Spain's consumers lose heart

A story from Reuters earlier today

Spain's key services sector --
more than 60 percent of the economy -- shrank at its fastest
pace in a year in December when consumer sentiment slid anew,
overshadowing an above-expectation rise in industrial output. Since Spain's property bubble burst in 2008 unemployment has
soared and increasingly gloomy consumers have abandoned the high
streets and restaurants, hitting the key services sector and
reinforcing worries over the economy's ability to recovery. "The headline PMI is consistent with stagnant growth. Our
view remains that Spain will fall back into recession this year
and, even if it doesn't, growth will be worse than government
forecasts," Capital Economics economist Ben May said. The euro zone debt crisis, which gained pace in November
after Ireland was forced to seek an EU/IMF backed bailout, has
stunted a recovery in the blocs' peripheral countries and
highlighted their disparity with the core economies.
"Near-record growth in Germany and strong expansion in
France contrasted with a collapse in growth in Italy to
near-stagnation and increased rates of decline in both Spain and
Ireland," said Chris Williamson, chief economist at Markit. Investor concern the Spanish economy will be unable to
restart after stalling last year following a prolonged recession
has pushed up bond yields and fuelled expectations the
government will be forced to apply for EU/IMF aid. The premium investors demand to hold Spanish debt over
German Bunds was around 244 basis points on Wednesday, below
euro-era highs touched at the end of last year but a long way
from the around 70 bps before the euro debt crisis began.
Markit's purchasing managers' index (PMI) of Spain's
services companies was below the 50 mark which divides growth
from contraction for the fifth straight month in December,
showing the economy is still struggling. November calendar-adjusted output rose 2.3 percent, the
National Statistics Institute said, far above a Reuters poll of
-3.4 percent, supporting government hopes of fourth quarter
growth, but clouded by continued gloom from consumers.
CONFIDENCE FLAGS Consumer confidence fell to 64.6 points in December, down
from 70 points a month earlier and the lowest recorded level
since May 2009, the Official Credit Institute (ICO) said on
Wednesday. Overall confidence was dragged down by a deterioration in
sentiment toward the current economic situation and expectations
for the economy going forward, ICO said. Prime Minister Jose Luis Rodriguez Zapatero has said the
country will beat public deficit targets of 9.3 percent of gross
domestic product and that the economy will grow in the fourth
quarter of the year. The government expects the economy to have shrunk 0.3
percent in 2010 and to grow 1.3 percent this year, a forecast
considered optimistic by many economists. November industrial output was boosted by the energy
component, which rose 7.7 percent year on year and was probably
lifted by harsh weather conditions, economists noted. But analysts were focused on the way shoppers were keeping a
tight hold on their purse strings. "PMI services is much the same story as we had on the
consumer component in industrial production, which is that
spending is constrained by the fiscal retrenchment and this is
reflected in the services component," economist at Deutsche Bank
Gilles Moec said. The Socialists have passed austerity measures last year
aimed at saving more than 50 billion euros ($66.40 billion) but
have said short-term growth would be boosted by rising exports. "Capital goods and intermediate goods, normally driven by
exports, are doing fine and this is perfectly consistent with
news on exports and the rebound in manufacturing PMI we had
earlier this week," Moec said.

Why mortgages might be Spain’s next headache

Are mortgages the next headache for Spanish banks? Regulators think the country’s 630 billion euro home loan market can survive the slump relatively unscathed, just as in the last real estate crisis of 1992-1993. Spanish banks’ biggest problem is bad loans made to real estate developers. But it would be optimistic to assume that mortgages will emerge unscathed.

In a recent presentation, the Bank of Spain pointed out that conditions in 1993 were tougher than they are now.
Unemployment hit 24 percent and interest rates soared to 13.9 percent, compared to 2.6 percent today. Even then, only 4 percent of mortgages went sour. And banks were able to sell repossessed properties after the bust without incurring losses.

There are grounds for optimism. Despite falling property prices, Spanish home loans are on average worth just 62 percent of the value of the property. These loans are recourse, making it harder for borrowers to walk away. Spanish families will often help overextended homeowners keep up their mortgage payments. This is reflected in banks’ data: the proportion of mortgages classed as non-performing has fallen to just 2.6 percent.

But today’s real estate bust is worse than in 1993. Spain started building 760,000 new homes in 2006 — almost four times as many as in 1992, even though the population has grown by just 13.5 percent. Most analysts predict Spanish house prices will fall 25 percent from the peak, twice the 12.8 percent drop to date. According to RR Acuna, a consultancy, Spain has 1.5 million unsold homes — about 6 percent of the total stock. These will act as a drag on prices, making it hard for banks to sell foreclosed homes at a profit. Moreover, households are more indebted than in 1993.

How bad could it get? If delinquencies on mortgages reached, say, twice the 1993 peak, banks would have 50 billion euros of troubled loans. Even then, this would be less of a headache than lenders’ 180 billion euros of potentially troubled exposure to construction and commercial real estate. Eventual losses would also be much smaller. Nevertheless, it’s hard to argue that mortgages will not be a problem.

Spain must act to capitalize banks

The last time

This is the last time I'm going to get caught up in the great Christmas shopping scam. The retailers have this perfect date of the 25th December which forces the vast majority of people to spend hundreds of pounds on Christmas gifts. And then, on the 26th or shortly after, prices drop through the floor, and we are bombarded with ads for 40 or 50% off. In our local shopping centre today, I was completely pissed off with seeing things that I had paid full price for, at 50% a few days later. The worse thing is, we know this is going to happen, and still most of us fall for it. Not me, not again next year anyway.....

More bloody snow

So, here we are, in the last few working days up to Christmas, and the whole bloody country seems to have ground to a halt again because of the snow.
I live near Gatwick and the news reports are full of stories of people stranded at the airports either trying to get away or trying to get home somewhere before Christmas. The news channels must be loving it - they can spend the whole day going live to helicopter shots over the M25 or Gatwick.
Also, we hear that retailers have seen their share prices fall, as people just haven't been able to get to the shops. One wonders what will happen to the boxing day sales if people haven't been able to get to the shops before Christmas day.
Of course, Christmas is the ultimate shopping scam anyway, in terms of forcing people to buy before the 25th, even though we know that prices will be lower on the 26th.
In economic news we hear from the CBI that they have scaled down their estimate for 1st quarter growth to an insipid 0.2%, with not much improvement through 2012. There also seems to be some expectation that interest rates will have to rise, to help curb inflation. Given that we are all going to be hit by higher VAT and other increases next year, that's hardly going to be welcome news. In terms of people with Spanish mortgages or other euro mortgages, there may be a small upside as the pound may strengthen with higher interest rates. Whatever happens, it looks like being a tough 2011.....

Poor sales to non-residents in Spain

Amazing property sales figures for the last quarter show that the number of properties sold to non-residents was, wait for it, 490. Yes, 490, in the whole of Spain!
I would imagine that a few years ago there would have been some large agents that would have expected to sell 500 units in a quarter!
So it seems that, even with falling prices (supposedly) the foreign buyers are hardly falling over themselves to buy places in Spain.
Clearly everyone seems to have their own economic problems at home, and the outlook for Spain seems to be shaky at best.
Also, although the banks can be identified as being the cause of a lot of problems with their easy lending practices, the current best offer of 60% LTV is not really very enticing for non-cash buyers. You are going to need 40% deposit plus up to 15% to cover all the costs - about 55% of the total purchase price. It's not difficult to see why the sales are so low.

Explaining the Sub-prime mortgage mess