Retail Banking At Its Best

A recent trip to a local bank branch to renew a term deposit went something like this:

Mouth-breathing Olive Farmer - What're ya payin' on x fer upta a year?

Silken-tongued Manager - I'm not sure, sir. I'll have to look it up. But you might be interested in this product we're offering.

MOF - Listen smart ass, I don't wanna hear nuthin' about no struckchered producks.

SM - No, no. Don't you worry, sir. No structured products for you. But, just listen to this offer.

Total, we were so amazed by the what ensued that we can't resist sharing it with our readers - notwithstanding that the manager told us that the document we asked to take home was 'internal'.

It works like this...

• 1). 70% of the reader's money goes into a 1-year term deposit paying 5.06% interest.
  
  
• 2). 30% goes toward the purchase of four index component stocks



• a. Yield variable over maximum 36-month term according to the following conditions:


• End of 1st year: if all four stocks are trading above their value on the day the contract was signed, the bank pays the reader the principal plus 10% and closes out the deal. Otherwise, the bank pays 2% and the contract continues in force.



• End of 2nd year: if all four stocks are trading above their value on the day the contract was signed, the bank pays the reader the principal plus 20% and closes out the deal. Otherwise, the bank pays 2% and the contract continues in force.



• End of 3nd year: if all four stocks are trading above their value on the day the contract was signed, the bank pays the reader the principal plus 30%. Otherwise, the bank pays 2% and the contract comes to an end.
  
  However, if at this time any one of the stocks is trading at less than 60% of its initial value, the bank takes the reader's investment and, rather than returning it, buys and delivers to him or her that value of shares in the worst performing component at the price it traded for 3 years prior.

Mention our name and receive a free newfie pistol.

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Mortgage Index

The Random Spaniard has suggested that our indexing, rather than providing the raw figures, of the new mortgage stats from the INE might detract from their utility. We think this is a legitimate criticism and would like to explain.

Simply, the new mortgage data does not tell us much about either the number of house sales or the prices for which they change hands. So we don't think it's more important than the goal of saving us the trouble of putting three separate graphs to merely illustrate trend in mortgage lending. Mortgages are merely loans guaranteed by a property. That they happen to be, in the case of a home purchase, guaranteed by the property being bought is incidental. The fact that the number of home mortgages granted in a given month consistently outnumbers residential sales by between 140 and 175% - averaging out to 155% - should be evidence of this.

The second chart shows this ratio. Interesting the huge bump in 2009, possibly indicating that any relaxing of credit conditions, or renewed demand for credit, was accompanied by more rigorous collateral requirements on the part of banks. Other suggestions accepted in the comments box.



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Don't Switch Dicks In The Middle Of A Screw

We have been paying very close attention to the sudden change of heart undergone by Spain's sole Anglo economic authority, Edward Hugh, since about last autumn. Abruptly and absolutely without warning, Edward has transformed himself from the panicked purveyor of pending disasters and serial manufacturer of mixed metaphors to the very voice of considered, elbow-patched reason itself. Take this bit from yesterday's entry, The EU Does Have The Legal Power To Organise Bailouts, as an example:

'Now finally, one piece of news few seem interested in. Santos Gonzalez, President of AHE (Spain’s Mortgage Association) has come out today and warned that Spain's banks do not have the financial capacity to assume the outstanding debt of property developers, which amounts to around 325,000 billion Euros, This he says "gravely endangers the viability of the Spanish property sector as well as Spain’s financial industry"'.

This, if the case, is the type of truly shocking news that would have hurled down an avalanche of hyperbole upon the unsuspecting reader as late as last August (assuming he or she lived in the antipodes, of course). In January of 2010, however, Mr. Hugh can only summon up the truly limp-wristed, '...Spanish sovereign spreads are going bo (sic) be in for a very bumpy ride.' in conclusion.

Or, how about his reaction in a prior piece to Martin Wolf's prediction that Europe's fate was one of permanent economic depression - a position once touted by Mr. Hugh with a religious obsession. Can he not come up with better than, 'No easy answers yet awhile (sic), but lots of interesting problems to talk about, and plenty of food for thought.'?

In all honesty (given Hugh's truly horrific predictive track record), we do not want to be on the same side of the trade as Spain Economy Watch, Fistful of Euros, or any of the myriad other publications that make up his spamdexing empire.

Does the irony of a resumption of the financial crisis occurring during both Edward Hugh's editorial about-face and Spain's risible stint in the EU presidency escape any of our readers?

Sorry for the rant, but we just did a Google search for some item or another and were, yet again, confronted with seven of the first ten results pointing to the same piece by Edward Hugh cross-posted in different publications. Totally unacceptable web etiquette.

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Giving Credit

Noting that the thirst for yield, outrunning the fear of ruin, led to the Greek government finding itself with 20 billion worth of bids for today's 5 billion euro 5-year bond offering, we thought we'd assemble a chart (actually two-in-one) on the Spanish borrowing of money. The blue line shows historical debt-to-GDP since 1995 and the orange and red the split between foreign and domestic counterparties to the debt component of the ratio over the same period.

Worth observing are:

1). Making a rough guess as to what the figures will be at the end of 2009, the debt-to-GDP ratio for the Spanish economy appears to be equal to that of the 1995 recession, and slightly below those of 1996. Readers might keep in mind that projections for 2010 are considerably higher.

2). The ratio was in constant decline from 1996 through 2007, even during the 2001 downturn - reasonable, considering that Spain provided virtually all the EEC's economic growth in the early part of the decade.

3). Tracking the decline in debt-to-GDP was that of the domestic market share for government bonds through 2007.

4). In the mid-90's, the Spanish government funded itself predominantly in the domestic market. Following the 1998 conversion of financial market transactions to euros however, foreign demand for this debt soared. Since 2005, this has been an even split.

5). The huge increase in bond issuance over the current year has not affected the ratio of foreign to domestic lenders - this despite the conclusion one might be inclined to arrive at on reading of the supposedly exorbitant degree domestic banks and cajas have been gorging themselves on local guvvies.

6). In the midst of last Thursday's Greece-inspired mayhem, Spain sold off 1.25 billion of a '1 to 2 billion' 20-year yielding 85 points over the equivalent German debt. Given the serendipity of the timing, we don't see the result as boding much ill.

As an aside, those that might think that last week's EUR/USD weakness was mostly related to the tanking of Greek bonds should keep in mind that gold also simultaneously went south. Terminal confusion in euroland would have had these moving in opposite directions. The degree to which exchange rates reacted to all this might be reflected by EUR/GBP, however - less pronounced than the former, but a trade we think might have legs.

Chart courtesy exchangerates.org.

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Reality Show

We said, a couple of months ago, that the graph of the 12-month rolling sum of house sales in Spain would track flat when November's numbers came out. We were right. The stats can be found here.

Those who were considering voting us off the program over this might want to reconsider and instead send us some money. We accept all forms of cash, but have a particular liking for British pounds.

In other news, the big winner in the worldwide real estate recovery sweepstakes is Canada. The Globe and Mail reports:

Across the country, the Canadian Real Estate Association (CREA) said Friday, December sales increased 72 per cent from the same month in 2008, to 46,805 units, while prices gained 19 per cent to an average $337,410.

The record month capped the strongest quarter ever recorded – sales increased 59 per cent over the previous year.

The national average price climbed 5 per cent in 2009, to a record $320,333.

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Trichet Talks Tough

FT Alphaville reports some of today's commentary on Greece from ECB president, Jean-Claude Trichet:

'We will not change our collateral policy for the sake of any particular country.'

'No government, no state can expect from us any special treatment; we have our own rules and we will apply them without special treatment of any kind.'

Of course, the last time M. Trichet ran into a conflict between reality and the official version he resolved it simply by deciding to accept covered bonds as collateral for liquidity. Odd that the true beneficiaries of this, Spain and Germany, were the ones with the biggest dependence on this kind of financing and with the biggest mortgage holes in their balance sheets.

Macro Man opines that it is specs that are having a go at Greek debt as we speak. That the euro, currently a tad under $1.45, refuses to even think about taking a run for $1.42 adds some heft to his argument.

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Hold That Writ

We pretty much figured out the editorial quality of right wing standard bearer, El Mundo, ten years ago when they published a back page item in which the writer, apparently chagrined over some perceived insult by an American official, referred to the United States as 'a country created by drunken Irishmen'. We, nonetheless, still occasionally consult the pages of what is often touted as the only domestic newspaper that undertakes investigative journalism. This is more a commentary on the rest than a feather in PJ's cap, by the way. El Mundo can only fairly be described as the brainchild of a secret tryst involving Cardinal Ratzinger, Ana Botella and Ambrose Evans-Pritchard.

Yesterday, under the typically dubious headline 'Mortgage defaults* double in one year' we find that the Spanish Mortgage Association has reported that said default rate had risen, year-on-year through September, from 1.84% to 3.04%. That this 65% rise is 'double' implies that the writer would accept 35% as 'unchanged' is secondary. More interesting by far is this third quarter report on defaults from said trade group, known as the AHE in Spanish.

Suffering, as does the item, from a serious lack of definition of terms, a table on page 3 nonetheless tells us that the default plus probable default rate for home mortgages through September stood at 2.99% (El Mundo in its attempt to squeeze blood from a stone quoted the insignificantly higher rate of off-mortgage credits associated with buying a house - co-signed by the parents, and the like - to get it over 3% so that they could call it 'double').

Notwithstanding that this rate did more than duplicate itself from June 2008 to one year later (since rising a statistically irrelevant 0.02%, as an aside), this figure falls far short of the end-of-the-world scenario predicted by the great bulk of uninformed commentators (being the great bulk of commentators, if the reader hadn't noticed). We believe that our prior insistences that falling values, and even a nominally collapsed national economy, would not bring floods of individually foreclosed homes onto the market at any price is being borne out.

Mortgage lending now dismissed as a threat, what have been disastrous for financial institutions are the loans they made further up the real estate food chain. The last two tables of the report show that credit extended to promotors and builders is doubtful to the tune of more than 8 percent in both cases.

The tables also do us the favour of showing which type of institutions are most affected. Except for the negligibly important category of 'loans for home renovations', the cajas de ahorros - comprising about half of the Spanish banking industry - are holding (at times considerably) more garbage than the banks. Combine this with their dominant position in coastal areas - where the prospects of actually selling a home are, ummm, limited - and one would love to be able to put on a bank-caja spread. And hold it for about a decade.

With their default rate of 1.81%, the big winners in the risk control game are the holders of 10 percent of the mortgage market. The cajas rurales, which are the bulk of what the AHE calls 'cooperative banks', are the provincially-amalgamated descendants of the mini-banking operations of individual agricultural co-ops. Their main business was originally to lend money against crops. Being perpetually sleepy and slow-moving sure looks like a good long term plan, does the reader not agree?

*Note also that El Mundo describes as 'morosidad' ('default' in Spanish) for what the report terms 'dudosidad'. This means 'doubtful' and certainly includes mortgages in arrears but not to the point of permitting foreclosure.

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Babel In Practice

Someone hinted that they might like to see more Andalusian nonsense posted at Ibex Salad. The photo (which we originally contributed pseudonymously to Alfonso el Idiota). 'Servicios' is the word for washroom in Spanish. Following it is the translation to some universal tourist language that we are sure the person charged with the task thought was English.










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Old Habits Die Hard

Last week's earth-shaking eurozone event was ECB Executive Council member Juergen Stark's announcement that his employer would not be providing the medicine to cure what ails Greece's national finances. That the final result of this latest German exercise in reasserting dominion over the fiscal moral high ground was both a substantial lowering of the Greek 10-year yield and, product of the seeming petrification of the bund at 3.39%, an identical 25 bps shrinking of the appropriate spread as well as an interday rise in EUR/USD of 0.3% should, rather than the home crowd haranguing of a Bundesbank minion, be the item of interest to Europe watchers and pundits.

Looking at the chart of eurozone spreads on the left (and ignoring Ireland for reasons described below) the bund was the all-round loser on the week. To say the least, the effect was counter-intuitive.

Our own suggestion is that the first decade ECB interest rate policy that so much accommodated Germany's special interests at the time, whilst fueling various undesirable outcomes in theologically lesser states, is turning out to be at least equally disastrous for that country. We do not accept the Teuton argument that the profligate ways of the community of drug addicts is fundamentally responsible for the collapse of the heroin trade. Germany got the interest rates it needed - as both a manufacturer and a seller - to export its way out of the morasse of unification. Despite tough talk from the likes of Mr. Stark, the market knows who has the most to lose from a limit situation.

One has to wonder what utility the maintenance of the fiction that EMU countries are actually independent states serves.

We rolled the Irish bond from the 2019 to the 2020 in conjunction with the new year and haven't gone to the trouble of doing it in a way that creates a generic item. We may or may not actually get around to it. Week-on-week changes should have some significance from this point onwards, although nominal values will continue to be out of whack for a while.

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New Year, Same Story

In the closing days of last year, the INE popped up mortgage issuance statistics for October. As usual - our visual representation of the residential component.

We noted that some now-forgotten press sources made a bit of a fuss over the marked decline in both numbers and total loaned. Readers might be advised that we include a 6-month average precisely because it is a very volatile series. October's decline, replicating similar in the same month of 2007 and 2008, is just standard issue for this set and the smoothed lines remain clearly ascending for both numbers.

Thanks to Clover, we came across an article in The Economist in which comparisons are made between the rental yield on residential real estate across a variety of countries - and from this a calculation of the fair pricing of homes. The result concludes that Spain, at +55%, is the most overpriced market in the world - at least by this gauge.

The simple criticism of using yield as a measure of overvaluation is that it assumes that buyers take yield into consideration when making a purchase and that renters consider rental as an economic option in competition with purchasing. Neither is characteristic of Spain.

Purchasing decisions here are more likely influenced by income, amount of savings, interest rates and confidence in the future. And potential renters, particularly young people, have a marked tendency to stay with their parents - or even overextend themselves, if possible, by buying - rather than 'give their money to the landlord'.

There would be no complaint from ourselves were the article to have been written as advice to income investors rather than as a general commentary on prices.

At the risk of exposing ourselves as less coherent than we might wish to be, we have taken the opportunity to create a new category for our posts. Real Estate Economy lumps together our past, present and future observations on everything to do with property.

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