Today the leaders of the European Union meet at their latest conference and as ever there is plenty for them to discuss. Not all of the issues concern only the Euro as for example plans for European banking union and a financial transaction tax are matters which attract plenty of attention in the UK which has the largest financial sector. However the Euro will no doubt take centre stage at the 22nd such conference since its crisis began. If it had slipped from the leaders minds there is the 20th general strike in Greece since its crisis began to help re-focus them. It is not only consumer prices which exhibit signs of inflation in these times.
I thought that today I would give an analysis looking at both sides of the coin and focusing on what is the current “swing-state” if we were to look at the situation in US Presidential election terms, which is Spain.
Reasons to be cheerful
The European Central Bank has found rhetoric can work
Back in the summer the head of the European Central Bank Mario Draghi made promises to support the government bond markets of the Euro nations in trouble. This eventually coalesced into the plan for Outright Monetary Transactions which would involve buying bonds mostly within the one to three-year maturity range. However in an unusual triumph for rhetoric and one I did not expect at the time this has led to what have been sustained rises in government bond prices in the countries in trouble.
If we look at Spain her two-year bond yield has fallen from a peak of over 6.6% in late July to 2.84% right now which is a considerable decline. The decline is even more marked in that it has been achieved without a shot being fired in anger as no bonds have actually been bought. Also even bonds outside the range that the ECB would purchase if it stepped in to help have rallied strongly. For example Spain’s ten-year bond yield has dropped from 7.62% in late July to 5.5% now.
The consequence of this is that there is less pressure on Spain from funding her borrowing. This morning she has issued some 1.5 billion Euros of ten-year bonds at 5.46%. So over the life of this particular bond around 300 million Euros have been “saved” if we compare with peak yields. Even in this era you can do quite a bit with 300 million Euros and this is only one bond issue.
Even countries which are unlikely to get help from OMT’s have seen rallies in their government bond markets. For example Portugal has sen its ten-year bond yield fall from over 11% in late July to under 8% now to hit its lowest in 2012.
A ripple of economic hope?
Today has seen some more hopeful numbers from Spain’s economy of which the details are below. Apologies for the English which is via google translate.
The General Index of Turnover Industry (CNI) undergoes a variation
annual 3.8% in August, almost six points higher than that recorded in July.
The General Index of New Orders in Industry (IEP) undergoes a variation
annual 1.0% in August, more than three and a half points above the July.
The annual turnover of the market services sector
stood at 0.8% in August, compared to -4.8% in July
To add to this Eurostat produced numbers yesterday that Spain’s construction sector had grown by 0.6% in August when compared to July.
As you can see August 2012 has produced some positive numbers if we compare with August 2011. A possible real economic recovery too which of course would add to the bond market recovery discussed above.
Reasons not to be so cheerful
Spain’s banking sector
Here we are seeing signs of yet more pressure as the effects of her housing boom and bust continue to impact. From Reuters.
Spanish banks’ bad loans rose to 10.5 percent of their outstanding portfolios in
August, reaching a fresh record high, Bank of Spain data showed on Thursday, up
from 9.9 percent a month earlier.
Quite a one month surge is it not? It is hardly a sign of a recovering sector to see bad loans increase in August by 5.3 billion Euros to 178 billion. And this is not the full-scale of the move as I note that the July figures were revised higher to 10.1% from the original 9.9%. Let me give you some perspective on this which is that at the end of 2007 this number was 16.25 billion Euros.
Whilst we are on the subject of Spain’s banks what has happened to the 100 billion Euro bailout of them? It never seems to actually happen and at the rate bad debts are growing they had better hurry up before it looks too small.
Bank lending in Spain
Moving from what are problems caused by past decisions such as bad loans we also got an insight today as to the state of bank lending and credit in Spain. If we compare August with July we see that there has been a 1.1% fall in bank lending. If we compare with last year we see that bank lending is some 5% lower.
If we try to peer at lending to businesses as a signal we see that trade credit fell by a much more severe 4.5% in August compared to July and a rather chilling 17.5% compared to August 2011. So it looks as though Spain’s business sector is being squeezed hard on the credit front.
Returning to the real economy
If Spain has made a turn in her real economy it has not been picked up in the survey data. If we look at the Euro area data as a whole this was reported for the period up to September.
The Euro zone downturn gathered further momentum in September, suggesting that the region suffered the worst quarter for three years. The flash PMI is consistent with GDP contracting by 0.6% in the third quarter
So Spain would really have had to bucked that trend if we was beginning to recover. If we look at the purchasing managers index survey data for September we saw this.
The third quarter of 2012 ended in familiar fashion for the Spanish manufacturing sector, characterised by falling demand amid the ongoing economic crisis in Spain.
The actual number was 44.5 which compares to 50 being the measure for unchanged. Also we have a clear contradiction between the number for August which was 44 (showing a substantial contraction) and the official data above.
Also we have the issue of August being a month where output is traditionally low so any changes are magnified and there is the danger of seasonal adjustments misfiring. If we look at August 2011 there were similar signs. If we looked at the annual change in the industrial turnover index it was 9.7% compared to this year’s 3.8%. The industrial new orders index rose by 9.3% on an unadjusted basis compared to 1% this year.
I have shown today that the official numbers for Spain’s economy released today if taken in isolation do show signs of a recovery. However I am afraid that hopes tend to fade when one looks at the pattern for 2011 which was similar in terms of improvement but actually much stronger. If we consider the survey evidence that suggests Spain is in the middle of a severe downturn we have a clear contradiction. So I await the evidence for September with some trepidation as there is a danger that it will be grim.
Moving to the official view I spotted this in the presentation by the Governor of the Bank of Spain to her Parliament given earlier this month.
The fact that, at present, the only source of improvement in economic activity is the external sector (neither higher exports nor lower imports generate, per se, increases in tax revenue) means that the prospect of buoyant public revenue is scant, and is compounded by the intensity of the real estate adjustment.
If we translate the code usually used by central bankers it looks as though he is worried too.
Moving to the European conference there is scope if they have been updated on these numbers for yet more dithering. As soon as the pressure reduces that is after all what politicians of all different types seem to do.