The Perfect Storm In The Spanish Banking Teacup

Posted on by

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.

Global Manufacturing Continues To Recover In August

Posted on by

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

Posted on by

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.

Slovenia Has a Better Second Quarter, But the Slump Continues

Posted on by

Sovenian GDP fell by 9.3 percent in the second quarter of this year when compared to the second quarter of 2008. This was the third quarter in a row which has seen a fall in Slovene GDP, and the was the deepest annual drop so far in the current economic crisis. In the first half of 2009, GDP decreased by 8.8 percent compared to the same period of 2008. On the other hand, seasonally and working day adjusted GDP increased by 0.7 percent compared to the first quarter of 2009 technically making a break in the recession.

But before we get too excited about this fact, we need to consider that this escape from recession was simply a technical detail, and due to movement in the trade impact. Both exports and imports fell sharply – exports of goods and services by an annual 21.3 percent and imports of goods and services by 24.8 percent, so since exports decreased less than imports the external trade balance contributed +3.1 percentage points to GDP annual volume growth, or put another way, without the slump in imports the drop in GDP would have been even stronger. Of course, it sounds funny to say you come out of recession when living standards actually fall.

In addition, gross capital formation slumped, falling by 36.7 percent over the second quarter of 2008. In the January-June period, gross capital formation decreased by one third compared to the same period of 2008 and its share in GDP fell from 32.2 percent in 2008 to 22.1 percent.

So exports, imports and investment are all still falling. Continue reading →

Yes, it comes down to bias. Whose bias do you want?

Posted on by

Broadcasting regulators: they’re creationists. They want to control everything. Well, OK then. Let’s try and follow this through. I give you an allotment gardener. As it happens, this gardener only likes to grow potatoes in his patch. In the neighbouring allotment, we find another gardener, and she likes to grow as many different plants as she can; from aloe to zinnia, it’s all in there. Which of our two gardeners is a creationist? Can’t say? I’d suggest, then, that calling broadcasting regulators creationists is a mis-analogy. Disbelief in natural selection – note, that’s natural selection – has almost nothing to do with preference among kinds. So maybe better to leave creationism out of it.

Mis-analogy number two: the monopoly:

There is a land grab going on – and it should be sternly resisted. The land grab is spearheaded by the BBC. The scope of its activities and ambitions is chilling. Funded by a hypothecated tax, the BBC feels empowered to offer something for everyone, even in areas well served by the market.

Murdoch junior’s insinuation is that the BBC is a rent-seeking organisation that is attempting to build itself into a position of market control. Now the BBC is in some sense a monopoly, in that it receives most of the public broadcast funding available in the UK, but James Murdoch conveniently ignores the fact that the BBC is also a state agency limited by charter, and has been so since its founding nearly ninety years ago. License fees don’t go up when the BBC decides the time is right, and they don’t go up by an amount it thinks it can get away with. Instead, government decides what the BBC can do (although it only sets broad parameters) and also decides what revenues it will receive. Regulation is already in place, to say the least.

What’s more, what ‘land’ is there for the BBC to grab? There’s a range of broadcast technologies and – as far as I can tell – none of them are mutually exclusive. My (non-specialist) understanding is that they work pretty much as follows:

(1) Terrestrial broadcast

Rights to terrestrial broadcast spectrum are regulated by the state; a portion is reserved for the BBC (and ITV and Channel 4) and the rest is auctioned. Since digital broadcasting allows more information to be broadcast in a smaller part of the spectrum, there’s actually more ‘land’ available now than there was before;

(2) Satellite broadcast

Here the bar to entry is not a shortage of spectrum but the cost of launching satellites, installing dishes, etc. and this is a hurdle that Sky, the company of which James Murdoch is non-executive chairman, has already jumped; the BBC has no ambitions to be a player in satellite broadcast, although Sky does carry BBC channels;

(3) Cable broadcast

In the UK, cable TV is constituted of a number of local geographic monopoly suppliers, none of which is the BBC; Sky does not provide cable TV service in the UK, although, as with the BBC, some of its channels are carried on cable;

(4) Internet broadcast

Here, the potential monopolists are BT and the cable TV companies, through their control of the infrastructure; however (in stark contrast to satellite and cable) the internet is arranged so that the means of access is transparent to the user, and anyone anywhere can have a web site, and that includes Sky and the BBC.

From this brief survey, I’d note two things. One is that there is plenty of space and opportunity alongside the state broadcaster. The second is that the organisations which control the various bits of infrastructure don’t necessarily control what is communicated using that infrastructure. Even though most would say this is a good thing, it’s possible that James Murdoch thinks it’s a bad thing; hence his suggestion that the BBC is “dumping” news (note also the “state-sponsored”, as in ‘state-sponsored terrorism’):

Dumping free, state-sponsored news on the market makes it incredibly difficult for journalism to flourish on the internet. Yet it is essential for the future of independent journalism that a fair price can be charged for news to people who value it.

But as the internet reveals, popularity isn’t always a function of resources. With news, many people want what they read, hear or see to be free from the crasser kinds of bias, which is perhaps why the BBC’s internet news site is as popular as it is. Now the BBC may have its own biases, but here’s the choice; do you want (a) the biases of several thousand middle class media professionals, left more or less alone to do what they think best in the context of their charter, or (b) the biases of a squadron of merchandisers? If you prefer (a), I’d argue that only a tax-funded organisation can deliver. If you like the BBC’s web offering and make use of it, this is what you are voting for. If you prefer (b), then presumably you’ll be content to consume a fair bit of advertising and product-driven editorial, which is exactly what James Murdoch has in mind:

The UK and EU regulatory system also tightly controls advertising: the amount per hour, the availability of product placement, the distinction between advertising and editorial and so forth.The latest EU-inspired rules on scheduling of advertising restrict the number of ad breaks permitted in news programming. Television news is already a tough enough business. These proposals could undermine commercial viability even further.

In summary, look who’s talking. Given half the chance, the Murdochs would make it so that all news is Murdoch news, and bastard crap at that. We can at least take some comfort in the implicit compliment to BBC news reporting. If everyone is following the BBC in preference to the Murdoch product, the BBC must have something going for it.

Update: Murdoch senior’s News Corporation (via its subsidiary News International) has been accusing of the BBC of empire-building for several years now. Here’s a 2006 article which talks about “unfair advantage” and the lack of a “balanced media ecology”. So clearly this is something they’re going to keep chipping away at. But if they’re talking about the internet, I don’t see any grounds for complaint. As I said, anyone can set up a web site. If it’s good, people will visit.

Also, I should have attached Exhibit A: News Corporation’s Fox News.

What Is The Real Level Of Unemployment In Germany And Japan?

Posted on by

With Japan having general elections today and Germany facing them next month, I though now might be as good a time as any to have a look at a topic which could turn out to be very important in the months to come: the real underlying rate of unemployment in both these countries.

While the present focus of most press attention is on the fact that GDP in Germany and Japan nudged upwards between April and June (over Q1), we should never forget that this increase follows substantial falls in output. Japan’s real GDP fell at a record pace in Q4 2008 and Q1 2009 (annualized declines of 13.5% and 14.2%, respectively), and German GDP fell by a quarterly 3.5 percent in Q1 and an annual 6.7% – making for the fourth consecutive quarter of negative growth. In both cases the fall in output was accompanied by only a much more moderate decline in employment.

Part of the explanation for this recent return of both economies to growth lies in the fact that both countries have very substantial stimulus and employment protection programmes in place, and these to some extent mask the extent of the output slump. At the same time both countries have been in run up periods to national elections, while both of them have rapidly ageing populations, rising health and welfare costs and steadily deteriorating gross debt to GDP positions. It is therefore highly likely that the positive stimulus programmes will wane somewhat after October as both governments are forced to move from very expansionary fiscal positions, to more or less “belt tightening” ones, and the big issue which lies in front is estimating just how far the respective labour markets can deteriorate in the two countries as a result. Fortunately analysts at Nomura (for Japan) and Societe Generale (for Germany) have recently produced what are very timely studies which help us get a better appreciation of the true underlying situation. Continue reading →

What’s more fun than staying away from carnival writing about the German elections?

Posted on by

It’s a tall order…but surely writing about German elections with statistics must beat it?

But there’s a German election coming up, although, as Der Spiegel points out, you might not have noticed, as both major parties are secretly quite pleased with the current situation. Polling data is here. Angela Merkel has spent the period since her triumph of 2005 governing well to the left of her party and being a quietly effective foreign-policy chancellor, just as we predicted; the Social Democrats have been struggling, as a result, to retain an independent profile, but (from their point of view) at least they’re in government, and paradoxically the main gainers from the economic crisis have been the FDP, the spokesmen for classical liberalism.

Their leader – still Guido Westerwelle after all these years – is behaving a little strangely in public, saying very frequently that he doesn’t believe there is any chance of the so-called traffic light coalition with the Social Democrats and Greens, but not saying that he rules it out. If the polls stay as they are, this would be the only chance of the Left taking power; but, of course, this is a huge assumption, especially in the light of their surge during the 2005 campaign. With the CDU on 37%, it’s essentially assumed that they are running up against demographic limits – a typically AFOE point, but a good one.

The all-time record conservative share of the vote is 39.7%, achieved in 1957, but more to the point, even another point-and-a-half would be more than one standard deviation from the long-run average, that is to say about a 3 in 10 chance. Theoretically, there is a 5% chance of getting to 42%, but if Konrad Adenauer couldn’t get over 40% in booming 1957 it’s probably even more unlikely that Merkel will in 2009. In fact, one thing that this little statistical exercise shows is that German party vote shares are very stable indeed – the SPD’s share of the vote has greater variance, but not that much.

So there is not much space for the rightwing vote to grow; and the Left Party is apparently stuck just under 10%. The strong Liberal showing – 15% in the current polls – suggests that the right could hope to form a new coalition without the Social Democrats, which would hold 50% of the vote. At the moment the only way the Social Democrats could checkmate this would be to get the Liberals and Greens into a coalition – the Left Party and the Greens wouldn’t be enough. This all assumes that nothing else changes, however; if the Left-Left-Green option was possible, all the coalition calculations would be altered, as the Liberals would face a serious risk of being left out in the cold. So what would it take to make it happen?

At the moment, the LLG coalition adds up to 46%, the “bourgeois” (i.e. CDU/FDP) option to 50%; so they need four percentage points to cross this strategic threshold. In fact, in so far as they are fighting a zero sum game, they might need fewer. The SPD’s share of vote in the current polls is on 23% – a shockingly low figure. In fact, based on the SPD’s historical vote shares, this would in itself be approaching a 1 in 100 event. Even taking account of the Left Party breakaway, the party polled just under the historical average last time out; and the 95% probability level corresponds to a vote share of 27.3%, which would put them back in the game. Actually, there doesn’t appear to be much covariance at all between the Left Party and SPD shares; this fits the explanation that the Left is still mostly the ex-PDS.

So I’m going to forecast that, even if the SPD looks down and out now, there’s an excellent chance of them being in with a chance on the night.

A flat tax bites the dust

Posted on by

So after a summer of suspense and rumour, Latvia got its 2nd disbursement of $279 million on the IMF loan.  As is customary in these situations, one must read between the lines but it appears that the IMF and the European Commission have agreed to let things play out as they are on the exchange rate, and thus despite IMF doubts about the peg-transition-to-euro strategy, it stays in place.

Continue reading →

More Comedy From The Spanish Banking System

Posted on by

Going through the Variant Perception report on the parlous state of Spain’s banking system, I couldn’t help stopping and thinking hard about this point from the Spanish newspaper Expansion.

The valuation of the guarantees of the mortgage book of the cajas and banks and of its real estate gains importance. The thirteen companies tied to financial entities represented 47% of all real estate appraisals in 2007. The valuation of these real estate assets has taken on new importance for banks in the context of the current economic recession. The valuation of the mortgage guarantees and of the real estate assets they are taking on through the courts and debt for equity swaps is key to calibrate the solvency of the financial system. This situation has placed the focus once again on the links between banks and the real estate appraisers that goes beyond in many cases a mere commercial relationship.

And then scratching my head, and scratching my head. Continue reading →