Recommended Reading

We suppose that some of our readers might have noticed how infrequently Ibex Salad resorts to press reports in order to prove whatever silly point it might be trying to make on a given day. The reason for this is that we don't actually read newspapers very often - because beyond simple stuff like exactly how many people died in a specific car accident at a given intersection on a certain day of the week, they are notoriously unreliable witnesses to the passing parade.

So it was with some trepidation that we took up an invitation to visit, and exchange links with, a Spanish internet news source known as 'Qorreo'. We were pleasantly surprised. Written entirely in English by a team that has (or has had) something to do with the English edition of El País that gets tucked in to the International Herald Tribune, Qorreo provides readers with fairly complete - and well-written - background articles on issues currently commanding attention in the Spanish press.

Readers tired of being talked down to by the uniformly simplistic and monothematic (this one* has Tuesday's demonstrations 'shutting down' Spain's cities) Anglo press treatment of Spain could do worse than give Qorreo a look. Start with Andrew Eatwell's take on Zapatero's proposed pension reforms, for example - the real issue behind the manifestations.

*The Globe and Mail piece might have only been read by a few hundred suits flying the Montreal-Toronto route were the always gullible Yves Smith not to have typically picked it up for redistribution in the rant-o-sphere.

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December Mortgages

Not interesting - the 8.66 point month-on-month drop in the number of new mortgages. The average November to December change for series is negative 9.02 points. The 12-month average of the number remains flat at October and November levels.

Yes interesting - the 6.16 point jump in average amount loaned. That's the second highest for any two-month pair in the series as well as an extension to five months of the current uptrend. Comparing only November and December since 2003, the average change is 0.84 points, approximately equal to the norm for all monthly changes.

Readers should note that this is not a commentary on home sales (go here for that), but is possibly an indication of credit conditions.

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Tightening the Noose

News from two days ago that the Banco de España has decided to raise the provisioning requirements for real estate loans from 20 to 30 percent has not gone down well with the listed banks - particularly (and maybe counter-intuitively) the two big ones. First casualty has been our recommended long-SAN-and-BBVA/short-builders spread. Flying directly out of the blocks with a near 10 percent gain, this leveling of the field had, when we closed yesterday afternoon, reduced that to a four and a half points. The rout continues today.

On a less personal note, it's more than a little ironic that the primary victims of this directive are the two banks that had so publicly and recently taken profit hits by... augmenting those same reserves. The four domestic banks that are listed on the index have gotten off relatively lightly.

We made the point in the above-mentioned entry that Santander's and BBVA's biting of the bullet was certain to place yet more pressure on the not-listed cajas de ahorros. Not unexpectedly, it has taken these only 24 hours to come out swinging in the aftermath of this next attack on their solvency.

El Economista yesterday reported that the president of the caja's trade association CECA (of which neither Caja Madrid nor La Caixa are members), Juan Ramón Quintás, believes that these provisioning requirements threaten to collapse the real estate market. Implying that the measure has not been well thought out he seems to have said that what Spain needs are 'surgeons, not apprentice witches' in charge of policy.

Señor Quintás knows in his heart what the issue is here. Besides the fact that the BDE has been fairly public in its insistence that housing prices should fall considerably further - not thinking it appropriate that the banks are satisfied with trading very low, if totally stable, sales volumes for only slightly decreasing prices - the Spanish central bank's governor, Miguel Angel Fernández Ordóñez, is more than mildly irritated at the success the cajas are having in resisting almost any and all measures intended to actually make them viable institutions in the long term. His preferred solution is the amalgamation of many of these petty and all too politically connected regional fiefdoms, but the lentitude of the negotiations and the regular walking away from the table of participants are proving this ineffective. Outstanding among the cases is that of CajaSur. Forced into the arms of competitor Unicaja, the Córdoba-based regional continues to stonewall the implementation of a fusion agreement already signed and sealed.

We suspect that a certain number of these will not be able to come up with the dough to comply with the new regulation. But Mr. Fernández (or MAFO, as he is referred to in the press) may find himself between a rock and a hard place when it comes to closing down some of these flim-flam operations. Exiting fairly unscathed from the Greek tragedy and its accompanying and predictable round of really bad foreign press (note that Spain 10-years are again yielding under 4 percent), he is faced over the next few months with the immediate task of rolling vast sums of short-term, credit crisis debt further out the line. A series of failures, small and cheesy as the affected institutions might be, would not ease this task.

Last week, despite the roiled debt markets, the BDE managed to unload 1 billion euros of an off-the-run 30-year, maturing in 2037, at a yield of about 12 bps (we believe) over market. It was oversubscribed 2:1. Next up in March - a 5 and a 10.

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Salt Pork

Referring to doubts concerning the viability of sovereign debt, Alphaville's Izabella Kaminska points us to the chart on the left (courtesy of Morgan Stanley) which intends '...to illustrate which countries are likely to come under more pressure than others...'.

Would someone like to argue that the acronym 'PIGS' is anything more than your standard wog-baiting from the British press? Takers should feel free to make their point in the comments section.

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Think Globally, Act Locally

Earlier this month, John Hempton penned a piece on the demographic challenges to be faced by the governments of the world's post-war industrialized countries. Simply put - too many retirees will, thanks to the overwhelming nominal success of scientific medicine, be living too many years. The resultant underfunding of pensions and health care programs will not be alleviated by the too few offspring that the baby boom generation brought into the world. Here locally, we already have a nice micro version of this.

The contract between the teachers' unions and the regional departments of education in Spain specify that an individual instructor can choose between paying into the public social security health system or a private insurance plan. The latter option (which most take - although it is not a slam-dunk if you live in small town) involves signing on to an administrative organization - MUFACE, for example - which, in turn, strikes deals with the insurance companies. The teacher then picks which company he or she wants after considering facilities available, or whatever. Lately, according to the schoolteacher to whom the writer is married, various insurance companies have abandonned accords with said MUFACE.

The problem, apparently, is the increasing average age of the educational workforce. A national birthrate of 1.1 does not require the continued hiring of young teachers and the ones that are working are becoming more and more costly to maintain in good health.

One has to assume that recent government proposals to extend the retirement age to 67 years will have more insurers rethinking their relationship with public sector unions.

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Is Pork Plural?

In the midst of the trash television spectacle that FT Alphaville has sadly converted itself into in an attempt (presumably) to squeeze some kind of traffic out of Greek fiscal difficulties, we have found a couple of points of actual light. Unfortunately for that sometimes valuable resource, they themselves seemed to have missed both of them.

A search of the Alphaville site for the terms 'dylan+grice' turns up 20 references to the SocGen analyst, Dylan Grice, since mid-September. Clearly one of their favourite sources, we were most surprised that the latest edition of his 'Popular Delusions' did not merit even the slightest mention, notwithstanding its direct relevance to the current situation.

The chart on the left, taken from the newsletter, shows both the on- and off balance sheet (this latter including pension and health care costs) obligations of various OECD countries, plus the EU. We'll point out the obvious that Spain is not only the least prejudiced by future liabilities of the eight nations represented, but also (the scaling of the chart not making it totally clear) the one with the smallest ratio of on balance sheet debt to GDP.

The newsletter goes on to illustrate its own depressing point concerning government indebtedness throughout the world with a series of charts. Curiously, however, in none of the combinations of statistics represented does the acronym, PIGS (later, and begrudgingly, changed to PIIGS to accommodate Anglo-irritating facts) actually seem to require the 'S' at the end.

Mr. Grice's analysis can be found here. Keeping in mind that he may not be to a sufficient degree taking into account events of the recent past, it's interesting throughout.

Did we mention that there were two items of interest? Ah yes. On the left is a scatter diagram from RBC Capital Markets, via today's Alphaville. The writer, Tracy Alloway, explains it succinctly:

The graph plots the 11 largest eurozone members — plus the UK — according to their expected stock of debt and structural budget deficit. It’s meant to capture “market concern” over the size of the countries’ debt liabilities and the pace at which the debt burden is rising.

What she leaves for the reader to derive is how difficult it is to find plural pork there, either.

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It's That Time of the Month!

Despite the field day today's press is having with the 25% drop in number of houses in 2009 sold compared to the prior year, the December statistics released today by the INE reveal merely more of the same monotony that is this writer's ideological lifeblood. Some boring details:

• Year-on-year, total sales decreased 0.4%, new sales 4.3% and second hand increased 4.3%;


• The 12-month rolling sum of total sales is approximately flat compared to November - the difference being a decrease of exactly 108, or 0.03%. Splitting new from used produces nothing worth the effort of having done it;


• If anything draws the eye as mildly exciting it would be that December sales were only 7.7% below those in November. December, between Christmas and the national holidays on the 6th and the 8th of the month, comes up short at least one week of work days. In 2007, intermonth sales dropped 22%. In 2008, the figure was 10%.

Displaying a coincidental timing, Banco Santander's private banking arm, Banif, released a report stating that real estate prices would have to fall '27%' in order for the market to clear. The finanzas.com article failed to make clear whether this was a proposed total drop, or a description of what remains. On the other hand it did distract us with yet another version of exactly how big the outstanding housing stock for sale is in Spain.

It appears that Banif's calculations place this at (we think - the choice of vocabulary is a little odd) 610,000 new finished, 380,000 under construction and 520,000 second hand - totalling 1,510,000 units. The first figure may be alright. The third should be taken with the big grain of salt shaken out by the widespread Spanish habit of permanently pricing homes just out of reach of any reasonable bid. The very definition of 'for sale' comes into question. Most unusual, though, is the claim that there are just shy of 400,000 under construction. This only makes any sense if one counts those on which work has been stopped. Jumping on the M-50 from the Carretera de Andalucía to get yourself to Majadahonda, say, will give the reader a first hand look at dozens and dozens of skeletal, unfinished apartment buildings. Next to none of them have construction cranes attached. Unless labour is now so cheap that builders can hire sherpas to schlep cement up to the top floor, the only conclusion is that they are not yet homes, are not for sale in any but a hypothetical sense, and they are not about to be either of the foregoing in the near future. An alternative version of this statistic might be that Banif is softening up its clientele in advance of yet another bout of really bad news from one of their real estate funds.

In light of the above, we think it appropriate to again post our totally unscientific 'years to clear' chart. We think it's self-explanatory, but questions may be directed to the comments section.

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Gossip Girl

FT Alphaville's Izabella Kaminska yesterday caused one of those Gibraltar-esque flaps which seem to arise whenever English-language commentators say anything about Spain that is not directly related to tourism or, alternately, cannot profitably be used by one local political faction against another. The matter in this case was her mocking of Development Minister Pepe Blanco's boilerplate claim that it was speculators, in cahoots with the Brit press, who were causing such uncertainty regarding Spain's financial future.

Be Pepiño's predictable blather as it may, we'd like to point out the bit that Ms. Kaminska gratuitously tacked on to the end of a piece, only 77 minutes earlier, on Spain's plan to reduce net debt issuance in 2010:

On a sidenote, earlier rumours suggesting Deutsche Bank and UniCredit Group had stopped accepting Greek bonds as collateral and were refusing to lend in the repo market for Greek banks are yet to be confirmed.

The speculation arose in a story published on www.bankingnews.gr, a publication FT Alphaville has not come across and hence cannot vouch for.

Requests made today in the comments section that she maybe clarify that one were met with what can only be described as 'defensiveness'.

It'll take more than a well-placed rumour to unhook the euro from gold.

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Tragedy? Or Strategy

Presciently, seeing as she might find a partial answer in this post (which has been rolling around our head for a number of days), Izabella Kaminska of FT Alphaville asks with regards to Santander's large voluntary write-down of real estate assets:

So what prompted Santander to suddenly brace itself for a 32 per cent depreciation of the property-assets acquired? A sudden realisation they were potentially worth so much less, or a prudent smoothing-out of potential losses to come?

We originally planned to write this commentary with respect to the BBVA provisioning which struck a blow to Spanish banking shares last week. The fact that Emilio Botín has jumped on the same bandwagon only adds weight, we think, to our argument.

This writer had found himself a touch perplexed at the very negative prognostications regarding Spanish real estate and construction emanating from BBVA's Economic Research Department over the last six months, or so - headlined by predictions that property prices had only dropped one-third of the amount needed in order to normalize the market. In English parlance, this type of statement coming from a bank with lots of real estate and related loans on its books would be though of as 'shooting itself in the foot'.

On the other hand, one might consider this supine acceptance of reality as a direct investment in future Spanish domestic banking share. Both BBVA and Santander certainly believe they can blow off the façade without bringing down the entire building. They also know that many, if not most, of the cajas (which handle a large proportiion of domestic business) will be forced to respond in kind. Being, as we pointed out earlier, up to their earbows in loans to builders and developers, they will not be able to do so without replenishing capital - zombies in their purest form will result. When legitimate demand for credit reappears, the two biggies will be among the few able to avail themselves of it.

As an aside, in the wake of today's release of Santander's results, the market awarded them a 9.4% thrashing - and BBVA 7.5%. The average beating that index constructors took was about equal to this latter. We'd suggest that the market has not quite got it. The hidden subtext here is that it will not be as easy for builders as it was to roll over debt they have limited prospects of repaying.

While the reader - having done his or her own homework - waits to get long both of these banks, he or she might consider spreading them against the most indebted builders.

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