New Mortgages

The INE has released April's new mortgage statistics. Lower month-on-month volume largely attributable to the Easter break. Considerably lower month-on-month average value also, but this is a typically noisy series. The more interesting 12-month average of this latter figure indicates a certain stability of prices at 2005 levels - or 2004, if one takes into account that no bank is giving out 100% loans as many did way back then.

To be seen is the effect that the 1% increase in the VAT on new home purchases will have. This comes into effect on July 1st and will begin to be reflected, due to the lag between purchase and the issue of the deed, in September. Our guess is the sellers - be they banks, cajas or developers - will swallow it whole, just as the major food chains have stated they will with their corresponding tax bump.

To be kept in mind is the potential effects of this month's civil service pay cuts. How much is to be seen, but this will take a piece out of house sales - although the recent cancellation of a proposed electricity price increase has this household's public functionary considerably less grumpy than she was a month ago.

On tap also for the new year is the removal of much of the tax deductibility of interest payments for a principal residence.

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EU Progress Report

When Angela Merkel came out a few weeks ago and elicited guffaws and belly laughs from all and sundry (given Germany's mediocre track record in this regard) by proposing that the EU enact stricter controls over countries with excessive budgetary deficits, we were kind enough not to suggest that simultaneously they might prohibit countries from suddenly increasing their populations by 16 million inhabitants from the soviet third world.

Now, unfortunately, it seems that the European Union is not only on board but wants to take the whole thing one step further.

Expansión is reporting that the European Commission is giving serious consideration to including a nation's private debt levels in the calculation from which appropriate punishments will be derived.

We can see it now. Private debt to GDP hits 60% and suddenly the shock troops of the Policía Nacional appear on the temple steps to haul off all the usurers.

To think that we were on the verge of scribbling a piece on how flexible, despite universal structurally-based prognostications, the EU had proven itself to be over the past two years. Then again, the incredible stupidity of this idea probably means that it is yet another later-to-be-ignored impediment being put in place to satisfy the parochial political necessities one very disruptive country - the one that got the low rates it needed to incorporate East Germany into its fold.

Etcetera.

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The Homeland Beckons

Among the incalculably immense benefits of maintaining, despite the odds against that the involvement of money would quote, very good relations with a certain family of first cousins who live a couple of hundred kilometres further down the Guadalquivir from his home here in La Quinta Leche are the occasional anecdotes that he hears from the lips of the two that are career Hacienda tax inspectors - like their observation from a couple of years ago that it was becoming increasingly difficult to find sellers of real estate willing to accept under-the-table payments consisting of 500 euro notes. A bizarre little story that appeared in the press recently confirms this.

It seems that a collection of Colombian, umm, businessmen were recently swindled by a group of Serbian money launderers in a transaction the intention of which was to exchange 800,000 euros worth of these 'bin ladens' (you've heard of him but never seen him) for bills of smaller denominations. That the latter group managed to pull a fast one on the narcos, and that everyone involved somehow got arrested, is secondary. More interesting was the rate of exchange. All news reports indicate (for what that might be worth) that the Colombians were taking a 37.5% haircut - 500,000 for 800,000.*

On a level less suitable for trash television, business daily Expansión has lately been dedicating a bit of ink to the matter of funds of Spanish origin deposited in Swiss banks. Starting Tuesday with the headline, 'More than 60 billion in black money in foreign countries could return to Spain', followed by reports that holders of these accounts were beginning to make enquiries concerning the terms on which they could expect to be repatriated to Spain. This was followed up the next day with, 'Hacienda gives an ultimatum to 3,000 fortunes with money in Switzerland', noting that these people - who deposited their money with the HSBC Swiss subsidiary and have been turned in by French authorities - have been given 10 days in which to come up with a good story for the relevant bureaucrats.

Apparently, and due to fear of a public outcry, the government will not be offering a tax amnesty in exchange for an investment in Spanish sovereign debt. The main beneficiary will end up being the country's national accounts (including the current, we imagine) and not the bund spread. Such is the nature of a zero sum game.

*That tricks like this may be a traditional and time-honoured economic activity here is betrayed by the headline under which the story appeared in El País. The 'desk swindle' is apparently well enough known to have its own name. The use of the definite article in 'el timo del escritorio' is equivalent to be being on a first-name basis with this type of thing.

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Can Bumble Bees Fly?

Courtesy of the indispensable Cajas y Bancos... the English-language investor roadshow pdf of a soon to be created (from the thought to be irrepairably fragmented savings bank sector) domestic banking giant. We refer to the merger of Caja Madrid, Bancaja and several small regionals.

Aside from the observations that the IPS creates the largest domestic institution both by assets and deposits and second in terms of loans to the private sector (and ignoring the obvious that the whole thing might have more in common with a post-traumatic stress syndrome self-help group than a financial intermediary), a few other points bear bringing to the reader's attention.

Possibly in order of importance:

1). The document appears to have been written by a native English-speaker. Great leap forward! Even the Ministry of Finance of this paradise on earth couldn't bring itself to plumb such depths of humiliation in last February's Spain-is-solvent London roadshow;

2). The overriding structure of this new institution - to which all profits, losses and measures of solvency and risk will be attributed - is a bank, not a caja de ahorros. This is to say that it is a for-profit company with an ownership structure and not an NGO. Over some term, this opens the door to capitalization in the equity markets, a route prohibited until now;

3). The 4.5 billion euro re-capitalization funds from the FROB take the form of a purchase of non-voting preferred shares with a yield ascending from 7.75%. Redemption is in five years (extendible by two). Failure to redeem converts them to common equity, with voting rights, at face value - a route which the Banco de España can take, at will, at any point in time it deems it appropriate. In the event that this asset comes into existence, it can also be disposed of as the BE sees fit, by the way;

4). At this point in time, institutions representing 87% of the assets of the caja system are merging or entering into IPS's with others of their ilk. This figure des not include the 1.4% of total assets attributed to the seized - and for sale even to banks and foreigners - CajaSur.

We're sure the reader will be able to find more than this light cherry-picking has uncovered.

Other interesting news with respect to the generalized structural inadequacy/political gridlock argument that is the mainstay of the justification for a whole array of predictions concerning the fate of Spain (and the EU, in general) is that the congress yesterday passed the PSOE's labour market reform lite. The bill is insufficient and the vote was won because all but eight opponents abstained. The process is lumpy and opaque, but the legislation got through with those who needed to save face also achieving their goal.

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Butler's Inferno

Abandoned by his righfully exasperated parents at a tender age in a mosquito-infested black spruce bog some 200 miles northwest of Kapuskasing, Ontario, the ragged and filthy not-yet-writer had the incredible good fortune to have been found and saved by a roving band of followers of the Black Pope. The subsequent upbringing of this feral Jesuit child among the independent and rigorous thinkers that fill the ranks of St. Ignatius' heirs resulted in his devoting a considerable amount of time and effort to understanding various symbolic pillars of the theo-sphere.

God? Dealt with by the age of ten. He, she or it is neutral with regards to human affairs.

Heaven? A town square located in a benign climate in which its fortunate (male, in this example) residents saunter smugly about under a luminous blue sky, hands clasped behind their backs, and with one eye covet both their neighbours' wives and the goods that they believe they have secreted away in a safe spot - whilst, with the other, maintaining a strict vigilance to ensure that none of his fellow travelers is on the verge of converting their own envy into ownership of our protagonist's possessions.

Now, fifty-some years following his salvation, the writer has finally come to understand what form hell will take. In point form...

1). The shame, guilt and anxiety ridden sentenced, upon passing through the surly gates, will (once he has summoned up the courage to open his tightly shut eyes) notice that everything seems absolutely normal. No fire, no brimstone, no thunder and no screaming and gnashing of teeth. This state of affairs will last as long as it takes for the sinner to begin to snigger about the fast one he had pulled on fate;

2) Then, at the opportune moment, the sky will fall;

3). It's work done, it will then cease to fall;

4). At this point in the predictable course of events, the dust and ashes of the last judgment finally subsided and quiet calm once again reigning, the damned will arise and begin to shout in a chaotic parody of unison, 'The sky is falling! The sky is falling!'. This will last for eternity.

Repent, sinners.

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From the Comments

The piece we posted eight days ago on the difficult task Spanish economic statistics have when it comes to depicting reality generated a comment worth promoting to the front page.

The commenter's problems with the English language are mostly limited to imposing Spanish structures on it and to spelling and in no way affect the understanding of the content.

inversorX said...

Foreing investors/journalist etcetera don´t understand the vertical distribution of the power in Spain. Behind a formal democracy is hided a political party elite-driven country with the King in the top of this distribution of power.

What Im trying to say is that maybe looks like the chaos is reigning, but in fact, behind that chaos there is a vertical distribution of the power, wich can make thing happen very quick.

For example. In the U.S. bailout the votation failed in the Congress, but in the social spending cut in Spain, the vote was approved. In a lack of democracy enviroment things can happen, even if it appear as for only 1 vote.

People don´t understand how Spain works. Crisis? Of course, but Spain can go to 30% of official unemployment rate and still be alive. Shadow economy wich is very very big and have a better answer on trouble times than the real economy. Why? Cause there is no stupid goverment rule, and the Shadow Economy adapt very well to the reality. IN fact Shadow Economy works like a real non-regulated economy. So it can accept the crisis quicker and addapt to booms betters. Just as the people who pay 50% less in illegal money.

There you have, Shadow Economy devaluated the problems. Now official economy, or call it burocratic economy will go to meet the reality.

(Vaya inglés mas malo que tengo :-)

We would really appreciate it if InversorX were to send us an e-mail - capra.iberica...gmail.

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More Hardball

Noting the similarity between the aforementioned in February BBVA and Santander beggar-thy-neighbour strategy of voluntary taking big writedowns on debt-for-equity properties in their portfolios and the German government's recently announced fiscal austerity program, we are pleased to also observe that the Spanish government has, for once, come out swinging in its own defense. The recent announcement that the BE would conduct, and publish the results of, stress tests on Spanish banks - with or without a similar commitment from Germany and France - marks a milestone in this country's relationship with its neighbours.

The fact is that Spain has always thought it more or less unnecessary to be a protagonist in European affairs. After all, the nation's self-image as a paradise on earth to which people, come they in airplanes from Stanstead or in rowboats across the Straits of Gibraltar, are hypnotically attracted precluded even the most rudimentary concessions to the rest of the world (such as a president that could speak English). The end result of this has been a country that receives so little respect on the international scene that, despite the size of its economy, its chief politician can only get into G-20 blabfests by sitting on Nicholas Sarkozy's knee.

This serious attitudinal encumbrance when it comes to dealing with blood-seeking global financial markets and international media appears to have been cast aside for the moment - with instant results. Germany, despite the generally held opinion that its financial institutions will likely come out looking pretty grim from the process, has reluctantly agreed to participate. Spain's banks will likely emerge looking comparatively healthy. That it came from the mouth of President Zapatero should not, however, make him elegible for any prize. He couldn't come up with this plan in six lifetimes.

On a peripherally related front, our attention was siezed by this morning's 'Further Reading' entry at FT Alphaville. Pointing to an item at the widely respected Econbrowser, it irritatedly reads:

- For the 100th time, is Spain next – or not?

Such a shame. To paraphrase Mssr. Johnson - when a man is tired of PIGS, he is tired of life.

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And the Facts...

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Another Rumour Mill

The Spain 10- and 30-year bond auction results should be out shortly. The rumour mill that markets are is voting 'success', or at least 'not failure'. The Ibex 35 showed a sudden jump at a very uncharacteristic time of day - 9:50 AM. Bloomberg reports an abrupt shrinking of the 10-year yield a few minutes later.

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Reactions to a Rumour

We've decided to track market reactions to the three appearances over the last six weeks of a rumour that the ECB was preparing a rescue package for the Kingdom of Spain. 

1). May 4 - Le Figaro;

2). June 10 - FT Deutschland;

3). June 14 - FAZ.

Measured as the 2-day change from the evening prior to the news releases, the graph shows the Ibex 35 stock index, the Spain bond and the eur/usd exchange rate reacting as expected to the first instance. In the second, they all go against the grain and, in the last, only the Spanish 10-year gives credence to the story.

Readers should note that we use, for the sake of scaling, different measures for each item. Our only point is the direction of the change.

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Another Spain-ECB Rumour

The stock market eventually shrugged it off after considerable morning volatility, but the bond people did not... yet another newspaper report that ECB support was being organized for Spain.

According to Bloomberg, the 10-year yield is up 22 bps on the day. On the other hand, 4.65% doesn't look like an interest rate that a sovereign basket case can escape with paying.

Interesting also that FT Alphaville didn't pick up and run with what was the mainstay of their stock in trade only a few weeks ago.

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Home Sales - More of the Same

Seeing as there is little to remark on here beyond a bit of volatility surrounding Easter holidays, we'll take the opportunity to comment upon a very odd statistic emitted last month by the Spanish Ministry of Housing. But first, the quick take...

Year-on-year new +9.8%, used +26.6%, total +17.6%.

Month-on-month new -7%, used - 10.1%, total -8.3%.

12-month rolling new sales continue flat at about 222,ooo units for the 6th consecutive month. The same for second-hand dwellings proceeds upward as they has for the same period.

The continued outperformance of sales of used homes, to us, indicates that there remain downward pricing pressures in the market. Individual sellers are much more agile and flexible in the face of buyer resistance than are businesses.

Continuing with the real estate theme, the Spanish Ministry of Housing last month issued a rather astounding report on the existing housing stock in this country. Their conclusion, shown in the accompanying table, was that the inventory of unsold new homes increased at a rate of 12.1% over the course of 2009.

This, to say the least, is counterintuitive. Any idiot with two eyes and an automobile knows that the construction cranes have disappeared throughout the country from the skyline above abandonned projects and that virually nothing new is coming on line. But, as always, we have the explanation.

Vivienda's methodology is to keep a rolling tally of the number of house sales reported by the INE and the number of work termination certificates issued by the Colegio de Arquitectos Técnicos as a proxy for finished projects.  Those thinking there might be some correlation between new stock and similar permissions might keep the following sequence of events in mind.

1). A builder finishes a project to the point that he can apply for approvals and finally get his buyers' last installments in his pocket (to parlay into another dream that will finally bankrupt his bank, if not himself);

2). He then notifies the Ministry of Industry so that they can come and inspect the electrical installation - something which must be done before Peritos sends their building inspector over;

3). He waits;

4). Finally, after a year or year-and-half of desperation, he approaches the local notary and property registrar and, begging on hands and knees, gets them to agree to formalize the purchase agreements and deeds before he is forced into bankruptcy by the slowness of the guy with the clipboard and the voltage meter;

5). The buyer, despite their doubts (and knowing full well that nothing works as advertised in this country) pay up and start buying furniture;

6). To ensure electrical service to the individual units, the builder gets the local specialist to plug the temporary work connection into the mains and... the folks move in;

6). Industria finally shows up, the técnico also in turn. The relevant documents are turned over to the town hall and the place becomes legal.

In the case of this writer's home, it was occupied in April, 2004. The cédula de habitabilidad was issued in January of 2007. The place up the road now lived in by his step-daughter was finished in December of 2006, occupied 10 months later and made official in the winter of 2008 - the date upon which the housing ministry would add it the stock.

Of course, some might argue that these numbers eventually cancel each other out. But to assume that the few promotors that actually finished unsellable homes in 2009, rather than walking away, are even going through the process of fully legalizing them is stretching it. This is all ancient history.

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Bet the Spread

The data we use to draw the eurozone yield and spread charts in the sidebar often comes to us via e-mail from a friend of the blog. Lately this has not been happening and we have resorted to the Financial Times for most of the numbers. We could, however, also turn to to Bloomberg.

The chart on the left shows the Friday closing Spain 10-year bond quote for the last few weeks according to each of these sources. A deal to sell in New York every weekend the Spanish debt we had just bought in London would have netted us 58 bps in 6 weeks. Worst week - +4. Best - +16.

A test run, perhaps, for the privatization of the ECB? 

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Fogbound, but Mildly Optimistic

The mark of a bona fide alarmist is that he or she not only is capable of finding imminent and life-denying threats on all sides, but also proposes solutions utterly impossible to implement or those that will end up, if put in practice, doing at least as much harm as the perceived menace. The best escape from death in a plane crash being to jump out of the falling projectile before the it strikes the earth, as it were.

We would put the so-called 'internal devaluation' - a (for example) 20-30% reduction of wages across the board - remedy to Spain's economic problems, and its inevitably consequent depression and sovereign default, into the latter category.

The problem, though, is that Spain - despite appearances to the contrary - is probably undergoing something similar. Totally apart from the recent wage cut foisted upon the country's civil servants, a conversation with a construction-worker friend from the economically devastated province of Almería reveals that:

1). The last few months, ending a period of one-and-half years on the dole in his case, have shown a considerable revival of the building trade - this mostly in the form of small jobs that are in a certain abundance;

2). Most are strictly under-the-table positions and involve about a 50% salary reduction.

Most outstanding, though, were his remarks on the above-board labour market.

Our friend is a specialist tile setter. During the boom he was paid piecework whilst simultaneously receiving an official salary with its corresponding tax deductions and social security contributions. Of the approximately 4,000 euros a month he earned slapping down baldosas on per square metre basis, 2,800 were paid in cash - the remaining 1,200 being what was statistically considered to be his wage.

His current short-term job is with a small operator and is paid in cash, but the larger companies are apparently reacting to increased government inspections by both the Ministry of Labour and the income tax department by declaring 100% of the pay of the newly re-hired. The end result is that official statistics will either end up registering an increase in certain employee costs when the reality is that they have dropped substantially, or miss completeley the uptick in activity in the underground economy.

With reference to the residents of the region in the northwest of Spain, it is said that 'you can't tell whether a Gallego is coming or going'*. We would suggest that one of the structural problems of the Spanish economy (in response to a reader request) is that, in the innocent and untrained eyes of international investors, economists, most pundits and apocalypticals in general, this opacity unfortunately permeates much of the Spanish statistical mass.

*No offense intended. The writer is, after all, married to one.

As an interesting aside, if the loosely interpreted 'magazine cover indicator' has any validity, this Spain-related item from the New York Times leads us to believe that it should be clear sailing for Spain, Greece, Latvia and the entire eurozone from here on in.

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Fusion Fever

Although it seems the English-language press refers to 'negotiations', the local rags are describing the fusion between the number two and number three cajas - Caja Madrid and Bancaja - as a done deal. The resulting behemoth would be larger than La Caixa and the new top two would comprise over 40% of the assets in the sector. Clearly, the Bank of Spain sees more risk in the continued fragmentation of the regional savings banks than in the possibility that they are creating institutions too-big-to-fail. Our guess is the new entity will slop up 4 or 5 billion euros from the Spanish bank restructuring pool.

Thanks to data from Cajas y Bancos, we've popped up a slightly dated Google spreadsheet showing assets, relative size and NPL ratios for (almost) all of the regionals. Readers can find it here. It should be kept in mind that amalgamations, in progress or agreed, are not shown.

Readers also might note the new gizmo in the sidebar. It will keep them up to date on Spanish bond auctions.

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Three-year Bond Auction

Expansión is reporting that this morning's completion of an auction of three-year debt by the Bank of Spain resulted in a very high 3.39% average yield and a bid-to-cover of 2.1. The secondary market's immediate reaction can be seen in the screen grab from Bloomberg on the left. Currently at 3.036%, that is a 23 bps reduction since today's open.

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Statistical Error

In preparation for that momentous time of the month when the INE releases Spanish home sale statistics we took a glance at the competing quarterly series issued by the housing ministry. Catching our eye enough to look into the matter further was the rather unexpected 21.5% year-on-year drop in sales of new homes. The results are shown in the chart on the left.

Most notable is the simple observation that the Ministerio de Vivienda fairly regularly comes up with a higher number than the INE - a total of 111,528 more in the three years that we've compared. Secondly, the former's numbers are considerably more volatile than those of the county's official purveyor of things numerical.

The lesser jumpiness of the INE results is easily attributable to the distinct methodology used - property registry records as opposed to the notarial data that Vivienda utilizes. The fact is that the time it takes the registries to work through the documents dumped on them by the notaries before they issue the actual title acts as an automatic smoothing mechanism for the series.

Less comprehensible is the five-and-a-half percent difference in actual numbers. Is it possible that property registrars send back such a quantity of purchase agreements to notaries playing fast, loose or just plain careless with the fine points of the law - and then they get double counted? We doubt it, but the chronically fractious relationship* that exists between these two groups of monopoly professionals places it within the realm of the possible.

In any regard, we'll stick with the INE's figures. Aside from our distrust of Vivienda's statistics in general, a property deed strikes us as being a bit more definitive than a purchase agreement. They should be out later today.

*The writer once found himself caught in the middle of what was surely one of those internecine battles - but probably made much worse by the fact that the offending notary was from Sevilla and the very picky registrar in Madrid. Even intervention by our uncle, a retired property registrar himself, couldn't make his colleague budge on the matter. Fortunately however, it was brought to our attention that the manager of the Madrid office was the sister of an ex-wife of a deceased cousin, so when the documentation was finally put in order the matter went in the side door and directly to the top of the pile - and was resolved three days before it was to cost us 30,000 euros for failure to deliver.

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More Strike News

In a development bordering on the sublime, the principal union of the Spanish civil service, CSI-CSIF, has announced that they will no longer be involving either UGT or CCOO - the main trade union alliances in this country - in their particular work stoppages. Following the very scarce attendance registered at nationwide strikes convoked yesterday to protest public employee wage cuts, CSI-CSIF are apparently irritated at the manner in which Cándido Méndez and Ignacio Fernández Toxo, leaders of the latter two groups, took control of the proceedings and converted them into a rehearsal for a proposed general strike in opposition to pending labour market reforms.

Having one's message diluted by association with a losing side is apparently not thought to be in their interest.

Wagging his finger in the photo is the Marx of the middle class (or the Trotsky of the tenured trabajador)*, Méndez, alongside Mr. Toxo.

*Lenin of the let-the-young-eat-cake, etcetera. Further suggestions for this ridiculous relic of the 1960's (or 1917) gladly received in the comments box.

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Yesterday's Strike

Real estate portal has kindly scanned and posted the front pages of 15 Spanish dailies to gauge the general take on the success or failure of yesterday's strike by functionaries protesting recent wage cutbacks. To assist those not able to read Spanish:

1). El País - Functionaries resist the first attack of the unions on the government;

2). El Mundo - The unions' failure facilitates labour market reforms;

3). ABC - The functionaries stoppage fails as rehearsal for a general strike;

4). La Razón - Zapatero negotiates the delay of the general strike with Méndez;

5). La Vanguardia - Failed rehearsal;

6). Cinco Dias - Faint echo from the functionaries strike;

7). El Economista - (no mention);

8). Expansión - The functionaries strike fails and gives oxygen to Zapatero;

9). Negocio - (no mention);

10). Público - Strike of minima;

11). La Gaceta - (no mention);

12). Heraldo de Aragón - The unions hardly mobilize functionaries in first attack on the government;

13). 20 Minutes - The unions - big strike. The government - very small;

14). Qué -Was there a strike?;

15). ADN - Failed rehearsal for a general strike;

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How Not to Solve a Problem

The original article is no longer available without going through some very suspect registration process but on Monday El Mundo published a piece stating that the government was planning to offer a tax amnesty to individuals willing to use their secret stashes of cash money to invest in Spanish government debt.

The last time this type of rumour surfaced, in October of 2008, we remarked on how the powers that be had read, and heeded, our yet earlier suggestion in this regard. Still missing, though, is the necessary involvement of the ECB. Removing the 500 euro note (of which there are 50 billion euros worth in circulation in Spain alone) from the list of what is considered legal tender, giving holders of such a period in which to turn them in for bills of an acceptable domination, combined with the amnesty would easily cover Spain's refinancing needs for the year - even in the event that no one else in the world would dare touch a Spanish bond issue.

Not that this idea is likely to go anywhere - the Spanish political class probably holds the largest stash of 'black money' - but fabulously predictable is the opposition PP's reaction to this (later denied by the government) report. They officially hate what is a beautifully workable solution to two untenable situations presumably because it is "unfair" to those who do faithfully pay their taxes. Next they'll be claiming that the 20% retention tax on the interest payments from those bonds would further deplete the nation's coffers.

As to the advisability of the PP's playing electoral politics two years prior to the next general elections in the face of generalized doubts as to the solvency of the Spanish state and viability of its economy, it is worth taking into account exactly how slowly capital markets are capable of reacting to the de facto resolution of a situation. In the early 1990's, doubts began to surface with reference to the fiscal deficits run by the Canadian federal and provincial governments. Rather than expressing themselves through interest rates, investors went directly for the Canadian dollar. The chart at the top of the page shows the fall of the 'loonie', in US dollar terms, from 1991 to 2002. The vertical line in the middle more or less pins the date by which the deficits behind the decline had been eliminated. Yet to come was a further 17% negative revaluation of the currency - more than it had dropped up to that date - over nearly five full years.

This all does nothing to cure us of our suspicion that ideologically entrenched interest groups - of all stripes - in Spain would consider it a deal well made were absolute victory over the enemy to come at the cost of returning the country to the stone age.

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Lights Out

Though paling beside last December's near simultaneous patricide, discovery of a hidden camera in the ladies' washroom of a local pub and arrest of a pedophile, outstanding among recent events in the town in which the writer resides in eastern Andalucía has been the electrical company's decision to cut off the power to the local theatre, football pitch and swimming pool - all this, as one might expect, owing to a failure to pay a long series of light bills on the part of the municipality. In fact as far as we can tell, the only non-essential service in Cazorla left untouched by Endesa is the town hall itself.

The town's official debt, according to the Banco de España, is (as of December 31st), 5.64 million euros. Per each of its 8,133 official inhabitants this rounds out to a bit over 690 euros. The neighbouring town of La Iruela (all of 500 metres up the road and in which the scribe is actually registered as living, if one were still yet to doubt the utility of Spanish statistics) has 1,985 residents, each of whom owes 606 euros.

It should come as no surprise then  that the present farmer, already considerably impoverished by olive oil prices not seen for at least twenty years, recently received from this latter lot a special tax assessment of 2,500 euros to pay (presumably, but not probably) for repairs to a dirt road which he does not use to get to his properties - on the grounds that he actually does.

Spain has approximately 8,100 distinct municipalities, many as inane as the two mentioned here.

Trevor offers a similar tale, but for all of Cataluña, here.

The sobering BE municipal debt spreadsheet can be found here.

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Sovereign Credit Doubts

This week's generalized widening of eurozone yield spreads this week. Few were spared.

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Friends in High Places

One of the more vocal, and widely quoted, prognosticators of sovereign debt doom is former IMF chief economist, Simon Johnson. From The Baseline Scenario (with comrade-in-arms, Peter Boone)...

Spain’s role in this possible calamity is more that of a sideshow than a frontline. Spain has a fighting chance for survival without serious economic disruption, but only if the world economy remains at the least benign. To get out of its difficulties, the Spanish government needs to be far more determined than the light approach taken by the Irish and Portuguese (which face far worse problems than Spain).

Last we heard, Ireland was still Europe's take-your-medicine poster boy.

To be clear, Spain has a better chance of avoiding sovereign and massive bank defaults compared to Greece,... In this regard, announcements in the last few weeks from Spain were helpful, for example when the government chose resolution authority over religious authority in taking legal control of a troubled savings bank (CajaSur) from the Catholic Church.

We think they are - at least to the degree that the widespread interpretation of this as a new sign of weakness was quite simply stupid - partly correct. The contrary argument would question why they didn't do it months ago when it first became obvious that the management of CajaSur was not not negotiating a merger in good faith.

The highly unpopular budget reforms announced by Prime Minister Zapatero further demonstrate some resolve – and the fact they just passed a legislative hurdle is encouraging.

The take in Spain was that the one vote majority showed the debility of the Zapatero government. But that he managed at all to get across a bill ordering civil service wage cuts and a general pension freeze is not without its merit.

But who is really safe in Europe? With France running an 8% GDP budget deficit (for 2010) and a debt/GDP ratio of 83.6%, should we be confident they are safe while Spain is not (with debt/GDP at 65%)? France’s thirty years of budget deficits do not bode well for anyone expecting an immediate strong fiscal response. In many ways Spain appears better placed to take tough actions than France.

It's nice to see someone with a bit more mediatic and (possibly) intellectual clout than this olive farmer state the obvious.

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No News is Bad News

No surprise here that the Ibex 35 remained resilient at the 9,000 level, given the really stale news that was cranking up the volatility since the weekend. To wit - it has been public knowledge that Unicaja was insolvent for about a year and a half and that talks to amalgamate its carcass into Unicaja were going nowhere was first made evident last autumn. Then the sovereign downgrade. The utility of ratings agencies when benchmark spreads are updated on the fly has yet to be explained to us. In this case, 170 bps over the bund is all one needs to know about AAA or AA+.

More insidious and troublesome, however, is the constant upward creep of Spanish bond yields - touching 4.41% today in the absence of any of the systemic news that has been the driver to these levels in the past.

The chart shows the average monthly yield of the Spanish 10-year since 1998. It can be seen in larger format at Extra Lettuce.

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