for the full year 2010 is 2.4 percent of GDP, Finance Minister Elena Salgado said.

The OECD said that if Spain's deficit-reduction measures fail to meet targets the government should consider raising VAT taxes on some goods and services.

[rffrydr]

Grupo Ferrovial SA, was supposed to be the posterboy for loose spanish money expansion in the thread started here. That bit of expansion instead has come off swimmingly:


http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a7uDTfB0Nad4


Just as here. It's not all condos and refis (which are much more tied to families in spain, not individuals BTW).
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Are we sure spain is even "in the woods"? Auctions have been managable and sky-high unemployment reflects immigrant underpinning to housing bust. So there are two tiers here. This a country with half of its GDP coming from trade and 30% of that euro-free to just Germany and France. Look for that to increase as Spain's "Singapore model" gains traction. The deficit? Well that's like most of the west, attributable to oil and gas. Huge overspending in solar this last 5 years will take some of that pressure off.

I can't go long any country who says "never" one too many times--or, that will "crush the market attackers." But I wouldn't be short either. GDP ratios have a way of turning quickly after market panics. Of course we're in the best of all possible depressions so the surprises will come on the upside.

The risk is this: Spain will be used as the chink to get at the EU. But that result has already been achieved. Now it's just a question of stirring the pot.

As in May, looking to buy Santander Pref. under $20. Market just doesn't seem to wanna let 'em go

http://www.economist.com/node/17575123?story_id=17575123
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

[rffrydr]

There's no calming the jackals:

http://www.ft.com/cms/s/0/aabdc6d6-f285-11df-a2f3-00144feab49a.html#axzz15dlO12hS

Things were fine until Merkel and ECB opined. Now all's a flutter again. Santander preferred have yet to be touched. Will look once again to take advantage of a nice spook. US jobs, ironically, will turn this tide. Can't think of anything else at this point.
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Now onto Spain:

http://ftalphaville.ft.com/blog/2010/11/18/408901/swelling-spanish-bond-yields/

Markets must know those "haircuts" or bust trying. They just might when it comes to Spain. This last year of profits alone from Santander cover most of its parent government debt (and Portugul to boot). See above "E. Looming Bust."

What EZ needs to do is implement their "CoCo" structures, contingent capital, with Irish banks/sovereigns that is simple and clear. Market might run out of recession to test that.
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Today is the Tomorrow you worried about Yesterday!