Oh It’s All Gone Quiet Over In The Eurozone!

Or has it? According to Anchalee Worrachate in Bloomberg:

“A report from the Bank of Spain showed Spanish lenders borrowed a record 126.3 billion euros ($161 billion) from the ECB in June as investors shunned the nation’s banks. Spain’s banks increased borrowing 48 percent from 85.6 billion euros in May. That compares with a drop of 4 percent to 496.6 billion euros that the ECB provided lenders in the whole euro area. Spanish banks haven’t sold any bonds publicly in the past two months on concern the nation won’t be able to cut its deficit without hurting the economy.”

Pretty hard to argue now the Spanish bank borrowing from the ECB is simply in line with the country’s share of total GDP I would have thought. Also, after having trended upwards ever so slightly for a couple of months, Spain’s industrial output actually fell back again in May (by 0.3%) while output in Germany roared ahead by 2.9%. Obviously not everyone is getting the same benefit from the weaker euro, could competitiveness have anything to do with it, I wonder?

Quoted in the Financial Times earlier today Klaus Regling, chief executive of the European Financial Stability Facility said the fund would be “ready to act whenever the politicians tell us to act.” I guess the situation of Spain’s banks would be one of the things he must have had in mind.

Using a footballing analogy, you get to see a lot in the press about how this club is chasing this player, while that one is chasing another one, until the moment of the actually negotiations comes. Somehow, at that point the sporting press goes strangely silent.

Of course, when those much talked of stress test finally come out, we’ll all be able to see for ourselves that Spain’s banks – apart from a few ropey old Cajas that no one in their right mind would be interested in anyway – are in absolutely sterling and tip top condition (and not like their shabby German counterparts at all). Won’t we José (Viñals)?

Or are those reponsible for the Spanish banking system finally going to face up to their responsibilities, amble out of that closet they have been tightly locked away inside for the last three years, and follow the advice of Jacques Cailloux, chief European economist at RBS, by seizing opportunity provided by this months “getting it all out in the open” fest to start restoring investor confidence by really getting down to straightening out the mess?

Postscript

The number of people employed continues to fall, unabated, as measured by contributers to the social security system. On a seasonally adjusted basis the number hit 17.66 million in June, down from the January 2008 peak of 19.42 million.

Seasonally adjusted unemployment in Spain – as reported to Eurostat – was at 19.9% in May, up slightly from the previous month, and with no real sign of reducing.

House prices continue to fall slowly according to the TINSA index.

and in June were down 16.5% from the December 2007 peak.

The goods trade deficit deteriorated again in April.

As did the current account deficit, which has now widened again considerably from the lows reached in the autumn of 2009.

The manufacturing sector showed very slight growth in June, as both output and new order growth fell back.

As Markit’s Andrew Harker said in his report:

“Latest PMI data highlight the continued uncertainty surrounding the Spanish economy. Output growth slowed for the second month running and firms still do not have the required workloads or confidence to prevent job losses. With the VAT rise kicking in and further austerity measures to follow, there appears to be a real risk of the private sector falling back into recession.”

While services activity actually contracted for the first time in four months.

Again, I will leave Andrew Harker to sum the situation up:

“Latest Spanish service sector PMI data provide some worrying signs regarding the path of the sector. Foremost among these is the first drop in new business since February. Also of note is the marked weakening of sentiment seen in the previous two months amid worries surrounding austerity measures in Spain and the effects these will have on the fragile economy.”

And finally, we have the inflation data, were I have put the CPI up against the German one. Worryingly, after falling sharply at one point in 2009, Spain’s inflation is now once more back over Germany’s.

Which means the the Spanish economy is once more losing competitiveness against the German economy, the exact opposite of what you want to see. And in July VAT went up two percent. Many argue this move is totally benign, but it will be interesting to see how Spain’s retail sales move over the months to come, and how the inflation differential with Germany is affected. Didn’t anyone tell them there are no free lunches in economics? And how cutting back on government fiscal spending – necessary as it is, since more government deficit is only going to get the country more into debt, not to mention the impact on investors – is going to help sort all this lot out, well I’m afraid that’s a complete mystery to me.

This entry was posted in A Fistful Of Euros, Economics: Country briefings, Economics: Currencies by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

8 thoughts on “Oh It’s All Gone Quiet Over In The Eurozone!

  1. Pingback: Noli Irritare Leones » Blog Archive » Links: Debt, Monetary Policy, Liquidity Traps, Austerity Measures

  2. Pingback: FT Alphaville » Further reading

  3. “Klaus Regling, chief executive of the European Financial Stability Facility said the fund would be “ready to act whenever the politicians tell us to act.” I GUESS the situation of Spain’s banks would be one of the things he must have had in mind.”

    Brilliant journalism: lets all just make our argument guessing what people have in mind!

    I would have GUESSED that after talking with IMF officials, and recommending contractionary fiscal mesures for Spain, Edward would be desolated when witnessing how conterproductive they are. But how wrong I could be!

    Then again how could I be surprised? He manages to find a negative reading in every indicator he uses: in one article he reckons house prices should fall, next line he points at the desolate situation of house prices dropping. One paragraph he is asking for salary reductions, next paragraph he is complaining about high inflation. When mentioning unemployment he choses to use absolute figures when these rise, if they are decreasing (as is the case) he opts for percentages.
    There is possible no free lunches in economics, but our Edward has found the perentorial free lunch on foreign economy reporting: whatever happens his discourse will be the same to those that want to hear the same.

    Regarding Spanish Banks stress tests maybe he should check with Goldman Sachs analysts, see if they agree with José Viñals:

    http://in.reuters.com/article/idINIndia-49831020100702

    http://www.imf.org/external/np/bio/eng/jv.htm

    On the other hand Mr. Jacques Cailloux could have advised better his employer RBS before being taken over by the british government or having to sell its business to an spanish bank, rather than give advice to the spanish banking system:

    http://news.sky.com/skynews/Home/UK-News/Spanish-Bank-Santander-Makes-Bid-To-Buy-Around-300-Branches-Of-Royal-Bank-Of-Scotland-Banks/Article/201006315651249

    Then again, Santander happen to be buying things everywhere:

    http://www.businessweek.com/news/2010-07-12/santander-buys-seb-german-branches-for-eu555-million-update1-.html

    http://www.rttnews.com/Content/TopStories.aspx?Id=1329069

    http://breakingnews.gaeatimes.com/2010/06/24/banco-santander-affiliate-to-buy-32-billion-of-citis-auto-loans-35999/

    http://www.bankinfosecurity.com/articles.php?art_id=1015

  4. Well it seems that censorship has arrived to this blog. Hooray!!

    Edward readers will not have to put up with any criticism of his thesis.

    The only thing I can wait for now is the 24th of July to see if Ecofin stress tests give spanish banks the gold cup, just as FIFA gave one recently to the spanish football team. It is a pity that we won’t see how well would british banks have performed in such tests. Well, nothing new, none of their four national teams arrived to the european football cup finals two years ago, when Spain also gained a gold cup. Whatever happens I am sure Edward will find a negative twist to the truth.

  5. Edward Hugh, maybe you you would like to consider a couple of points:

    1º You seem to believe that sustainability has to do with debt levels. I will treat here the case of corporate debt.
    Suppose there is a debt. It is because someone made a loan of money: a loan of existing money.
    You know, you can´t borrow a money that doesn´t exist (even if its supply is increased through its circulation, an “economy of use” matter).
    Suppose now that the propietors of that existing money do not loan it to others, but thet invest it, for example, they constitute a new enterprise and subscribe the shares, or financing through growth capital. In this case you have not debt but you have an investment that is subjetc to busines losses in case of overproduction. So, I mean, there is only a merely formal difference (and so, for me, it is not the core problem).

    2º The United States have a big current account deficit, does this mean that they have an uncompetitive economy? I mean, they appear to have high productivity. So, for me, this is another formal issue.

  6. It’s possible to have a current account deficit because the economy is producing new companies that need the capital and the rest of the world, in the aggregate, is willing to help finance their capital needs. Or existing companies want to expand, and foreign companies want to set up new plants, warehouses, or retail outlets, and come in and spend money on that, all of which could finance a nice current account deficit.
    I don’t think that’s the case in Spain, however. I’m willing to be proven wrong. Hoping, even.
    Meantime, the only way out continues to be a fall in the real wage rate and in the real price of Spanish exports. The only politically acceptable means to that end is a currency that falls against its principal trading partners.
    Who might those be, I wonder? Well let’s see: according to the CIA World Factbook these are:

    France 18.3%, Germany 10.6%, Portugal 8.7%, Italy 8%, UK 6.7%, US 4.2% (2008)

    Not surprisingly, its neighbors, mostly, mostly in the Eurozone. So, a fall in the euro isn’t going to do anything for the competitiveness of Spain’s exports.
    The only way out, in short, continues to be to leave the euro. The only question on the table, realistically, is when.

  7. Interestingly, in the US, all sense of urgency about the Eurozone’s problems has disappeared (at least in the general populace).
    The gestalt seems to be that the bailout by the ECB is working. However, Greece is paying 5% for 6-month bills, Spain and Portugal seem to be moving toward recession, etc.
    Of course, the US appears to me to be moving back towards recession (see ECRI data, consumer confidence, etc.) while the Baltic Dry indicates perhaps the entire world is slowing.
    Will we ever try to address the real issues (govt deficits, zombie banks, non-performing loans) or try another “kick the can down the road” solution of QE, bank bailouts, so-called stimulus? Given the politicians we (in US) have, I guess the answer is obvious.

  8. “Klaus Regling, chief executive of the European Financial Stability Facility said the fund would be “ready to act whenever the politicians tell us to act.” I GUESS the situation of Spain’s banks would be one of the things he must have had in mind.”
    Brilliant journalism: lets all just make our argument guessing what people have in mind!
    I would have GUESSED that after talking with IMF officials, and recommending contractionary fiscal mesures for Spain, Edward would be desolated when witnessing how conterproductive they are. But how wrong I could be!
    Then again how could I be surprised? He manages to find a negative reading in every indicator he uses: in one article he reckons house prices should fall, next line he points at the desolate situation of house prices dropping. One paragraph he is asking for salary reductions, next paragraph he is complaining about high inflation. When mentioning unemployment he choses to use absolute figures when these rise, if they are decreasing (as is the case) he opts for percentages.
    There is possible no free lunches in economics, but our Edward has found the perentorial free lunch on foreign economy reporting: whatever happens his discourse will be the same to those that want to hear the same.
    Regarding Spanish Banks stress tests maybe he should check with Goldman Sachs analysts, see if they agree with José Viñals:
    http://in.reuters.com/article/idINIndia-49831020100702
    http://www.imf.org/external/np/bio/eng/jv.htm
    On the other hand Mr. Jacques Cailloux could have advised better his employer RBS before being taken over by the british government or having to sell its business to an spanish bank, rather than give advice to the spanish banking system:
    http://news.sky.com/skynews/Home/UK-News/Spanish-Bank-Santander-Makes-Bid-To-Buy-Around-300-Branches-Of-Royal-Bank-Of-Scotland-Banks/Article/201006315651249
    Then again, Santander happen to be buying things everywhere:
    http://www.businessweek.com/news/2010-07-12/santander-buys-seb-german-branches-for-eu555-million-update1-.html
    http://www.rttnews.com/Content/TopStories.aspx?Id=1329069
    http://breakingnews.gaeatimes.com/2010/06/24/banco-santander-affiliate-to-buy-32-billion-of-citis-auto-loans-35999/
    http://www.bankinfosecurity.com/articles.php?art_id=1015

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