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On The Pain In Spain

Tyler Durden's picture




 

Much has been made, and rightly so, of the echoing crisis that is evolving in Spanish bank and sovereign credit (and equity) markets in the last few weeks. The impact of the LTRO on the optics of Spain's problems hid the fact that things remain rather ugly under the surface still and with the fading of that cashflow and reach-around demand from the Spanish banking system, the smaller base of sovereign bond investors has shied away. Stephane Deo, of UBS, notes that while the Spanish budget is a positive step (with its labor market reforms), Spain's economy remains weak and will face a severe recession this year followed by still significant contraction next year. However, he fears the measures announced may not be enough to calm investor angst as he doubts the size of fiscal receipts numbers and the ability to half the deficits of local authorities. Furthermore, the measures will have a large impact on corporate earnings - implicitly exaggerating the dismal unemployment numbers (which is increasingly polarizing young against old) with expectations that the aggregate unemployment rate could well top 26% and youth well over 50%. This will only drag further on the housing market, which while it has suffered notably already, is expected to drop another 25% before bottoming and credit is contracting rapidly (compared to a modest rise overall in Europe). Spanish banks remain opaque in general from the perspective of the size and quality of collateral and provisioning and Deo believes they are still deep in the midst of the provisioning cycle and tough macro conditions will force restructuring and deleveraging. Spain scores 5 out of 5 on our crisis-prone indicator and markets, absent intervention, are starting to reflect that aggressively.

UBS: Spain After The Budget

A few months ago we wrote a piece on Spain (see “Next on the watch list: Spain” 11 November, 2011) as we thought the market was way too sanguine on the Spanish risk. Since then our three worries have become bigger if anything: the deficit slippage last year was larger than expected, the GDP this year has been revised down since then, while the banking system still needs further resolution, in our view.

 

From a macro economic point of view, Spain remains weak; it will face a severe recession this year followed by another contraction next year. We also believe that the adjustment in house prices is far from finished. By contrast, we present the labour market reform which is a positive. On paper, the deficit reduction target is ambitious: a 3.2ppt decline from 8.5% to 5.3% with credible macro economic assumptions; GDP is expected to contract by 1.7%, with domestic demand down by a striking 4.4%. This fiscal consolidation is a step in the right direction. We think, however, that the measures announced might not be sufficient: some fiscal receipts numbers could be too high; we also have doubts on the planned halving of the deficit of local authorities.

 

The government plans to capture €5.4bn from these new measures which compares to the €17bn corporate receipts captured in 2011 or €30bn net profit generated by Spanish IBEX-35 stocks. Several measures affect corporate taxes: 1) Financial expenses will be deductible up to 30% of gross EBIT. 2) Depreciation rates will be regulated. 3) Upfront fraction payments are newly implemented. 4) Goodwill amortisation reduced from 5% to 1%. 5) Tax on repatriation of foreign subsidiaries dividends which are based on tax havens.

 

We believe that the Spanish banking sector is likely to require further writedowns of loans and real estate beyond what is being enforced by the recent change in provisioning rules by the Government. In addition, we expect the system to continue to make a strong and sustained effort in re-balancing its balance sheet through de-leveraging and replacing short-term wholesale funding (inter-bank, ECB, commercial paper) with more stable sources (time deposits, long term bonds).

 

Concerns are likely to remain over the extent of the problems facing the banking system, and we believe it will take some time to demonstrate to the market that spending has been cut at both the regional government and central government levels. The path of Spanish bond yields for the next 9 months depends a lot on changes in growth expectations, not only in Spain but also elsewhere in Europe (and indeed globally). Without growth expectations turning up significantly, we expect the structural deficiency of demand for bonds to re-establish itself in the form of higher sovereign yield spreads in the shorter term.


Top-down Macroeconomic outlook - prepare for a big decline in GDP

 

Given The Output Gap - unemployment will increase to well over 26%

But as we have noted before remains massively polarizing for the youth...

And while housing has dropped around 20%, it is expected that it has 25% more price depreciation to go (while in reality many question the government data that reflects this relative modest price drop relative to 50-60% drops in Ireland for instance)...

and bank credit extension is falling dramatically - with loans to households very negative YoY...

leaving banks increasingly the only marginal buyer of sovereign debt as foreign ownership plummets...

 

So in summary, a quick scorecard for the crisis-factor in Spain:

Government Bond (unaided access to public funding markets) - Fading rapidly - Check!

Housing - Prices down hard but falling further and reaccelerating - Check!

Unemployment - rising, accelerating, and increasingly polarizing youth - Check!

Banking - Opaque, unclear collateral, restructuring likely, deleveraging needed - Check!

Credit (the juice to keep growth going) - declining rapidly and negative - Check!

 

But apart from that...

 

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Thu, 04/05/2012 - 11:56 | 2319620 FOC 1183
FOC 1183's picture

OT, but where the fuck is Brusca? Vacationing after 5
grueling posts? The people demand Friday Humor

Thu, 04/05/2012 - 12:26 | 2319747 Harlequin001
Harlequin001's picture

'This will only drag further on the housing market, which while it has suffered notably already, is expected to drop another 25% before bottoming'...

Yeah, right, says who?

Thu, 04/05/2012 - 13:26 | 2319910 schatzi
schatzi's picture

Some things don't need to be told, they just require some logical deduction and knowledge of current economic affairs:

compare real estate prices of comparable bubbles in Ireland or US. House prices have come down much further than in Spain in both those countries. If you consider the fact that Spain's housing bubble was multiples larger than the one in the US (capita and GDP based comparison), then it is only logical to expect an even larger drop. Further fuel to the fire are decrepid banks, reeling economy and unemployment yet unheard of.

Thu, 04/05/2012 - 13:56 | 2319975 Pladizow
Pladizow's picture

The Pain in Spain falls mainly on the ......?

Thu, 04/05/2012 - 14:48 | 2320076 Börjesson
Börjesson's picture

On the Plain, of course; i.e. the humble, ordinary folk.

Thu, 04/05/2012 - 14:48 | 2320077 lineskis
lineskis's picture

"But apart from that..."

We can just love ZH's rethoric... :)

Fri, 04/06/2012 - 08:43 | 2321694 GMadScientist
GMadScientist's picture

BRAIN

Fri, 04/06/2012 - 08:43 | 2321697 GMadScientist
GMadScientist's picture

"Yeah, right, says who?"

9 million sheriffs.

Thu, 04/05/2012 - 20:56 | 2320986 Buck Johnson
Buck Johnson's picture

Spain is next along with Portugal, but there is not enough money to bail them out.  Scaramucchi on CNBC essentially said that Spain's going down and what we wait to see is how the US markets will take it.

Fri, 04/06/2012 - 01:22 | 2321355 Madrid2020
Madrid2020's picture

We're all in this together,only the timeline is different. Impolsion is coming to America too,but unlike Spain,Americans burn their own cities. 

 

Fri, 04/06/2012 - 07:10 | 2321569 Lednbrass
Lednbrass's picture

Yes, but most of our cities already look like 1980's Beirut before the rioting starts so its not as noticable. Places like Detroit, St. Louis, and Baltimore havent had a good riot in years but you certainly cant tell by looking at them.

Thu, 04/05/2012 - 11:58 | 2319628 Jlmadyson
Jlmadyson's picture

Let's say it together; Depression.

Period.

Thu, 04/05/2012 - 12:02 | 2319638 Bwahaha WAGFDSMB
Bwahaha WAGFDSMB's picture

Depression?  How about global financial collapse.

Thu, 04/05/2012 - 12:20 | 2319711 Buckaroo Banzai
Buckaroo Banzai's picture

The Pain in Spain falls mainly on the Sane.

Thu, 04/05/2012 - 13:15 | 2319882 forward ho
forward ho's picture

Lets go ahead and give this whole mess a proper historical term. The Great Contraction. Or better yet... THE CRUNCH.

Thu, 04/05/2012 - 22:49 | 2321210 StychoKiller
StychoKiller's picture

The Great Implosion™!

Thu, 04/05/2012 - 12:00 | 2319632 tocointhephrase
tocointhephrase's picture

Ole

Thu, 04/05/2012 - 12:00 | 2319634 DoChenRollingBearing
DoChenRollingBearing's picture

Visit Spain and Italy soon, they may soon become too dangerous for regular tourists...  

I have never been to Greece, is it already too late for tourists there?

Thu, 04/05/2012 - 12:05 | 2319652 Madrid2020
Madrid2020's picture

Factually speaking Madrid is among the safest capital cities in Europe.Much more so then:Amsterdam,Rome,Paris,Berlin  and Londonistan.

Thu, 04/05/2012 - 12:09 | 2319654 Ghordius
Ghordius's picture

I've just been in all three and it's as safe (or dangerous) as in the last decade.

In fact, watch this video of how the police in Athens is battling some molotov-cocktail throwers and watch the passersby, the open shops, the traffic and all that.

You'll note that life goes on nevertheless and many look even bored. http://youtu.be/1_E4f1kcqjk

Thu, 04/05/2012 - 13:46 | 2319955 DoChenRollingBearing
DoChenRollingBearing's picture

Thanks Madrid2020 and Ghordius for the reports.  If all is well with Mr. and Mrs. Bearing, we will be going to Apulia in Italy later this year, they say it is very pretty.  And my wife LOVES Italy, she's been studying Italian for 12 years...

Fri, 04/06/2012 - 01:24 | 2321356 Madrid2020
Madrid2020's picture

Italy is beautiful and Italians are the nicest people in Europe.Enjoy!

Fri, 04/06/2012 - 08:46 | 2321704 GMadScientist
GMadScientist's picture

Italians outside of Rome...are the nicest people in Europe.

Thu, 04/05/2012 - 12:00 | 2319635 Tsar Pointless
Tsar Pointless's picture

If TPTB were able to pop the S&P over 1400 on the backs of "Greece hopes", to what level will they be able to pump the S&P on the backs of "Spain hopes"?

The gain on Spain will decimate your brain.

Besides, you can't spell "Spain" without the S & P.

Thu, 04/05/2012 - 12:03 | 2319639 Madrid2020
Madrid2020's picture

On the bright side it looks like Real Madrid may play Barcelona in the Champions League Final.

Thu, 04/05/2012 - 12:10 | 2319670 swissaustrian
swissaustrian's picture

Both have a combined debt of more than a billion Euros!

Fri, 04/06/2012 - 01:11 | 2321348 Madrid2020
Madrid2020's picture

Actually both are the wealthiest soccer clubs on earth!Madrid #1

Thu, 04/05/2012 - 12:04 | 2319643 gjp
gjp's picture

That's ok.  With Starbucks and Apple making new highs today and each up more than 18% in the last month alone, we can all happily play with our iPhones while sipping $5 coffee and get rich while doing so.  Who needs Spain?  Or a job?

Thu, 04/05/2012 - 12:05 | 2319650 navy62802
navy62802's picture

It's all good. They've only got unemployment in the mid 20s. They'll bounce back in no time! :-P

Thu, 04/05/2012 - 13:33 | 2319928 Non Passaran
Non Passaran's picture

I'm sure a bit of US stimulus via BLS assistance to their Spanish counterparts would bring down Spanish unemployment

Fri, 04/06/2012 - 08:46 | 2321705 GMadScientist
GMadScientist's picture

What's Spanish for Foxconn?

Thu, 04/05/2012 - 12:10 | 2319667 Vince Clortho
Vince Clortho's picture

Scary stuff.

Spain = Spain't

Thu, 04/05/2012 - 12:12 | 2319673 machinegear
machinegear's picture

Greece was just the fart before the turd. Spain is about to go PLOP!

Fri, 04/06/2012 - 01:27 | 2321358 Madrid2020
Madrid2020's picture

When this shit hits the fan,you'll be the first to know!

Thu, 04/05/2012 - 12:41 | 2319794 slewie the pi-rat
slewie the pi-rat's picture

ole!

Thu, 04/05/2012 - 12:57 | 2319837 pods
pods's picture

What could go wrong with half the young folk unemployed?

pods

Thu, 04/05/2012 - 13:11 | 2319874 bobola
bobola's picture

"..Charles V had left Philip with a debt of about 36 million ducats and an annual deficit of 1 million ducats. This debt was caused by Phillip II defaulting on loans in 1557, 1560, 1575, and 1596. This happened because the lenders had no power of the king and could not force him to repay his loans. These defaults were just the beginning of Spain's economic troubles as Spain's kings would default 6 more times in the next 65 years. Aside from reducing state revenues for overseas expeditions, the domestic policies of Philip II further burdened Spain, and would, in the following century, contribute to its decline, as maintained by some historians..."

(...keep in mind that during this time there was a constant flow of silver and gold flowing into Spain from the Spanish Main, yet they kept going bust time and time again...)

http://en.wikipedia.org/wiki/Philip_II_of_Spain

Fri, 04/06/2012 - 01:30 | 2321364 Madrid2020
Madrid2020's picture

True,but Philip II and his son and grandson, also gave Spain perhaps the greatest collection of art treaures in Europe.Think Museo Prado and Spanish National Trust(Colecciones Reales).

Fri, 04/06/2012 - 08:49 | 2321715 GMadScientist
GMadScientist's picture

And they only had to rob, steal, and kill how many?

 

Fri, 04/06/2012 - 14:58 | 2322941 Madrid2020
Madrid2020's picture

Didn't they all Blanch! Apocalypto 1492 and Spain brings civilization to the Americas.

Thu, 04/05/2012 - 13:53 | 2319970 Stackers
Stackers's picture

I've been told by reliable source that the rain in spain falls mainly in the plain

Thu, 04/05/2012 - 14:39 | 2320063 Pancho Villa
Pancho Villa's picture

And the capital gain in Spain has gone completely down the drain.

Thu, 04/05/2012 - 14:49 | 2320079 orangegeek
orangegeek's picture

Ah, the successes of socialism.  And after the collapse, Europe will have their hands out for US help much like post WWII.

Thu, 04/05/2012 - 15:04 | 2320097 Mysteerious Roo...
Mysteerious Rooshian Vooman's picture

Es grünt so grün wenn Spaniens Blüten blühen!

Thu, 04/05/2012 - 18:39 | 2320723 Pairadimes
Pairadimes's picture

­Peligro!

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