Cooking the books

The fiscal year of the public schools of Andalucía ends on the last day of September, and the accounts for each instituto and colegio are presented at the end of October. A high school adminstrator whom we know - and who refuses to be named, of course - reports that the Consejería de Educación is requesting that the school secretaries report certain payments promised over 2010-11, but never delivered, be booked as received.

With the distinct possibility that elections next March might produce a change in government, those that are being asked to sign off on this trick are, understandably, a little nervous.

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El Gordo

The Ciudad Real Central Airport, the doomed investment that brought down both Caja Castilla La Mancha and the government of the region after which that caja was named has effectively ceased to operate. Despite the termination of its only remaining scheduled route - Vueling to Barcelona - the airport's website has yet to reflect this new situation.

The promoters of this inane project may never have intended to get into the airport business, but rather their plan was to indulge in the near-zero sum game that substitutes for economic activity in the minds of many Spanish business people - the clocking up of capital gains. The airport was apparently always intended to be resold at a profit. Unfortunately it didn't enter into operation until 2008.

More interesting to the casual observer is the ease with which a project which cost a full three percent of Castilla-La Mancha's gross 'national' product found financing. Here's looking at, among others, the legion of really stupid French and German buyers of too-low-yielding Spanish covered bonds who poured money into the hands of a cartel that could think of nothing better than to invest it in a lottery ticket.

According to the official website, the CR airport saw about 100,000 passengers pass through its doors in nearly three years of operation. At a reported cost of 1.1 billion euros, that's 11,000 per head.

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The Train to Mecca

Seeing as a Spanish consortium has beaten out one from France for the 7 billion euro contract to build, stock with vehicles, operate and maintain the 450 kilometre long high speed 'pilgrim train' in Saudi Arabia, it's probably a good moment to apprise the reader of the impressive international expansion of this country's construction services industry - in this case represented by OHL - over the last few years. We're not sure why construction exports spiked like that in the latter half of 2007, but the industry has never looked back from that moment.

According to a Saudi Rail official (quoted here):

"This phase of the project includes the construction of railway tracks, installation of signalling and telecommunication systems, electrification, operational control centre, the procurement of 35 trains, and the operation and maintenance for a period of 12 years."

Apparently, there is also an option to purchase 23 more trains from Talgo over the life of the contract. This company is not listed but train, streetcar and subway manufacturer, CAF, is. Their chart is seen on the left.

The Madrid-listed Indra will be supplying the scheduling and ticket sale software to accommodate the projected 160,000 passenger per day capacity of the system. Click through to their chart to see a nice example of leakage - up nearly 20 percent in the last month, presumably on yesterday's news.

How many others think that maybe the excellent relations between the Spanish royal family and their Saudi equivalents may have had some say in this outcome?

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Live to die another day

Only nine days ago we reported that:

...Banco Santander is shopping around its entire residential real estate portfolio with an apparent eagerness to accept whatever losses the market assigns to it.

Well, not quite 'whatever losses'. El Economista today tells us that Emilio Botín's giant has nixed that plan. It seems the best offer they received applied a 60 percent discount to the 3 billion+ euro book value assigned to the package.

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Nearing the end

The recent flurry of activity amongst the remains of Spain's caja sector has reached a certain inflexion point with today's news that both Banco Mare Nostrum and Liberbank (themselves amalgamations of various sickly regionals), both of which had been given a 25 day extension of the Banco de España's order that they find private capital, had found ways to keep themselves from being intervened by the central bank. This followed on announcements made earlier this year that CAM, NCG, Unnim and Catalunya Caixa (these three also fusions) had all found themselves with a new, very dominant shareholder in the form of the BdE.

BMN has saved itself by finding institutional buyers of 250 million euros of 8% 2014 convertibles with which it will be buying time to proceed with an IPO. Liberbank, which found its plans delayed when they decided that they would not be taking charge of a very suspect CAM, has sold most of its share in cable television operator Telecable to Carlyle Group, an American firm, for 270 million euros.

Immediately on the horizon is the auction that will place CAM in private hands. The list of finalists in the competion is made up of Santander, BBVA, Caixabank, Sabadell, Barclays, Ibercaja y JC Flowers. People seem to love their branch network in Murcia and Valencia. Surprises still to surface from the Alicante caja's 17.5 billion euro construction and real estate promotion loan portfolio, currently sporting a 40 percent NPL ratio, will have to be dealt with via guarantees from the state.

Barring complications, the story will soon be over - at least for a couple of years, following which we can expect to see yet more concentration in the sector as some fail raise their heads despite these efforts.

Readers wishing to keep tabs on credit conditions in Spain might want to glance at the new addition to the right hand sidebar. We've incorporated our simple measure of availability of/demand for credit in the form of the ratio of new mortgages conceded to home sales, presently indicating a moribund situation. This will be updated around the third week of every month.

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Distance makes the heart grow fond

Physical distance from the subject matter, as the writer became aware courtesy of the numerous occasions during his recent stay in Canada on which he was asked if Spain were on the verge of bankruptcy, seems to cause perceptions of foreign lands to become concentrated on a very few - preferably catastrophic - media-delivered impressions. Apparently, even the largest (and presumably well-informed) of American financial institutions fail to escape this kilometric bias.

The table on the left, is IE's compilation of current predictions of 2012 Spanish GDP growth. By clicking on it to make it legibly large, the reader will note a certain geographic skew to both the high and low ends of the guesses. This comment, by the way, is by no means intended to lend credibility to any of the prognostications, which seem to centre on 0.9 or 1 percent.

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Bumps on the road to recession

If for no other reason than it struck us as an easy and facile way to keep a very profitable disaster ball rolling on the part of people and institutions that do rather well from this kind of thing, we have not been big adherents to the imminent re-entry into recession theory that started making the rounds at about the halfway point of this summer's eurozone banking rout. Fortunately, a tiny bit of evidence that we might be on track, at least in Spain, has appeared courtesy of the INE. And it comes from a least expected data point.

Digging down through the August industrial production index* for this country - itself positive year-on-year for 19 months straight - we were more than surprised to see the the durable goods sub-section print non-negative for the first time in a year, and for only the third time since April of 2008. Furthermore, and in no way attempting to obfuscate the fact that the actual index itself is crawling along at extremely depressed levels, the monthly change in the series is about the third highest on record.

At a component level this measure of 'big ticket' consumer items becomes even more interesting. Although the production of electronic goods gives every appearance of actually dying, both the fabrication of household appliances and furniture have veritably skyrocketed - at least in the context of their actual moribund levels.

Far be it from us to derive a trend from a single summer data point, but the above is not contradicted by the latest living conditions survey published today by the same source. All of the subjective to one degree or another questions asked by the INE resulted in some improvement over the 2010 results. Outstanding among these was the query concerning whether respondents had some difficulty getting financially through the month. From record levels posted last year, a smaller percentage of 2011 respondents answered 'yes' than did in 2007.

*The first chart, in the interests of not cluttering it up with irrelevancies, fails to include non-durable goods and energy products. The first is the least volatile of all because people do have to eat and clothe themselves regardless of economic conditions. The second, though, excludes a very vibrant sector that has been growing at between 15 and 50 percent annualized for the last 21 months. Unfortunately, this mostly reflects the currently super wide 'petroleum crack spread' rather than any insight into the economic background. The definition of this obscure price series can be found here and a Bloomberg chart here. For readers not wanting to bother, it is best thought of as the reason that they are still paying the same 1.35 euros a litre for 95 octane gasoline as they were last April even though crude prices have dropped 23 percent since then. Still too lazy to click through?

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The official version

The writer of Ibex Salad has devoted over the last couple of years considerable effort towards revealing some small part of the chronically dubious analysis of the Spanish economic situation for what it is - the search for and, if necessary, fabrication of any smidgeon of evidence to justify coming to the same conclusion as the one that everyone else is arriving at at any moment in time. The end result bears the same relationship to reality as gossip does to fact. Seeing, however, the utter non-reaction of both stock and bond markets to Moody's recent two-step downgrade of Spanish debt (and coming to the conclusion that the howling mob is no longer being paid attention to), we are taking our first step towards resuming normal operations. This would consist in providing some sort of insight into how this country operates - warts and all, if need be.

About three and a half years ago, the writer decided to stop publishing (despite howls of protest from various industry participants, none of whom offering to send money to ensure its survival) a unique trade-specific blog called The Olive Oil Gazette. One of the last posts there dealt with the extra-legal - despite or owing to the fairly ample formal infrastructure constructed around such matters - process by which irrigation found itself inadequately extended in the olive groves of the province of Jaén. Those caring to read the short piece, first taking into account that the situation was resolved last year in a great and tremendous picture-taking ceremony attended by the usual collection of smiling politicians and other parasites, will note the limited degree to which the official version coincides with the actual nature of the beast.

Even better expressed, Spain has a long and inglorious history of creating legislation that gives every appearance of being up to the task assigned to it but, in fact, is so full of loopholes, omissions and conflicts with pre-existing legislation – this without mentioning the interests those supervising it might have in controlling the way it is meted out - that it becomes unenforceable or, minimally, does not end up with the intended results. The most notable cases may all involve illegal construction but the latest is the decree that has denied Romanian workers free access to the Spanish market.

Published on the 22nd of July, the decree states that Romanians (who had for the last two years enjoyed full EU rights) who were not registered with social security or on the unemployment lists on that date could no longer come to Spain without a pre-existing work contract – this without regard to their prior labour history in Spain. Originally enacted so that a diminution of the numbers of Spanish jobless, primarily via participation in the olive harvest in Andalucía, would be noted statistically in time for the election campaign that was originally slated for March of 2012, it is proving itself to be another exercise in futility that penalizes the law-abiding and rewards the less observant of such niceties.

First, a look at how an EU worker goes about regularizing his or her situation in Spain:

1). A trip to the capital of the province in which he wishes to live and work to be assigned a foreign resident number – the NIE. This is usually done on the same day and is retained for life;

2). The person then takes his NIE to the social security office and gets put on the rolls;

3). Having found an employer, the two then do the appropriate paperwork with the social security. The cost to the worker is about 80 euros a month. At that moment, firm instructions are given that he should unregister with the SS when he returns to his country of origin because, if he fails to do so, they will continue to bill the 80 euros in perpetuity.

How this last point works in real life, however, is a different story. In the event that the worker does not take himself off the list, the SS will attempt to embargo his pay to make up for the arrears. So the next time he shows up as an employee his boss will receive a registered letter ordering that an amount be witheld – except that this does not apply if the worker is paid less than a certain mimimum wage, which threshold farm labour does not reach. The end result is that the first payment is always made, but subsequent contributions are normally not. The negative consequences of this strategy are nil, and this year the unconditionally positive benefits are not only the 80 euros saved every month but derive from the fact that the person in question is never removed from the social security list for non-payment. The current effect of this impressive bureaucratic silliness is that any Romanian who followed the rules and removed himself from the registry following last year’s harvest can not work in Spain this year. Those that just completely ignored that part of the process can.*

Be the matter Romanians, irrigation cooperatives or building permits, all too often the most direct route to a given goal in Spain is to pay initial lip service to the official requirements and just pass on the rest.

*A secondary effect would be that a certain perennial employer of Romanian migrant labour is currently looking pretty stupid - not to mention feeling extremely bad for those he has deprived of a job in 2011 - for having insisted that his much-valued cuadrilla of olive pickers play it all by the book. In his heart of hearts, he is tempted to hire them all anyway and fight the obvious consequences in the courts.

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August Spanish home sale statistics

Notwithstanding the boom in raw material exports to China, it remains a surprise to the writer that a country with a tremendous dependence on trade with the United States has managed to be one of that select group of western economies that has avoided anything resembling a recession. But such is the case with Canada. We'd point out, though, that our personally conducted survey of the financial inaccessibility of both homes and meals served in jammed-to-capacity-on-a-weeknight Toronto restaurants revealed both to be more than a tad reminiscent of 1987 - the year before everything started to change in southern Ontario.

The INE has, in our absence, released Spanish home sale statistics for August. On the fringe, however, of what appears to be the new dormant normal, a couple of recent news articles have caught our eye.

Both via Idealista, the first reports that Banco Santander is shopping around its entire residential real estate portfolio with an apparent eagerness to accept whatever losses the market assigns to it. In the second, BBVA has announced that it has moved its assistant CFO, Pedro Urresti, to a new post in charge of the management of what are termed the bank's 'illiquid assets'. It is pointed out that this means that Spain's second largest bank will be following in Santander's footsteps. Clearly, neither bank thinks it is worth the effort of remaining in the retail property business - at least with the unappealing collection of stuff they have been left with after a couple of years of force feeding their retail clients.

Interesting, at least to us, is the mentioned number of homes in Santander's portfolio - 29,000. We would have thought it to be more, given the bank's size, the moribund state of the real estate industry and the 700,000 low end figure for unsold new homes in Spain.

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This too shall pass

The writer, having shucked off the shackles of his now chronic all-too-comfortable small town lethargy, finds himself in Toronto following a six year absence. What he encounters in the vicinity of the now totally gentrified Queen Street West neighbourhood in which he is staying is a tremendously prosperous and vibrant city - one in which are visible none of the scars (which still remained in 2005) of the disastrous real estate credit bust, exacerbated by events like a brutal cutting back of public expenditure and the coming into effect of NAFTA, that had so negatively transformed the panorama of the city for the entire decade of the 90's.

The weather's wonderful, the friends are all in fine fettle and it's a treat to be here. Normal Ibex Salad service, including the updating of the sidebar bond charts, will resume in about a week.


The aerial photo of downtown Toronto is from Wikipedia.

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Southern gibberish

In the context of the latest bit of Squabbling between Catalonia and the rest of Spain (this time concerning the language of instruction in Catalan schools), regional president Artur Mas made the interesting point that instructing Andalusians exclusively in their native Castillian had not been universally successful in producing intelligible speakers of that language.

The incomprehensible gibberish in the video - fairly similar to what this writer has to deal with on a regular basis - gives an idea of the point he was trying to make...



Hat tip to the indispensable Trebots.

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