What’s happening in Spain?
I have come across a number of Spanish-language links that I believe collectively add good colour to our understanding about the current economic and political situation in Spain. I am going to use them as a jumping off point for this quick post on what’s happening in Spain as opposed to burying them in the daily links.
Let me start out here by turning your attention to Lithuania, which has just issued 400 million euros of five-year paper at a yield of a measly 2.63 percent. That means you get just above the inflation rate as compensation for default and inflation risk for a full five years. Lithuania has promised to apply for euro membership as it now meets the fiscal and macro criteria.
To me, this is the major story of the day in Europe. The so-called dearth of safe risk-free assets in the euro zone amidst an environment of low-interest rates and financial repression means that people are willing to give Lithuanian bonds a chance to earn an extra yield pickup. As I wrote last week, this benefits government bond issuers with sovereign currencies the most. Nonetheless, euro zone government bonds are quasi-sovereign due to the now explicit backstop that the ECB’s outright monetary transactions program would represent. And so, even without having to buy a single bond, yields in the euro zone are declining. We should see this as testament to why the ability to print money is of foremost importance to a government’s solvency.
Spain, of course, has received quite a lift from this as well despite the poor macro fundamentals. I believe investors will re-examine Spain in a more dubious light as these fundamentals become more important than the OMT backstop. And I believe this will eventually lead to Spain’s yields rising and Spain’s tapping the OMT program sometime in 2013. Nothing says this is an outcome that is axiomatic given how self-reinforcing lower bond yields can be on public finances. But these articles give the background to why I see a bailout.
Rather than craft a holistic message for the post, I’m just going to comment on a post by post basis here.
Spain and Greece are at the head of the list of highest unemployment levels in the European Union. In 2007, the unemployment rate in Spainreached a low of 8%. Now it is 26% and growing. This is Spain’s biggest economic problem. As long as the jobless rate is increasing, Spain will be in a crisis. Greek unemployment is now 26.5%. Portugal and Ireland have 16 and 15% unemployment respectively. Elsewhere in Europe, only the Balkan nations of Macedonia, Bosnia and Serbia have higher levels of unemployment.
15 provinces in Spain have an unemployment rate higher than 30%. Andalucia, Extremadura, Castilla La-Mancha and the Canary Islands have the highest unemployment levels. These are also some of the poorest regions in Spain.
Rental prices in Spain have declined a total of 28% in five years, alleviating some of the burden of the crisis on those not encumbered by mortgages.
The numbers on employment in Spain are grim. Here, the latest data show an increase of 16.4% in 2012 of households without a single member with a job. There are 1,833,700 households in Spain in which no one is employed, an increase of 5.5% from Q3 2012. That means the employment situation in Spain is still deteriorating.
Not much to add here other than the headline that 55.13% of young Spanish workers have no employment. For workers under 25, that puts the number of unemployed at 930,200.
According to the site pisos.com rents in Spain decreased 4.7% in 2012. This is interesting because there are two ways to close Spain’s price-to-rent overvaluation. You can see house prices decline. However, you can also see rental prices increase. Right now we are only seeing the gap close through house price declines as rental price declines actually perpetuate price-to-rent overvaluation. Could this prevent house price declines in Spain from stopping in 2013? That is definitely a possibility. I see this, despite the obviously positive implications for consumer demand, as a bearish data point since it undermines housing prices, a major problem in Spain.
The government of Galicia and the government of Madrid were both able to go to market and get funding. In fact, Galicia has filled its entire 2013 objective already. That’s big news because it says the Spanish government may NOT be on the hook for financing this debt. The problem I see for Spain is a combination of the government’s own targets, the financing of the state governments and the recapitalisation of the banks. Here, we are seeing that one of the problems is starting to fall away because the capital markets are becoming more welcoming to all government issuers, Spanish state governments included.
If there is one reason to think Spain could avoid crisis in 2013 based on available information, this is it.
The IMF’s Christine Lagarde has criticised Spain for making deficit reduction objectives that it simply cannot possibly meet. Now remember, this is the same IMF that wants Portugal to really go to the wall with austerity. So the point here is not to avoid austerity. Rather, what Lagarde is implicitly saying is that Spain’s economic performance relative to its goals is critical to how well Europe survives the entire European crisis. If Spain comes up short of its targets, it could cause Spain’s yields to back up and trigger an OMT-style bailout (one I am saying will come).
The long and short here is that the IMF under Lagarde is more worried about meeting targets and objectives than before. Austerity is still considered the policy prescription of choice. But if the outcome causes GDP to contract too much or if the target is too ambitious, the IMF supports delaying austerity or softening the target.
As of Friday the difference between German Bunds and Spanish ten-year bonds was still 354 basis points, which is high. This article in El Pais notes that the difference between the Italian and Spanish ten-year is at its highest levels since the crisis began – as high as 116 basis points.
Is this a sign of Spanish-Italian decoupling? I think it could be. It’s definitely something to watch, especially if talk of Spain asking for OMT support starts up again. It could be for the first time since the crisis began that what happens in Spain has marginal impact on what happens to Italy. For the first time, I am thinking that a solution for Spain might not have to take Italy into consideration.
Interesting article here from ABC in Spain saying that Poland is the country that has doe the best economically and it resides outside the euro. It grew 15.8% between 2008 and 2011. Poles’ disaffection for the euro has delayed its accession to EMU the article says.
The under-current here is that the euro has negative implications for the periphery and Poles are happy to have been on the outside looking in during this period.
One side note here of importance is that there has always been a certain tension between Spain and Poland because of the size of the economies. Before Poland became a part of the euro zone, Spain was the big peripheral economy and had more say, especially regarding its getting European monies for infrastructure, etc. But when Poland came onboard that changed and Spain took on a more marginal position, especially given Poland’s size as a non-core EU country.
“Lithuania raised 400 million euros ($538 million) in its first sale of euro-denominated bonds since April as improved economic growth and steps to cut the budget deficit spurred a plunge in borrowing costs.
The 2018 euro bond tap was priced to yield 2.631 percent, the Finance Ministry in Vilnius, the capital, said in an e- mailed statement. That was in line with guidance of 140 basis points above the benchmark swap rate. A 400 million-euro tap of the same issue last April was priced to yield 4.216 percent.
The four-party coalition formed after October elections approved a budget that reduced the planned deficit to 2.5 percent of gross domestic product this year, from about 3 percent last year.
The government and central bank agreed last week to seek euro adoption in 2015 and align policies with that goal.”