Yes, up to three million. That was the conclusion reached in the 2009 annual report on the Spanish property market prepared by Madrid-based real estate analysts R. R. de Acuña & Asociados. The report is described by Sunday Times Spanish Property Doctor columnist Mark Stucklin as one of the most influential annual reports on the sector, so the conclusions are hardly to be sneezed at, indeed the assumptions made in the calculations appear on the surface to be entirely plausible. In fact, having read the summary of the report in this article here, Variant Perception’s Jonthan Tepper wrote to me to ask whether I thought we were being “dire enough”. Yep. Sufficient unto the day is the direness thereof. Continue reading →

Hungary’s economic correction still fails to convince. Indeed I am not the only one who remains unconvined by the viability of what is currently taking place it seems, since according to the opposition supporting local daily newspaper Magyar Hírlap, none other than the Hungarian Prime Minister himself may be having doubts, as he is reportedly thinking of leaving the helm of the struggling ship placed under his charge before the next general election, which is scheduled to take place sometime early next year.

If this version of events is ultimately confirmed it will only add to the IMFs growing problems out East, since events in Latvia are not going at all according to their liking – see FT Alphaville’s Izabella Kaminska’s “Another Latvian wobble” of last Friday – and indeed Latvia’s government rapidly cobbled together another 275 million lati ($575.6 million) in spending cuts for 2010 yesterday after EU Economic and Monetary Affairs Commissioner Joaquin Almunia called on Latvia on Friday to “renew a national consensus”, and Prime Minister Valdis Dombrovskis paid a flying vist to Brussels, following a parliamentary vote against sending a real-estate tax bill through to the committee stage, implicitly rejecting part of an agreement with the IMF and EU. How many times this year does that now make it that the national consensus has had to be urgently renewed under directives from either Washington or Brussels, could someone please remind me?

Further, Hungary’s main opposition party – Fidesz – which looks well-positioned to win next year’s general elections, are threatening to rewrite the current ever-so-carefully written 2010 budget when they comes to powe next year, according to the latest statements from party president Viktor Orban.

“This (the IMF inspired text, EH) is the most dangerous budget of the past 20 years … never before has a budget put hundreds of. thousands, or even millions of Hungarian families at such grave risk,” Orban told private broadcaster Hir TV in an interview late on Friday. “This budget will not remain in place, we will draw up another one instead,” said Orban, a former prime minister, adding that if in power, his government would create one million new jobs in 10 years.

Well, things certainly do not look good either for Gordon Bajnai or for the EU Commission/IMF team who are behind the budget. Perhaps that is why the IMF’s representative in Hungary, Iryna Ivaschenko, told national news agency MTI yesterday that while the government was committed to its 2010 fiscal targets, there were economic and implementation risks on the nature of which she declined to elaborate. Continue reading →

Vengence, they say in Spain, is a dish which is best served cold. Looking at the pace with which things are now moving here, maybe the waiters are getting themselves ready.

According to Bloomberg the Spanish Dept Agency now has a new head – Gonzalo Garcia – who previously lead the Spanish Treasury’s financial analysis department. Garcia is 35 years old, and already has ten years experience working for the Spanish Treasury in the head that is sitting on those ever so young shoulders, while the person he will replace – Enrique Ezquerra – himself only 37, now becomes economic adviser with Spain’s Permanent Representation to the European Union based in Brussels. Something, it seems to me, is afoot, and it isn’t that hard to work out what. With Spain’s banks having something like 75 billion euros in short term loans which need to be renewed with the ECB in Frankfurt next June (see this post for a full explanation of the background to all this), and the Spanish government having a similar (or before we get to the end of the year possibly somewhat greater) quantity of debt outsanding in one year bonds which will need to be renewed next year along with all the extra debt they will also need to finance next year, and with a domestic banking system which is already struggling to refinance existing household and domestic loans, it isn’t hard to see that the position of Head of the Spanish Debt Department and direct coordination with Brussels are two of the key items on next years Spanish government agenda.

And the only issue left in my mind is whether the head which will need to be served up on the proverbial plate as the ritual offering to ensure the free flow of communication (and money) will not be
none other than that of the existing President of the Spanish government, José Luis Rodriguez Zapatero.

Certainly all the early warning signs are there, and no one can watch Spanish television news, or listen to the radio here without becoming immediately aware that something has now changed, and that he who was once all powerful is now, himself, in his turn steadily being subjected to that big squeeze of which he was, in an earlier epoch, such an admirable exponent himself. Basically I have no doubt that, whether the coup de grace comes later or sooner, Zapatero is now on his way out, and the only real outstanding question I have is whether he will in the end go before xmas (the start of Spain’s EU Presidency) or after June (when it finishes). The decision is I suppose in the hands of the Spanish people, and it is just a question of how much more unemployment they are willing to stomach before those inevitable “casserolades” start to break out.

Interestingly, for those us who follow this kind of thing, one of the obvious candidates, if not to replace him, then at least to take a key role in the new government of economic technocrats which is undoubtedly being prepared even as I write – ex Public Administration Minister Jordi Sevilla – recently left his seat in the Spanish Parliament – in an ominous and deeply significant leaving of the sinking ship with two other ex-ministers Pedro Solbes and ex-Defence Minister José Bono – to go and work for Price Waterhouse Coopers. And irony of all ironies, he had earlier been replaced in the Public Administration Ministry by the unfortunate Elena Salgado, who may well be about to see her short term in the Economics Ministry abruptly brought to an end. But Sevilla’s latest move becomes even more charged with symbolic significance when you consider that the role model for what may now be about to befall Zapatero, Ferenc Gyurcsany, was replaced by the current Hungarian Prime Minister Gordon Bajnai, who immediately called the now Finance Minister Péter Oszkó away from his labours at Deloitte. And Gyurcsany in what could be an early anticipation of what Zapatero may now need to do, resigned while muttering “I am leaving as I am being told I am the biggest obstacle to the structural economic reforms my country is said to so badly need”. Who exactly it was that was telling him this it may be judicious not to ask, but one thing is obvious, you can’t have people always coming from the same consultancy group, now can you? It just wouldn’t look right.

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 →

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 →

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 →

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 →

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, since there are several banking systems and software that help the banking industry, since now a days you can even go online to get the best banking software for collections, which is a great option for banking clients. 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.