This time, Spain has secured a $125 billion bailout of its essentially bankrupt banking system, saving it from the consequences of the construction bust – for the time being. But the cost will essentially be passed on to the country’s sovereign debt, exacerbating Spain’s other problem: how to stabilise the government debt ratio.
Indeed, in the latest turn in the Eurozone debt crisis, Gavyn Davis estimates that a bank bailout of €80 billion, while solving the problem of the Spanish banks, would be at the cost of adding around 11 percentage points to the government debt ratio, taking it to over 100 percent of GDP by 2015. As it is, Spain is paying around 7 percent borrowing costs; with austerity measures still to bite and unemployment at 25%, tax receipts are likely to fall and the situation will only get worse.
MetalMiner welcomes guest commentary from Pepe Valderrama of Fullstep.
Recent media coverage paints a dreadful picture of Spain’s current economic condition and outlook. Years of excess growth based on an enormous housing bubble and fueled by unusually loose monetary conditions — which burst in 2007 — seem to have brought the country to its knees.
Part of the banking system is currently being bailed out, unemployment at nearly 25 percent is the highest of any developed economy, and recession forecasts set out a seemingly impossible path for recovery. But look deeper and further and you can imagine a different outcome for the country of the bulls, the fiesta and the siesta.
As sourcing and procurement specialists, we have and continue to live the experience of Spain’s companies from all sectors, quickly restructuring and aggressively cutting costs. In manufacturing, asset and capital management, banking and even in the government sector, we are carrying out accelerated cost reduction programs to help optimize spend through all purchasing categories.
So is Spain’s economy indeed doing better, not worse?
Although its government finances don’t look so bad relative to Italy’s, Spain has the potential to go the way of Ireland, where relatively low government debt ballooned as the state was forced to bailout banks. As with Ireland, the problem will be the property market; in Spain’s case, it is the opaque state of the local Cajas savings bank finances.
As Liam Halligan wrote last week, total private sector debt in Spain is almost 300 percent of annual GDP, half as much again as Italy. With property prices 30-40 percent down on their 2007 peak, swaths of non-performing loans lurk on the balance sheets of Spanish Cajas with potential as the economy slides further to default and create a massive domino effect.
Don’t Let the Prime Minister Fool You…
Whatever Mr. Roy’s assurances about the state of Spain’s economy, the figures tell a different story. Output fell 5.1 percent year-over-year in February, after 4.3 percent in January and 3.5 percent in December. Durable goods fell 14.8 percent, the sixth successive monthly fall. Capital goods output fell 10.6 percent, according to an article last week. Unemployment is already 23.6 percent on the Eurostat measure. David Owen from Jefferies Fixed Income expects this to reach 27.5 percent by the end of the year (which is roughly 32 percent using the old measure from the 1990s, based on a Bank of Spain study).
This is socially and politically an untenable situation. Informed Spaniards are beginning to talk about life after the Euro — and this is before the powerful unions have begun to seriously oppose the imposition of austerity measures for which the government is signing up.
Greece was hugely significant both last year and this year for commodity markets, not just directly impacting buy and sell sentiment day by day, but undermining the whole ethos of investment in what became seen again as riskier commodity products.
The size of Spain threatens the very existence of the Euro in its current form, so stand or fall with the single currency, daily news from the area will continue to cause immense volatility in spite of otherwise strong fundamentals for metals like copper.
Across Europe, figures understandably vary. Whereas Germany and France’s jobless rates held steady at 5.7 percent and 10 percent, respectively, Spain’s hit 23.6 percent in February, up from 23.3 percent in January and Greece’s was at 21 percent in December — since then, the authorities have been unable or unwilling to continue reporting the numbers. Unemployment among 18-25 year-olds though, is greater than 50 percent in both countries.
Meanwhile, PMI numbers are falling. Spain’s fell to a three-month low of 44.5 in February and Greece recovered to 41.3 from a record-low 37.7 in January, the economy is clearly still contracting fast. In Germany, manufacturing contracted last month while in France activity dropped at the fastest level in two and a half years, according to the WSJ.
With China slowing (the latest official PMI figures conflicting with HSBC’s showing a decline suggest no more than the general trend is still positive, if slower) and raw material costs rising, Europe will continue to be a drag on global recovery.
Indeed, it is those rising raw material costs that probably present the greatest challenge. Globally, input price inflation in March was the highest in eight months, with rising oil prices presenting the drag on GDP, representing a massive transfer of wealth from developed economies to oil producers.
It is possible the US’ recovery over the last 12-18 months has in part been due to the historically low natural gas prices and the knock-on suppression of chemical feedstock prices. It could also be argued that the large delta between global oil prices (as displayed by the Brent crude price) and US crude prices (as displayed by West Texas Intermediate) has also benefited the US relative to Europe.
As the US gradually adds unconventional oil to its reserves of unconventional natural gas, this advantage may be enhanced, but the economies of scale, unified politics, and integrated redistributive taxation — not to mention single official language — continue to support the more dynamic nature of the US market relative to Europe’s, debt crisis or not.
Outside of Europe, the Netherlands is often overlooked in the debt crisis debate and analysis, largely because it lacks the GDP of other core countries — $780 billion as compared to Germany’s $3.28 trillion and France’s $2.56 trillion. (Even Spain at $1.41 trillion and Italy at $2.01 trillion are considerably larger.) But the Netherlands is also overlooked because of its relatively small landmass and population.
It is a mistake to dismiss the Dutch as peripheral to the workings and future of the EU. The country punches well above its weight both economically and, more importantly, politically. In the halls of EU power brokers, the Netherlands has been a keen advocate of austerity, a natural extension of its Germanic approach to hard work and fiscal conservatism — a doctrine that has served it well over the years, achieving a high standard of living and a pivotal role as the entreport to the industrial heart of Europe.
So the recent political crisis faced by the Liberal-led coalition in the country is all the more intriguing for what it tells us about possible futures for the European Union.
Where the Netherlands Economy Stands
The Netherlands has slid into recession this year, resulting in a sharp rise in its projected 2013 deficit to 4.6 percent. At the same time, the spread between Dutch and German 10-year bonds has risen over 20 basis points as the markets have worried the country may lose its triple-A rating, a fear heightened by the political deadlock.
The crisis is about how to bring that down to the 3.0 percent target, which the country has been at the center of insisting other European states should aim for. Although the Netherlands has led by insisting Greece, Portugal, Ireland, Spain and Italy must adopt harsh austerity measures if they are to qualify for any support, nevermind bailouts, the government cannot now agree on how to bring its own house in order.
A row between the Liberals and the far-right Party for Freedom (PVV) means the government is short on votes needed to push reforms through, even after three weeks of secret talks. A report by the “Euro-sceptic” (as the FT put it) research group Lombard Street, a UK consultancy, is probably not helping things.
Will the Netherlands Leave the Euro?
The FT states the report was prepared for the PVV and is pessimistic about the euro-zone’s future. Under its worst-case scenario that Greece, Portugal, Italy and Spain all have to leave the euro-zone after failed bailout attempts, it concludes that the Netherlands would save €120 billion over three years if it left the single currency now bolstering the PVV’s antagonism toward cuts, which would not be necessary if the country was not part of the Euro.
The report painted a bleak future for European core countries Germany, the Netherlands, Finland and probably France, saying austerity programs and internal devaluation would be unable to restore peripheral European economies to competitiveness, meaning the euro-zone would become a transfer union.
Will the Netherlands drop out of the Euro and go it alone, as the report recommends? No, almost certainly not, but the very fact such hard-line positions are holding any credence in the Hague underlines how troubled the core states are at the almost inevitable prospect of them having to fund bailouts in southern states for years to come.
In the autumn of 2010, the International Monetary Fund thought Greece would shrink by a rather modest 2.6 percent in 2011. We now know the economy last year fell about 7 percent. The Greek fiscal position was bad not only because of a lack of effort, but also because the economic problems were far stronger than expected; the fear is that with 25%+ unemployment and a severe economic squeeze just starting, Spain will contract more than expected. Major deficit reduction in the wake of economic collapse is near enough impossible, the FT suggests, yet the more Spain resists deficit reduction, the greater the eventual scale of the problem will be.
An article in the Independent postulates a third cause for concern among investors, which unfortunately runs counter to the previous positions; namely that austerity, demanded by the EU, is driving the Spanish economy further into the mire and making the need for a rescue (which the EU might not be able to afford) all the more likely.
The problem is Spain cannot address both fears. They either implement austerity measures to satisfy conventional wisdom and their EU paymasters, or they try to reduce debt via growth, which essentially involves stimulating the economy – almost impossible to do while simultaneously reducing government spending and trying to balance the books.
As with Greece, Germany is claiming that the existing facilities are sufficient, but it may be, just as with Greece, that the market has other ideas and that in order to avert a run on Spanish debt, eventually the richer northern states will have to stump up a bailout for Spain as they did for Greece.
The scale of the problem, however, is on a whole different magnitude with Spain.
Just when we thought the European debt crisis was behind us, at least for a while, it is back center-stage and frightening the markets. Not yet frightening them as much as it should…but give it time.
As Greece slips from the front pages, the much larger problem of Spain takes the limelight. Spain Prime Minister Mariano Rajoy’s PP party failed to win a majority in the recent regional elections for Andalusia, according to the Telegraph.
Ruling from a minority position will severely hamper the already tough challenge the PP party faces in Andalusia to implement austerity measures demanded of the whole country by the rest of the EU. Where Andalusia has led other provinces will likely follow as a national strike this Thursday underlines widespread opposition to further austerity as the economy gradually implodes.
Yields on Spanish debt have started to rise again, as investors fear either Spain’s unwillingness to implement the required cuts or a leaking of support by Spain’s EU partners, or both. So far, rates are “only” at about 5.4 percent, up from 4.9 percent at the beginning of the month, but anywhere over 5 percent is painfully high and much depends on the market’s confidence that debt reduction will be delivered.
Following a significant deficit overshoot last year, Mariano Rajoy informed Brussels earlier this year that it was aiming for a budget deficit this year of 5.8 percent of gross domestic product, significantly higher than the 4.4 percent agreed earlier. Following intense public and behind-the-scenes “discussions,” Spain and the EU agreed on a revised target of 5.4 percent for this year, but kept the 3 percent target for next year.
The market’s fear is Spain will not deliver. Indeed, to achieve a significant budget reduction in the face of a contracting economy is a major challenge, even with the population behind you. On top of this, the suspicion is growing that Spain’s position is even worse than it seems as projection falls short of reality.