World Crisis: Spanish Update

[Murazor]

Since it is seriously looking like Spain is next after the Wolfpack is done with Greece, I thought that some people in this board might be interested in hearing about the latest developments in our economic situation.

From BBC News

Spain is taking the right measures for economic stability, the head of the International Monetary Fund has said.

Dominique Strauss-Kahn said he was "confident" Spain's economy would recover and called on all Spaniards to back the government's austerity work.

He was speaking after a meeting in Madrid with Spanish Prime Minister Jose Luis Rodriguez Zapatero.

Mr Zapatero had earlier denied his government was seeking an IMF bailout, but markets have been nervous.

Mr Zapatero said on Thursday that Spain's economy was solid and solvent, and the visit by Dominique Strauss-Kahn was a scheduled one.
'Determination'

Mr Strauss-Kahn said all the measures being put in place by the Spanish government were "clearly being done for the benefit of the economy".

"I am really confident in the medium and long-term prospects for the Spanish economy, providing the efforts that have to be made will be made," he added.

He specifically praised continuing efforts to liberalise the Spanish labour market, saying they went in "the right direction".

Mr Zapatero said that during the meeting he had conveyed to Mr Strauss-Kahn "the determination of the Spanish government to implement and to make effective every single one of these reforms that we have launched".
Nervous markets

Mr Zapatero's government recently introduced a package of spending cuts and a reform of the labour market in an attempt to persuade nervous financial markets that Spain's finances are under control.

However, that's a difficult task, as after the crisis in Greece, the financial markets have been concerned that Spain could be the next country to require outside financial assistance.

As a result, Spain is having to pay record rates to sell its debt, and this week a senior banker revealed that Spanish financial institutions are struggling to get funding on international markets.

Spain is now promising to publish the results of what are known as "stress tests" on its banks, to prove that any fears of their failure are unfounded.

The country is still reeling from the collapse of the construction sector, has a budget deficit of 11%, and one in five workers is unemployed.

To help reduce the jobless count, the Spanish government wishes to liberalise labour laws that currently deter Spanish firms from taking on full-time staff because of the difficulty of making redundancies.

However, this has already faced strong opposition from unions, who are threatening to hold a general strike in September.

One of the most important parts of this "liberalisation" of the job markets (which was literally approved by the government the same day Spain played in the World Cup, to lessen public attention) is lowering the severance pay for improper firing by about 25%, with a further 17% of the cost to be paid by the state rather than the ex-employer.

Obviously, this is going down about as well as a lead balloon, though the situation is compounded by the fact that our larger national unions are scorned by a large majority of the population, since it is widely believed that they are in cahoots with the government to keep the subsidies flowing and that the September general strike is little more than theatrics.

The situation might finally become explosive next year. Long term unemployed aren't getting any money at this point, the sometimes retarded "shovel-ready" jobs that the public sector has been paying over the last couple of years are over and the European Commission has demanded that Spain make budget cuts worth some seven billion euros next year (on top of the ten billion euros already cut), so the government will be forced to either raise direct taxes (unlikely) or make additional cuts to the salaries of public sector workers (fairly likely, since the recent public sector strike was only followed by about 15% of the workforce by the most reliable accounts).

So... thoughts?

[Guardsman Bass]

It's just an ugly mess, combined with what the popping of that real estate bubble did for you guys in terms of tax revenue, employment, and GDP.

What I'm hoping is that Spain can get balanced with the austerity measures (avoiding the whole situation Greece has gotten itself into, having to draw upon EU resources), without those measures so negatively affecting economic recovery that it sends you into a downward spiral of declining economic growth reducing tax revenues, requiring more austerity, which decreases economic growth and tax revenues further, and so forth.

[Questor]

I'm just curious, and I can't seem to come up with the right search terms in google to answer this myself.

According to Wikipedia, California's GDP is in the same range as Spain. How do the budget of Spain and California compare, and how do these budget cuts compare with what's been happening in California?

I am just trying to get an idea of scale, and my state's woes are something I've been spending a while trying to wrap my head around.

EDIT: I know the situations are not directly comparable, or even close. I'm really just trying to understand the issues in play.

[Murazor]

Since I am lazy and couldn't be bothered to track the actual official data, I am working with 2009 information provided by the CIA world factbook.

Budget:
revenues: $420.4 billion
expenditures: $536.3 billion (2009 est.)

Now, this rather significant deficit appeared after several years of modest surplus, but it was enough to raise lotsa eyebrows. So they have been more or less forced to cut everything (new public sector job offers reduced by 90%, no more infrastructure building, 5% average pay cut for public sector workers) and hoped to save some fifteen billion euros between what is left of this year and the next. Now, the EU is telling them to plan for an extra seven billion euros in cuts.

[Elfdart]

Can anyone point to examples where austerity measures actually worked? Every recession I can think of was fixed by more government spending, not less.

[Samuel]

It works when tbe economic problem is inflation or increasing debt costs. I think that is the current problem for Spain.

[J]

Can anyone point to examples where austerity measures actually worked? Every recession I can think of was fixed by more government spending, not less.

Canada in the early to mid 1990's. Our economy was stagnant following a recession in the late 80's to early 90's plus our debts were starting to get out of hand. We held our spending level and then started cutting it while raising taxes & revenues. It worked because we attacked the problem in time and we had a bit of luck.

The reason most austerity measures fail is they usually come far too late, by the time they're implemented economy is already in a death spiral with pretty much no escape. It's like getting in debt with your credit cards and mortgages, if you catch it in time you can cut your expenses and pay them off, but if you wait too long they get away from you and you end up as a debt slave.

Spain is in deep doo-doo, note the amount of debt they have, then look at the growth rate of said debt. It doesn't take very long before the debt growth eats up all the revenue at which point it runs away and the country is mathematically guaranteed to default. The killer is where the debt is concentrated; in households and non-financial businesses, these are the sectors which drive economic activity and if they're stuffed with too much debt it chokes off growth since capital has to be diverted to service those debts.

[Guardsman Bass]

Can anyone point to examples where austerity measures actually worked? Every recession I can think of was fixed by more government spending, not less.

What J said.

In addition, it depends on what you define as "worked". Austerity measures are usually aimed at problems that inhibit economic growth in the long-term, like rampant inflation or a government default on its bonds (which makes it extremely difficult for that government to get credit for a long time, and usually makes it very difficult for anyone period in said countries' economy to get outside credit at anything other than severely high interest rates and returns). They don't usually result in economic growth immediately - quite the opposite (just look at the recession in the early 1980s, which deepened because Fed Chairman Paul Volcker had official interests up extremely high to try and kill inflation in the US).

[K. A. Pital]

If the governments of the world weren't so busy saving the capitalists from defaulting on their debts by transforming private debt into public debt during 2008-2009 and then claiming "the crisis has passed, wohoo!", I'd maybe support some of the "austerity measures". But as it is exactly that - the redistribution of money from public finances to cover private debts that the nation-state took on to "save the day", it's just a massive fucking rip-off and I can't support it no more than I can support, say, the tobacco industry. Doctor Doom aka Nouriel Roubini, concurs:

We socialised part of the private losses by bailing out financial institutions and providing fiscal stimulus to avoid the great recession from turning into a depression. But rising public debt is never a free lunch, eventually you have to pay for it.

Those who support the bailout practice can perhaps point me to a place and time where the government took on private debts to save the "poor businessmen" - and it was a success.

I sincerely hope the whole "financial system", the cherished ugly child that caused it all, collapses even harder under the debt strain now that the state can't support it any longer, and people finally learn something. About bailouts, private debts and the practice of saving private institutions out of the public's pockets.

All the current haphazard measures by governments around the world only show how fucking clueless they are once they enter a crisis. The deep, key problems of this crisis, the deep imbalances in the world economy have not been adequately adressed (if adressed at all); and this means the foundation for another crisis is made by today's decisions and "simple solutions".

The First World nations (in different degrees, of course, but the responsibility is collective nonetheless) are entirely responsible for all that transpired, from it's private instututions to it's inept governments who offered what I'd describe as non-solutions or patches at best. If it's nations are embarking on such a reckless course, so be it - I'm not sure I can "hope" for the crisis to end until the underlying causes of the crisis have been adequately adressed, or support the "measures" that only serve to preserve the current order at all costs, like a sinking man grasping at a straw.

Meanwhile, more and more talks about privatization as a solution to the debt problem are heard around the world (I'm certain I also heard that Spain is planning a privatization program; Greece has one in the making). "Privatization will cover some debts". So in essence, you've covered the debts of insolvent private companies by taking on their debt, then allow the private sector to enroach on public functions to cover state debts. *laughs

[Admiral Valdemar]

Stas, it pretty much has to collapse anyway. The system is unsustainable, and none of these austerity measures can even touch the greater problem of debt, just chip at the edges. All the bailouts did was, as you say, move the debt from one sector to another, and now the banks are making profits, but still not lending out, while the taxpayer is saddled with the greatest debt in human history. In the UK, the past week has seen £2bn of projects axed by the coalition, from things like free swimming at local pools, to those that are an economic bonus such as the expansion of the A14 highway, which, Zeus willing, will be not a large parking lot when I drive it in a bit. They basically took an axe to any and all projects they could, even if the expense would bring benefits and couldn't be paid for by banking loans (a forging company in Sheffield lost funding for upgrading itself to become the only other company other than one in South Korea, to make certain nuclear reactor vessels).

When your economies rely so heavily on consumerism which is basically now fuelled by credit, then the house of cards has a definite limit to its existence. This whole economic paradigm is more potent than any resource limit right now, because it means problems we could normally tackle with our economic clout and foresight, are now woefully beyond us as we find the biggest economies in the First World can no longer do anything but service debt obligations.

[Guardsman Bass]

Those who support the bailout practice can perhaps point me to a place and time where the government took on private debts to save the "poor businessmen" - and it was a success.

That's more or less part of what Deposit Insurance with the FDIC does in the US.

[K. A. Pital]

Those who support the bailout practice can perhaps point me to a place and time where the government took on private debts to save the "poor businessmen" - and it was a success.

That's more or less part of what Deposit Insurance with the FDIC does in the US.

Securing routine small-scale bankrupcies? Or large bailouts?

[Elfdart]

The FDIC insures personal accounts up to $250,000 and takes over banks that are insolvent. So if you have $100,000 in XYZ Bank and XYZ Bank is closed by the government for mismanagement, your $100,000 is secured by the FDIC. The agency's role is the opposite of bailing out the bank.

[Guardsman Bass]

The FDIC insures personal accounts up to $250,000 and takes over banks that are insolvent. So if you have $100,000 in XYZ Bank and XYZ Bank is closed by the government for mismanagement, your $100,000 is secured by the FDIC. The agency's role is the opposite of bailing out the bank.

It's actually something similar in principle to the financial reform bill that's being proposed. Instead of floating the bank, you'd instead set up procedures so that the big bank can slowly be dissolved and sold off (instead of it collapsing quickly and taking a huge chunk out of the stock market and financial sector in the process).

[Big Orange]

Spain supposedly has 40% unemployment: crashing down from a five decades long increasingly unbalanced construction bubble is not going to be pretty. Spain's larger and more developed than Greece, and its banks didn't own up on a lot of debt, so it's going to drag down the Euro even more. The Euro currency was introduced too fast and applied to too many comparatively impoverished countries that don't have the solid industrial bases that France and Germany have.

And here's an excellent Channel Four documentary on Britain's leeching City of London banking sector, titled How the Banks Won:



And in Britain I'm fearful about Cameron's slashing of the heavily in debt public sector, wondering if he's going to be Mrs. T Mark II, causing more problems than he solves.

[Murazor]

Spain supposedly has 40% unemployment: crashing down from a five decades long increasingly unbalanced construction bubble is not going to be pretty. Spain's larger and more developed than Greece, and its banks didn't own up on a lot of debt, so it's going to drag down the Euro even more.

... the hell?

Official data puts the unemployment rate at just over 20% early this year and while there is some manipulation going on with that figure (a secondary and far more valuable number, the indicator of Social Security affiliation, shows a difference of about a million workers between both), there is also some of that good ol' illegal work coming back.

Quite simply, things are bad at 20% unemployment and going to get worse before they get better, but 40% would have already seen an explosion of social violence the likes of which Spain hasn't seen in the last eighty years.

[Big Orange]

OK, I overstated general unemployment, but 40% unemployment certainly applies to the young. And it's still too early to rule out major rioting in developed countries like Spain or Britain with cratering service sectors.

[Murazor]

OK, I overstated general unemployment, but 40% unemployment certainly applies to the young. And it's still too early to rule out major rioting in developed countries like Spain or Britain with cratering service sectors.

This, in the other hand, is entirely accurate.

Dunno what the term is elsewhere, but in Spain the demographic group between 18 and 30 years is being called generation ni-ni (ni estudian, ni trabajan; meaning not studying, nor working) and generally relies very heavily in the extended family resources for survival. This combined with the generally high cost of renting in Spain obviously restricts geographical mobility, which is big trouble in addition to the few entry level jobs being offered, insane experience requirements for said few offers and an overabundance of college graduates (versus the sorely needed technical schools) means that this is unlikely to change in the close future.

[Admiral Valdemar]

Students, and young people in general, are the disenfranchised group of our times. They have massive debts, are overqualified for what work is out there, and too numerous to employ for even that. The few who will be worthy of working in a job even remotely related to their degree will have to fight to the death to get any such position. There are going to be a LOT of very pissed off, unemployed and ever more trodden on people in the next few years.

[Xon]

the next few years decades.

I feel this correction is needed. It is highly likely we are going to be looking like Japan's Lost Decade where an entire generation is rendered practically unemployable across large parts of the industrialized world.

[Vendetta]

Dunno what the term is elsewhere, but in Spain the demographic group between 18 and 30 years is being called generation ni-ni (ni estudian, ni trabajan; meaning not studying, nor working) and generally relies very heavily in the extended family resources for survival.

They're called NEET here, Not in Employment, Education, or Training. It's a fairly large section of the agegroup, there are just under a million 16-24 year olds that are out of education and have no job.

These are the people that became the Lost Generation in Japan, because in five years time when they hit their thirties, entry level employers won't look at them because they can recruit younger people with less commitments, and they haven't been in work so they have no experience.

[Admiral Valdemar]

I feel this correction is needed. It is highly likely we are going to be looking like Japan's Lost Decade where an entire generation is rendered practically unemployable across large parts of the industrialized world.

I guess that was terribly optimistic. Japan has had two lost decades at least, and it'll get worse when the people buying government bonds out of patriotic duty, decide they need to cash in those cheques because they're retiring. That was all that kept them from the precipice. What's keeping us from it?

The system needs to fail controllably, and now.

[Xon]

Admiral Valdemar, a major problem is no one in power wants to admit there is issues which who employeement is done. It took to after a multi-trillion dollar "industry" very publically imploded before they where even willing to grudgingly admit something might have been wrong.

These are the people that became the Lost Generation in Japan, because in five years time when they hit their thirties, entry level employers won't look at them because they can recruit younger people with less commitments, and they haven't been in work so they have no experience.

As Broomstick shows, even if you have experience, if you are outside the age-bracket for new hires and don't have exactly the skillset they are looking for it's really damn hard to get employeement for older people as well.

[J]

Let's play the mortgage game!

WSJ link

Home Loans Get Easier For Spaniards
By SARA SCHAEFER MUñOZ And CHRISTOPHER BJORK

Spain has one of the world's most-troubled housing markets, yet some buyers are suddenly able to get mortgages with 100% financing, and developers are building new homes on empty lots despite a huge glut.

The reason: Spain's banks took possession of a large inventory of homes, buildings and land two years ago, forgiving the debt in hopes of heading off defaults. The plan was to resell the properties when the market bounced back and evade the worst impact of the looming housing crisis.

But Spain's housing market has only gotten worse, and now the bill is coming due as the banks labor under the weight of an estimated €59.7 billion ($73.8 billion) in real-estate assets on their books. Under pressure to make further markdowns on the assets by their main regulator, the Bank of Spain, many banks are now scrambling to unload the properties as quickly as possible.

In some cases, that means offering deals to consumers that are suspiciously like those that got the global housing market in trouble in the first place. The tactics include not just 100% loans, but also low initial teaser rates for buyers or initial payment deferrals for as long as three years.

At the same time, banks that own big plots of unbuilt land are announcing plans to build new houses to give the illiquid lots more value, despite the country's estimated glut of one million empty homes.

"On the one hand, they are selling the properties that already exist, and on the other, they are building houses," said Fernando Encinar, the director of research at http://www.idealista.com, a Spanish real-estate website.

The banks making such financing offers, which range from giants like Banco Santander SA to Spain's small regional banks, say they are for primary homes and only available to credit-worthy buyers.

To be sure, such financing accounts for a small portion of the Spanish mortgages; 81% of mortgage loans to households in Spain have a loan-to-value ratio below 80%, according to March data from Bank of Spain. The higher the loan-to-value ratio, the riskier the mortgage is considered to be.

Some analysts, however, suspect the strategy is simply kicking today's housing problems into the future. "They're making a bet," said Alfonso de Gregorio, director of wealth and fund management at Gesconsult, a Spanish fund manager. "Wait for the economic crisis to resolve itself, push forward the problems by three or four years, and try not to let it show too much on the bottom line."

Others worry that the generous financing, which helps maintain the prices, is muddying the long-term picture for a sour Spanish housing market. Unemployment in Spain is currently 20% and is likely to rise with the austerity measures recently announced by the government of Prime Minister Jose Luis Rodriguez Zapatero. A recent Standard & Poor's report said that housing prices, which have fallen 16% from their peak in 2008, could fall another 12%.

"In other countries, the prices have adjusted significantly," said Rafael Repullo, professor of economics at the Center for Monetary and Financial Studies in Madrid. "The sooner they adjust in Spain, the better."

Two years ago, debt-for-asset swaps were seen as a way for banks to get ahead of the housing crisis bearing down on them. The program usually targeted developers who hadn't yet missed payments, but who the bank judged would have problems over the long term. Banco Santander was one of the first to aggressively pursue a debt-for-asset program two years ago. It now holds €4.2 billion worth of these acquired assets, with loan-loss provisions on 33%. Competitors made similar deals.

But last month, offloading such properties became more urgent as the Bank of Spain unveiled proposals that would require banks that haven't already to set more funds aside against potential losses on these assets. This gives the banks a choice: take more hits in the coming months or unload the assets into a difficult market.

The Bank of Spain wants "banks to be banks, and not real-estate companies," said Javier Ariztegui, deputy governor, in a speech Friday.

He said it is reasonable that banks use the tools at their disposal to minimize losses, but that doesn't mean they should postpone recognizing them.

Banks are piling on incentives. Midsize Banco Espanol de Credito SA offers deferred deposit payments and 100% financing "for many of our houses," according to its website. Larger lender Banco Bilbao Vizcaya Argentaria SA and smaller Banco Pastor SA offer generous financing and lower teaser rates, as well.

"Need a home? Now is the moment!" says Caja Madrid on it website, where it also advertises financing options and special offers, such as an apartment in the small city of Manresa, near Barcelona, for €247,000.

"Escape your old home!" says the site of Valencia-based savings bank Bancaja, which advertises no payments for as long as three years at the start of the mortgage.

Such programs are having some impact. Santander sold 2,045 of the 2,745 homes it has placed on sale through its Altamira subsidiary since January, 2009, said a spokesman. Caja Madrid said it sold 10 times the amount of properties in the first five months of 2010 compared with a year earlier.

Meanwhile, to grapple with illiquid empty lots on their books, banks such as Caixa Catalunya, Banco Sabadell SA and Banco Popular SA are working with developers to build cheap housing on the land to boost its value. In April, Caixa Catalunya announced plans to build 400 apartment units on empty lots in Madrid, and 100 more in Barcelona, through Procam, its property-management subsidiary. Sabadell is in talks to build public housing on some land in Barcelona, and eventually sell it to the local government.

"You have to find different exit strategies, and how to get your best return on the land," said a Sabadell spokesman.

Write to Christopher Bjork at christopher.bjork@dowjones.com

Hmmmm...this looks oddly familiar, where have I seen this before?
Oh yes, I remember now, it's the joy of subprime mortgage lending and NINJA loans!