Spain’s House Sales Stabilise, While Prices Continue Their Fall, And The EU Forecast The Country Has A Long Hard Road Ahead

Spanish house sales were down an annual 20.3% in July, with a total of 37,039 homes changing hands. 50.5% of these were new according to data released today from the National Statistics Institute (INE). The interannual rate was thus down over June, when it stood at 25.5%. In fact, month on month sales were up 4.7%, although over the first seven months of the year as a whole there was an inter-annual drop of 33.1%.

However, while it is clear that sales have been improving now since April, which was definitely the worst month to date, with monthly sales down 65.1% over the January 2007 peak, the recovery rate is very timid, and if we take into account that there must be more well over 1 million empty, unsold new houses all over Spain, and in July there was only a net difference of 18704 homes (50.5%) or about 1.9% of the total, then across Spain as a country about 374 houses per Spanish province were sold. At the current rate, it would take 1,000,000 / (18704 x 12) ≈5 years just to get back to the starting block, and this with no new homebuilding at all between now and 2015. And if we were start to think about migrants who change country, young educated Spanish people who emigrate in search of work, and residential tourists who simply give the keys back and go, then as long as there are more than 374 immigrants/residential tourists leaving each province each month, the Spanish housing market will simply be treading water. This is the very high cost which could be attached to having that “L” shaped non recovery which the irresponsible government “non policies” risk inflicting on the Spanish people.

Continue reading

Bank Rossii Eases Further As Russia’s Economy Contracts At A Record Rate

Russia’s central bank this week lowered its main interest rates for the seventh time since April 24 – lowering the refinancing rate a further quarter percentage point. The decision came hard on the heels of the announcement that the Russian economy suffered a record economic contraction in the second three months of the year and refelect the growing recognition that the country now faces a painfully slow recovery. Just how painful things might become will form the subject matter of this report.

Risks Rising On All Fronts

Bank Rossii cut the refinancing rate to 10.5 percent from 10.75 percent (following a quarter point reduction on August 10), and lowered the repurchase rate charged on central bank loans to 9.5 percent from 9.75 percent, effective from tomorrow. The bank has now cut the rates six times since April 24. Nonetheless Russia’s benchmark refinancing rate is still the second-highest in Europe, after the 12% on offer in Serbia and Iceland – meaning ruble denominated assets remain an attractive carry pair with either Euro or USD, and that with inflation stuck around the 12% mark the problems for central bank monetary policy are legion.

In the report that follows I will argue how the steady and systematic long term mismanagement of Russia’s monetary policy has now created a veritable Procrustean bed of problems for Russia’s economy and society. Failure to address the underlying inflation problem between 2005 and 2008 meant that large structural distrortions were accumulated in the economy, including a massive problem of commodity export dependence, a problem which effectively turned the country into a veritable disaster waiting to happen if ever there should be a protracted lull in the secular rise in energy prices. That lull has now arrived, and it is not at all clear just for how long we will all need to get to learn to live with it.

In a more or less reasoned analysis Capital Economics suggest that oil prices could fall back to somewhere around $50 a barrel in 2010. If this forecast proves anywhere near correct, the Russian economy is going to be subject to major downside risks, due to the difficulties posed by:

i) financing the fiscal deficit
ii) rising unemployment
iii) growing bad loans in the banking system
iv) refinancing external debt
v) the continuing high level of consumer price inflation and the difficulties this poses for monetary policy at the central bank

Added to all this, the economy will clearly not rebound as easily as many seem to foresee, adding to the risk element on all fronts. The Russian Economy Ministry seem to be getting ahead of themselves at the moment, since following a period when they have tried to get the bad news all out up front, just last week they decided to raise their 2010 forecast to a growth of 1.6 percent – up from the previous 1 percent forecast. This growth, if realised, would follow an anticipated shrinkage of some 8.5 percent this year, based on the September 9 estimate of Economy Minister Elvira Nabiullina that output may grow 3.9 percent to 4.5 percent in the second half of this year compared with the first six months – such strong optimism I find hard to accept, unless the turnround in global economic activity turns out to be much stronger than the one we are currently seeing. Continue reading

The crisis* in Lithuania

*So you thought we meant economic crisis?  Of course not.  Football!  The kind of crisis that comes with losing to the Faroe Islands in a World Cup qualifier.  Then again there are other matches this evening that people might want to discuss.  We’ll try to bring word of the Saudi Arabia vs Bahrain match in Riyadh, winner plays New Zealand.   One never knows what kind of geopolitics could come to the surface in that one.

UPDATE: No easy way to summarise the evening.  A bad night to be a small nation from the UK, a better night for small nations elsewhere.  France still looking for a path to the finals after an ill-tempered night at Marakana as they say in Belgrade.  But in that Riyadh match … incredible stuff as two late goals, one from each team, see Bahrain through to a playoff versus New Zealand for a spot in South Africa.  King Abdullah will be making some phone calls.

Latvia’s Agony Continues In The Second Quarter – With Little Relief In Sight

Latvia’s economy shrank a revised 18.7 percent in the second quarter of 2009 over a year earlier in what was the second-steepest drop in the entire European Union (worsted only by Lithuania) according to detailed data released by the statistics office yesterday. The contraction, which is now the largest since quarterly records began in 1995, was revised down from a preliminary estimate of a 19.6 percent annual drop. And Latvia’s problem can easily be seen in the above charts which show the most recent movement in exports, and quarterly data for constant price imports and exports. The Latvian economy grew driven by domestic consumption and increased borrowing during 2006 and most of 2007, but then the country ran out of extra sources of cash, and so imports slumped, followed by exports as the global economy entered crisis. Now its time to pay back, which means the lines we see in 2006 and 2007 will now need to be repeated, only this time with exports on the top and imports below. Of course, really doing this will only be possible once the global economy recovers. But the key question is, will Latvian export capacity be ready when that critical moment comes, or will Latvia’s agony continue, stuck in a horrid “L” shaped “non-recovery”? The most recent data on foreign trade, which saw exports fall and the trade deficit once more widen suggest that the latter danger is far from being a mere theoretical one.

And I am not the only one to be raising it, since according to the latest report out from Nordea Bank, Estonia, Latvia and Lithuania, may well suffer deeper economic contractions than previously estimated as government austerity measures simply serves to sap domestic demand while export growth remains muted.

So well done Nordea! But please permit me to say that this discovery does come as a bit rich from analysts who have persistently remained in denial that the key to Latvia’s recovery was a substantial reduction in the price level in order to facilitate exports (on my view better achieved by formal devaluation, but by the express desire of the elected political leaders of the Latvian people now being carried out via a convoluted and painful process known as “internal devlauation”).

Still, it is interesting to see mainstream analysts starting to question the current orthodoxy that fiscal prudency will (due to the impact on investor confidence) lead to recovery in Eastern Europe, while here in the West our leaders have just re-affirmed the need to maintain fiscal stimulus, given the fragility of even those earliest signs of recovery.

Indeed the analyst consensus is becoming more and more pessimistic. Danske Bank say the following in their latest Emerging Markets report:

“Worries over Latvia’s public finances continue. Despite aggressive cuts in public spending so far this year, total central government spending in August 2009 was, extraordinarily, exactly the same as in August 2008. This is partly due to spending cuts being offset by increased social spending, and partly to some ministries and agencies awarding their employees big pay increases in June this year before imposing cuts in July as part of the IMF/EU programme. It is still too early to say that everything is fine in the state of Latvia.”

In the following monthly report I will examine just what evidence there is for the idea that Latvia’s economy has actually bottomed out. Continue reading

There Is Another Shoe To Drop In The Global Economic and Financial Crisis – And The Focus Will Be On Europe’s Perifery

‘As far as I am concerned, this is … the most complex crisis we’ve ever seen due to the number of factors in play’
Spanish Economy Minister Pedro Solbes speaking to the Spanish radio station Punto Radio September 2008

“‘The global imbalances have to add up to zero and so, if the US is going to be less the consumer importer of last resort, then other countries are going to need to be in different positions as well.”
Director of the US president’s National Economic Council Larry Summers, speaking over lunch with the FT’s Chrystia Freeland.

Basically what we now have before us – as Pedro Solbes pointed out before being uncerimoniously defenestrated from the inner circle of the Spanish government – is an extremely complex situation and problem set. The background has evidentally been an unprecedented global financial and economic crisis, but this crisis has affected countries unequally, and it is noteworthy just how many people in what could be called the “weaker” countries have often sought refuge in the global nature of the crisis, rather than asking themselves just what it is exactly about their own particular economy that makes them “weaker”, and more vulnerable, and why the crisis has struck more severely “here” rather than “there”. Thus there is a great danger that people take refuge in the fact that the crisis is global in order to avoid thinking about the actual reality that faces them. This danger becomes even more of an issue as some countries begin timidly to return to growth, leaving others stuck in the mire – and possibly in danger of bringing the whole pack of cards tumbling down on top of them again. One such danger is evident in China (for which see the numerous warnings from Andy Xie) but others are for me somewhat nearer home, on Europe’s periphery. A number of countries in Eastern Europe immediately come to mind – not only the Baltics, but also Russia, Ukraine, Bulgaria, Romania, Hungary, Serbia and Croatia. And in Southern Europe Spain and Greece stand out as in particular need of what Jean Claude Trichet would undoubtedly call “extreme vigilance”. Continue reading

P2P In The Spanish Economy

Well, we are getting a lot of waffle out there (noise), and talk about greens shoots and muted recovery, but all too often what is lacking is anything very substantial in the way of hard data to back up the various arguments. In particular, when it comes to Spain I would like to know just where people are finding the justification for all the optimism, since as we will see below, there is little in the way of hard data to suggest anything other than continuing deterioration. In this post we will look at the most recent data for three key indicators – construction, industry and retail sales, as well as the most recent services and manufacturing Purchasing Managers Indexes (August). Continue reading

The Perfect Storm In The Spanish Banking Teacup

Well, Jonathan Tepper’s initial Variant Perception Report on the Spanish Banking system (here, with Catalan translation here) has certainly stirred things up. After a string of articles in the Madrid press (including this one here, which talks of the “Seven Days Which Shook The Spanish Financial System”), Iñigo Vega of Iberian Equities – one of the leading Spanish bank analysts (indeed Iberian Equites was ranked 4th by Starmine for Ibex 35 stocks in 2008, it will be interesting to see if they keep their rating in 2009) – has come out with a full frontal reply. The reply is covered by FT Alphaville’s Tracy Alloway here, and I reproduce the full text here, on my Spain Economy Watch blog.

Not surprisingly Varariant Perception has come back in full swing, and you can find Izabella Kaminska’s FT Alphaville coverage here, while I reproduce the full text on my Spain Economy Watch blog.

Perhaps the key quote in the whole affair is this one from Variant Perception:

“Non-performing loans are being passed off as current, vacuumed up and rolled ito cedulas to deposit at the ECB’s repo window. (Incidentally, that is the only way many Spanish banks are finding any semblance of liquidity right now. Without the ECB, some Spanish banks would have the same liquidity problems that subprime mortgage originators had. The ECB is a mega warehouse, effectively, for the Spanish banking system. This is intimately tied in to the question of funding excess consumption in Spain, which we discussed.)”

As Danish blogger Claus Vistesen so aptly puts it in his summary on Alpha Sources:

In my opinion and apart from the glaring neglect, in the Iberian Equity report, on the macroeconomics of the situation this is the most important omission. This is to say, that had it not been possible (which it still is) for Spanish banks to park many of their assets at the ECB as collateral for funding, they would have effectively needed to mark to a non-existing market (i.e. write off the whole thing in one swoop in which case it would have been bye bye Sandy). I mean, this was what happended with Bear Stearns and Lehmann and then only afterwards did the Fed (and the “appointed” buyers) wade in to scoop up these assets which are now sitting and waiting for better times (presumably, I mean, I don’t know how quick they are ground down to reflect market fundamentals).

Finally, a recent quote from the Economist:

The new accounting guidelines will help Spanish lenders smooth out the effects of the property bust over time. But the risk is that the problems are merely postponed. The ratio of bad loans to the total, property included, has tripled to 4.6% over the past 12 months as unemployment appears to head inexorably towards 20%.

The true picture is worse still. Commercial banks have bought about €10 billion in debt-for-property swaps, according to UBS. Spain’s savings banks do not disclose the figure. Assume it is similar to their commercial peers and reclassify all these property purchases as bad loans, and then the non-performing loan ratio would be 5.7% (before any further adjustments for loan restructuring). Deferring losses to mañana doesn’t change the extent of the difficulties facing Spain’s financial system.

So, as the Economist says, we really don’t know what the real level of Non-performing Loans in the Spanish banking system is at this point, mainly because the system itself is not providing enough high-quality, detailed, credible information for us to make that judgement. That is partly why Jonathan Tepper is, I imagine, reduced to popular press articles and testimonials from insiders. And one last question, is there anyone still left out there who continues to believe that the ratio of bad loans actually fell to 4.6 percent in June from 4.66 percent in May? I think all that is necessary for Jonathan’s point – that Spain’s banks are going to some considerable effort to cover up the extent of their growing bad loan problem – to be valid is that the former claim is untrue. C’mon gentlemen, try offering some credible numbers and then people may start to believe you. Have you never heard of getting the bad news all out in order to be able to get on with the job? But isn’t this just Spain’s problem at the moment, people are going to any length not to get on with that badly needed economic correction.

Global Manufacturing Continues To Recover In August

Global factory business activity expanded in August for the first time since May 2008 in a broad-based revival, witnessed especially in the United States and Japan, according to the global PMI index, produced by JP Morgan. The index rose to a 26-month high of 53.1 in August.

The general picture is positive, and manufacturing output generally held up better again in August, although only a few countries managed to actually show an expansionary headline reading. To be clear, when reading the individual countries it is important to understand that the headline index is made up of a series of sub indexes – like current output, sales, future orders and employment, and so the indicator is not equivalent to the actual industrial output reading later published by national statiistics offices. Indeed, since current output is only one of the sub indexes, the headline index can show deteriorating conditions even while current output is growing. Continue reading

Renewing Roads in the Caucasus

Turkey and Armenia are tantalizingly close to opening diplomatic relations, and may re-open their border — which has been closed since 1993 — by the end of 2009.

The BBC says,

They are to hold six weeks of domestic consultations on the move [to have diplomatic relations] after which their parliaments will vote on it, their foreign ministries announced.

FIFA has helped, again according to the BBC:

Anticipation of a diplomatic breakthrough has been growing ahead of a planned visit by Armenian President Serge Sarkisian to Turkey on 14 October.

He is due to attend the return leg of a World Cup qualifying football match between the two countries.

Swissinfo is chuffed at the local angle:

Historical foes Armenia and Turkey took a step toward reconciliation on Monday by announcing they would launch final talks aimed at establishing diplomatic ties.

Both sides said in a joint statement, also signed by Switzerland as mediator, that they expected the talks to take six weeks and to end with an agreement setting up and developing diplomatic ties.

If both parliaments approve the protocols that emerge from these talks, the border would open two months later. I saw signs of this development earlier in the year, and wrote a bit more analysis when the two countries announced their framework for normalizing relations, back in the spring. The Armenian Ambassador to Georgia has apparently been a regular visitor to the Turkish Ambassador to Georgia, so these talks are proceeding along a number of tracks and are probably getting quite detailed.

I don’t think that Armenians have been able to visit Mr Ararat since before the Soviet period. (Anyone with more historical knowledge care to enlighten me?) That might change by the end of this year.