And the Beat Goes on

We're sure it's merely coincidence, but Edward Hugh seems to have addressed the concerns we expressed in the second last post. In an AFOE entry entitled, 'Chart Of The Day: How Spain’s Stimulus Money Helps Germany Achieve Record Growth', he states: 'Basically, what little improvement Spain did manage to achieve (0.2 q-o-q, -0.1% y-o-y) came from domestic demand and not exports', followed by the chart that can be seen on the left.

We have a couple of objections to this interpretation.

1). Mr. Hugh seems to want to communicate to his readers that the chart shows actual GDP growth. It does not. As it clearly states at the top right, it is of the 'contribution to GDP growth' of the external and domestic sectors through the second quarter of this year;

2). What he describes as 'improvement' on the part of domestic demand, is actually a negative number - -0.1, to be precise. The rate of change of internal demand continues to be negative measured annually, albeit less so than at the end of March. This while export contribution to the same remains positive.

Now, to thank him for confirming with actual statistics what we had previously merely surmised - that internal demand is an actual drag on an economy only saved from utter ignominy by the export sector, we will provide the reader with the link to the INE press release which he seems to have forgotten to include in his rush to declare victory (or, God forbid, actually obfuscate the truth in defense of the party line). It is here, and in it (immediately below the graph) the reader will find the table from which this screenshot is taken.

To help non-fluent readers through the Spanish in our copy, it should be noted that the 'Producto Interior Bruto' means GDP. The first eight lines below it refer to components of internal demand. The ninth shows the last 'national demand' data point on the above graph. The following two are exports and imports.

Certainly worthy of the reader's attention would be the following:

1). Exports rose 10.5% over a year in which GDP fell 0.1 points;

2). Not included in the pdf, but calculable also from these INE numbers, is the very interesting fact that exports comprise only about 25% of Spain's GDP.

For those interested in measuring exactly how much this presumably moribund and uncompetitive mere one-quarter of the Spanish economy has contributed to GDP, we suggest the following exercise. Look at the chart and approximately add together the values representing exports and domestic demand. The figure arrived it will be that quarter's GDP growth. Next, subtract the number for exports from the other. This will give the reader a pretty good idea of what this country's economy might look like without the external sector. Finally (just as an interesting exercise), do the opposite.

The only thing wrong (and no surprise in a very insular country) with Spain's export sector is that it is not big enough. Isn't it about time that A Fistful of Euros stopped insulting their readers' intelligence with this drivel?

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An Apology to Edward

The writer believes he owes an apology to Edward Hugh for our previous entry. Not only has it come to our attention that yesterday (due to a computer error, apparently) Spanish export statistics were briefly not available to the public and he was forced by circumstances to resort to the proxy of industrial production in order to make his point. As a matter of fact, the same thing happened to us this morning - except in mirror image. And we thought, probably due to the gnawing of a guilty conscience, that we would make amends by likewise substituting the goods exports time series from the Bank of Spain for the industrial production index for Germany from Eurostat, which we just could not find when we needed it.

Fortunately for us, the reappearance of this latter material occurred before we had a chance to publicly humiliate ourselves- but we'll come clean despite the serious berating we are certain to be forced to endure. On the left is a chart of Spanish exports of goods superimposed on German industrial output - normalized from January 2007.

One can, of course, interpret such a close correlation in a variety of ways. But unless the reader is willing to wager that:

a). The fit is a result of random happenstance and has no significance whatsoever;

or

b). That Spain's entire export production consists of the making of floor mats for BMW;

then he or she might have to weigh the possibility that Spain's economic problems may not be entirely the result of international uncompetitiveness, but merely are a result of the country not actually getting around to exporting enough of what it produces to make up for the horrible state of internal demand.

We'll try to not be so quick to judge in the future.

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Edward Hugh Thinks You're Stupid

Edward Hugh has posted an item, entitled ‘How Many Times Can One Driver Fall Asleep At The Same Wheel (And Live)?’, at A Fistful of Euros. Below is a quote from the piece.

Going back for a moment to the Spanish administration’s tendency to move the goalposts, we have also seen a permanent chorus of complaints from them that using Reel (sic) Effective Exchange Rate data to assess competitiveness is not valid or relevant in the Spanish case (those on whom this data fall negatively rarely are prepared to accept it has any), since Spain’s export sector has been well able to retain its share in global exports despite the distrortions produced by the property boom. Fine! Perfect! But then how the hell do you explain the difference between these two charts?

Here they are (we hope with permission of the author):






















For our part, the question which occurs to us is: Does Edward Hugh think his readers are so stupid that he can get away with using industrial output (a purely tautological device, given that one must a priori assume unchanging national destinations for goods produced over the series in order for it to prove the point) as a proxy for competitiveness - made worse by the exclusion of the service sector from the calculation - instead of putting up actual exports, imports and balance of trade figures? We think that the charts below will help shed light on this conundrum.



























Monthly goods exports have recovered from 2009 lows to, in the month of May, 12 percent more than what was their yearly average at the beginning of 2007 (not to mention that this change is far in excess of any European country's GDP growth over the same time). Goods imports, also as at the end of May, are at 8.5 percent less than those from three and a half years ago. The end result is the trade deficit seen in the second graphic.

It is fairly evident from these graphics that what has failed in Spain is domestic consumption, which is an entirely different - and far more diffcult - problem for policy makers than is international non-competitiveness. The question, however, remains. Why did Mr. Hugh post an irrelevant, and misleading to the point of being devious, chart of industrial output and not one of the statistics that actually measure what he claims to be the case?

Our gut feeling is that he might not want (much like the banking industry's generalized resistance to stress tests) to have facts knock a hole in his reputation. After all, his sure-fire 20 percent 'internal devaluation' panacea for Spain's trade balance (and hence, economic) woes certainly got him a lot of attention last May. Pity if that were not to be the problem.

Other suggestions gratefully accepted in the comments box.

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Where's that Entry Go?

The Financial Times draws our attention to a recent change in international accounting standards which will require corporations to book operating leases as liabilities – debt, in effect. Stated simply, the bean counters don’t like the fact that leases can be notched up as operating expenses when the debt on the purchase of the same installations would not. Eliminating the need to make some comment on the effect that this might have on the Spanish banks (Santander, BBVA – most of them, really) that have funded their way through the crisis by selling and leasing back their entire branch networks is the apparent fact that ratings agencies and informed investors already count these kinds of arrangements as such. Although the reader might imagine the stench that would have been raised were this to have taken place last May, quite possibly there is no news there. But it does make us wonder when certain national accounting conceits might also find themselves up for a similar, if opposite, revision. For example...

Why, in a sentence, does the purchase of a holiday residence by a foreigner (with no intention of becoming resident) get booked as a direct foreign investment lump sum to the capital account rather than finding itself amortized over some period in the current? After all, assuming that the buyer would be a repeat visitor regardless, nothing is taking place here that does not come under the heading of ‘roof over one’s head’ – this, of course, with the added feature that the service export section of the current account irrevocably loses a summer renter of residence in perpetuity.

Calculating the effect is likely to end up being a fairly onerous task and the end result possibly small. But if one believes that what threatens Spain’s solvency the most is its current account deficit - and can accept that the evil twin of the concept of diminishing marginal returns is described by the adage, ‘the straw that broke the camel’s back’...

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Yield Not

Although we can’t find the source, we recall a certain investment house research report that surfaced, receiving due widespread redistribution, in the spring which claimed that Spanish real estate prices still had a tremendous fall facing them because yields on residential property investments were still well below the norm for the industrialized world. Noting that the INE has released June house sale statistics which indicated a continued stagnation of the market at around 37,000 units a month (450,000 a year, 1 per 100 Spanish residents per year – to save the reader the bother), and that the valuation company TINSA claims that prices maintain their slow descent at about four percent annually, this might be the moment to put to rest that deficient and less than useful analysis.

Not that the writer of that piece is factually mistaken – the yield on property investments in this country, outside of certain large cities, is absolutely miserly and rare are the places in which rents will actually cover an 80 percent mortgage on a home. On the other hand, one would think that this same state of affairs would result in a vibrant rental market but, unfortunately, Spaniards do not arbitrage one against the other because the calculation – if that is what it is – made here is not based on squaring the books on a monthly basis but by way of a long term comparison of the perceived qualities of money and property. The latter wins hands down with certain very real, though not specifically quantifiable, effects on the real estate market.

In a property crash:

1). Demand reappears at higher price levels than the experience of many other countries would predict;

2). Real, serious supply, being the perceived need or desirability to convert to cash, does not find its way to the market*.

Readers who might have difficulty wrapping their heads around this might try imagining the gold market were it dominated by Wyoming bunker dwellers and other compulsive hoarders of Spam and Argentine bully beef. Or, searching for an example less on the fringe of reasoned discourse, the current negative yield on certain American inflation-linked bonds – TIPS, for the unitiated – might fit the bill.

*Sensing that someone might come out snapping at this assertion, the writer wishes to make it clear that 'inventory' and 'supply' are not identical concepts. Though the former may be a necessary condition for the latter to exist, it is far from sufficient.

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Mean Reversion

It's not as if we at Ibex Salad envy the position that Spanish President José Luis Rodríguez Zapatero finds himself in. Who, after all, would want to be forced by circumstances to cut back on infrastructure projects in an economy so overloaded with construction capacity? But to now, after having bitten the bullet to the relief of international investors (even receiving minor kudos from this writer in the process), come out and say that he will be reinstating some of the 10 billion euros thus cut from the budget...

The Bank of Spain, with 12-month, 18-month and 5-year issues coming to market in the next three weeks, will certainly not like the look of today's reaction. The Bloomberg chart on the left is of the 10-year.

That Zapatero was able to, with a straight face, characterize this announcement as an unalloyed - either by facts or by offsetting cuts elsewhere - 'noticia positiva' should tell reader exactly how profoundly he is trapped in that 1980's socialist belief that government policy is, by definition, never zero-sum.

Readers not familiar with the matter might try imagining having Pedro Almodóvar leading their country at this moment in history.

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Ah! To be the Bund

Euro breaks below $1.20 on the imminent disolution of the EU - yield drops to 2.5%. Euro hits $1.33 as the serial vampires (and the august corps of ambulance chasers) move on to American economic news - yield drops to (yes, that's right) 2.5%.

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More on Pagarés

Noting the unusually large number of readers that clicked through the links in our previous post, another entry or two on the world of pagarés would seem to be in order.


On the left is a chart, compiled from BdE data, of the 12-month rolling sum of the nominal issuance of both these and normal corporate bonds. A few things to keep in mind...

1). These numbers refer to issuance by non-financial companies;

2). The pagarés referred to are those registered with the Spanish market supervisor, the CNMV. They do not count the personal version one might write in conjunction with a real estate transaction, for example (or to get one's bookie off one's back);

3). Pagarés, generally with maturities of one or two years, have comprised between over 50% of the total debt issuance market, in 2001, to about 1/8th, in early 2007.

The total Spanish corporate debt issuance of 200 billion euros in 2007 is pretty amazing in itself, but a look at these two series normalized uncovers an interesting indicator - and right lively it is - of the country's economic situation. Keeping in mind that December 1998 is equal to 1, and not 100...

1). The relative issuance of pagarés began to go ballistic in the summer of 2006 - a date that we believe more or less coincides with the arousal of doubts concerning the real estate venture on the part of financial institutions. Within less than a year, they were already engaging in their first equity for debt exchanges;

2). The turning over from the peak in annual issuance coincides with the bankruptcy of Bear Stearns;

3). Issuance went net negative at a moment most famous for the dissolution of Lehman Bros.;

4). Despite some signs of second order recuperation one year ago, the market today remains below zero almost to the same degree that it was positive at the heights of the real estate bubble.

One could argue that these promises to pay are no different from junk bonds, but that would display an unacceptable lack of respect for an instrument that has been around since the middle ages, even (according to this Spanish pagaré-specific website) predating the bill of exchange that was the precursor of modern paper money. Their current form as zero-coupon bonds appears to be fruit of the successful attempt to circumvent ecclesiastical laws prohibiting the charging of interest on loans. All of the above fails to point out that that they seem to have provided the net non-bank financing to Spanish corporations in one of those years, 2001, in which this country was the source of virtually all of the economic growth the European Union could lay claim to.

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The Undead

We have, on a couple of prior occasions, remarked on how the large Spanish banks were intent on stealing market share from those cajas that might find themselves debilitated by their present circumstances. The excellent Joseph Cotterill at FT Alphaville recently, quoting from something from Credit Suisse, showed us what this looks like from the point of view of the weaker party:

Banks are gradually reducing their exposure to the {construction} segment (-3.4% YoY) while Cajas continue to increase (+1.1% YoY) according to our estimates base of information released by Bank of Spain.

Combine the effects of good loans being paid off, negative new loan growth and the chronic rolling over and extending of builder and promotor debt and we have construction loans comprising an increasing proportion of the book.

Zombies by any other name.

In other news... not only first out of the gate in admitting private capital (and determined to not be relegated to the above group of victims), Banca Cívica has now announced that they will be, in short order, taking themselves public with an IPO and shoring up the dike with a 4 billion euro emission of pagarés - that curious Mediterranean form of subordinate, unsecured debt which we dealt with here earlier.

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