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Debunking The "Spain Is Safe" Myth
Recently there has been a lot of bullish opinions in the market attempting to debunk the reality that Spain is next on the contagion bandwagon, despite glaring signs to the opposite. Below is probably the best analysis, from JPMorgan, destroying all myths and mirages that Spain will survive the contagion intact. Also, no love loss for Chiswick here.
Full report:
Market update: we continue to be concerned about Europe. This week we look at Spain, Europe’s next weakest link, and U.S. job growth, which has yet to re-ignite. While profits, capital spending and manufacturing trends are positive, unresolved legacy issues from the prior boom-bust argue against riskier portfolio allocations, which has been our overriding investment theme all year long.
European banks, which are 3x-4x larger than U.S. banks relative to GDP, are under pressure. CP issued by non-U.S. banks in US markets continues to fall, and is down 20% this year (branch deposits of non-US banks are also falling). In Europe, bank borrowings from the ECB are rising, as are European bank deposits at the ECB. The latter suggests that banks are hoarding cash due to fears of being unable to access more, or are unwilling to take exposure to other European banks. Either way, a sign of distress. The larger size of Europe’s banks argue against using simple GDP weights to assess potential risks to global markets. Due to a buyer’s strike over the last month, European banks now have 3.5x as much debt to issue than U.S. banks over the remainder of the year.
Next stop on the European credit crisis: Spain
On May 13, we reviewed why we believe Italy is more insulated from the European credit crisis, a result of a smaller budget deficit, greater public and private sector reliance on domestic financing, and lower banking sector risks. Unfortunately, the same cannot be said of Spain. I won’t repeat the 4-dimensional chart again, but Spain’s fiscal adjustment in a low growth-limited devaluation environment is almost as difficult as Greece’s. We’re concerned about austerity in a country that already has 20% unemployment; where home prices are down only 11% with half the newly constructed ones sitting unoccupied; and with $3.4 trillion of household and corporate debt (220% of GDP, one of the highest ratios in the world). Progress is being made on the lending mechanism that offers countries like Spain a chance to fund bilaterally rather than in debt markets, as well as on Spanish fiscal reform. But systemic risks remain, and we retain large underweights to European equities and the Euro.
Among the comments I see regarding how Spain will be OK, these 2 are prevalent: “the current account is healing rapidly (reducing reliance on foreign capital)”, and “Spain’s public debt is not as high as in other countries”. On the first, the current account has improved, from 10% to 4% of GDP. But how? In prior cases of current account improvement, imports and exports both rose, with exports rising faster. Over the last two years, Spain’s current account improved as imports and exports both declined. This is not a positive sign for growth, employment, or private sector solvency.
Secondly, after adding possible costs from Cajas (regional savings banks) and Autonomias (municipalities), Spain’s public debt is higher than Portugal and Ireland. Some analysts believe the Cajas have enough capital and operating income to make it through the next couple of years. A comparison of Survival Ratios does show that Spanish banks are comparable to US banks circa May 2009, when the Treasury SCAP Stress Test was conducted. But this is due to the strength of Santander and BBVA. The Cajas, which represent 40% of banking sector assets, are in much weaker condition and may face more than EUR 100 bn of losses. The Bank of Spain seized CajaSur, a savings bank in Cordoba (note that Moody’s last rating on CajaSur was A1, one of the highest of all the Cajas). The 7 arranged mergers of undercapitalized Cajas seem to be based more on regional proximity than on relative financial strength, and may not reduce the government’s need to recapitalize them.
Wonderland. We have expressed unease about consequences of European austerity. The other day, I read the following from a Chief European Economist: “I have found that with respect to this assessment of the socio-political situation in each country, the further you get away from the Euro-zone, the more skeptical (and often the more convinced) observers get. Makes you wonder, doesn’t it?” No, it doesn’t. The closer that economists and strategists are to a region, the harder it has been for them to see a negative paradigm shift. Examples include Citicorp in Mexico 1994 (the only U.S. firm that had a Mexican branch banking license); Asian economists in 1997; Renaissance Capital, Deutsche Bank and CSFB in Russia in 1998; U.S. technology analysts in 2001; Argentina’s “Chicago Boys” economists defending its currency board; etc. These are my own experiences, and others’ may differ. But there is a Stockholm syndrome at work sometimes; investors are wise to be wary of it.
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http://www.bls.gov/fls/intl_unemployment_rates_monthly.htm
CHART 2. Monthly unemployment rates unadjusted by BLS, 10 European Union countries or areas, seasonally adjusted, November 2008–April 2010http://www.bls.gov/fls/chart2.gif
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And Spain's housing surplus is permanently collapsed, unless 8 to 10 million Moroccans boat across.
In 2001, 14% of the total housing stock was vacant, more than the entire rental stock.
That was before the RRE bubble. No one is even willing to estimate the percentage of housing sitting vacant in Spain right now.
LOL @ your avatar
Fuck Spanish politicians, Fuck Spanish Banks, Fuck ridiculous Spanish Home prices and Fuck JPM too. Conniving, thieving bastards.
Thanks for those insights, VK. Quite illuminating.
Now the market proved that the prediction is right - unfortunately... Lose Thigh Fat
You can even try fucking "FUCK " itself
Uhmmmmm pot meet kettle...glass houses everywhere
+1 mil.
Totally.
JPM - itself FULLY bankrupt and solely surviving on account of fraudulent "mark to myth" accounting and Fed infusions of "money" printed out of thin air (as is the US itself, I might add) - has some gall pointing fingers at Europe/Spain.
No shit.
Could anyfuckingbody get thru tha second paragraph without saying Bullshit ?
I love it. we where thinking about buying a vacation house in spain, and the prices right now are already down 70% on villa's.
You can buy a nice place (4 sleeping rooms, 3 bathrooms, kitchen, living, study, garage, swiming pool) for 250.000 euro. If this keeps up, it could actually go down another 50% :)
what area of Spain are you looking in?
With 20+% ue, just be careful of rampaging Spaniards. Unlike American peasants, European peasants have a long history of killing rich people. The American peasant might be dumber than dirt, but they worship their betters; and that is a wonderful thing.
I don't think so, but I'm not just worried about Spanish savings banks. The whole system is at risk.
Before taxes and provisioning, Spanish bank operating net income is about 39.5 billion euros. Total capital and reserves of same is 232.2 billion euros.
Spanish banks have 445 billion euro exposure to construction and property development loans alone. Already euro 165.5 billion of this exposure is troubled, only 4% written off.
If 25% just of these troubled loans are written off in a year, (not a stretch with 20% unemployment) it will result in just more than a complete wipe out of operating income. This represents only a 9% write off total loan exposure.
The biggest Black Swan is the United States. Period.
It's not really a black swan. It's just the biggest brick wall to ever meet reality...
tyler,
you just doctored michael's update and that ain't cool
Tyler, do you have a take on commercial real estate in general?
It's been a while already.
I just read that ING bank is looking to Morgan stanley to sell off it's commercial real estate portfolio.
Any improvement there or panic sale?
BBVA is one of the highest leveraged banks in Europe if you include repo 101s. Santander is rumoured to get 80% of the ECB banking aid from 2009. The Cajas are all gone into a subprime game of 3 x C-= AAA.
It is all rotten.
GREETINGS FROM ESPANA:
http://williambanzai7.blogspot.com/2010/06/euro-card-series-espana.html
home of the Bull...
Trying to save the European banking system is akin to Travis Bickle trying to save Iris in Taxi Driver. With the squid as her pimp. Anyone who thinks 'everything's gonna be alright' is deluded. The lyrics of PQM's 'You Are Sleeping' should serve to clarify...
You pick up this working girl who's hooked on smack, who hussles and scores. "That's all I do" she says, she says "Ten bucks for head, fifteen for half-and-half". She says "Three hits a day at 35 per", you say "that's seven tricks a day at least", but she says "sometimes I get lucky. Once this guy gives me a bill-and-half just to eat me, only time I ever came". You figure you can save her.
You sell your color tv, that keeps her off the streets a whole day. You hawk your typewriter for one job. Then your shotgun, your watch. A week later you say "Listen I'm a little short", but she says "No scratch, no snatch". You say "Look it is better to give", but she says "Beat off creep".
One night they spot you on the street in your skibbies trying to sell your shoes. You tell them who you are, but they nail you. Then she happens by and she says " Christ you look f*cked", she says "Hang tough!". But you don't say anything, you just think "what a bum rap for a nice, sensitive guy like me".
Hear it here...
http://www.youtube.com/watch?v=1HyS80Uf9a8&feature=related
Jim Willie CB called this...
Charming story about Edward Hugh "Blog Prophet of Euro Doom" in NYT. He lives in Barcelona.
http://www.nytimes.com/2010/06/09/business/global/09blogger.html?ref=global-home
If Santander goes any lower, I am loading up the truck!
Leo, love your work...maybe you could keep me updated with your trades.