Ibex Salad

Farmer's almanac

2012-02-03T10:23:00.001+01:00

If the beginning of the olive harvest marked the high point in Spanish government yields, the last day also showed its mettle. Expansión reports that, on Wednesday, Banco Santander successfully flogged 2 billion euros of 3-year mortgage covered bonds. Bid-to-cover was 4.5 and yield turned out to be 20 bps below the bank's original guidance.

It was the first time since May that they were able to turn to public markets for their funding needs.

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While we were out

2012-02-02T11:42:00.000+01:00

Having been long ago proved erroneous any hypothesis that the efforts indulged in by this writer were to any avail in the real world, we now have had the opportunity to test its opposite - that the lack of Ibex Salad would prove itself crucial to the grander outcome.

The chart on the left shows the progression of Spanish sovereign bond yields since November 25th, the day on which they peaked and we excused ourselves from active service in order to start the (finished yesterday) olive harvest.

Perhaps we should just shut up and quit while we're ahead.

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You can't make this stuff up

2012-01-06T19:00:00.000+01:00

FT Alphaville treats us to a bit of analysis from Rabobank. The absolute high point of the piece...

Both France and Austria now form a peripheral core...

Coming up next week - the coral periphery.

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Not open for business

2011-12-28T19:08:00.000+01:00

The chart on the left - also a permanent fixture in the right sidebar - shows the monthly number of residential mortgages registered in Spain as a percentage of actual house sales. It's our proxy measure of credit availability in the Spanish economy.

Calculating from the November mortgage report from the INE, this figure currently stands at 98.71%. Almost inconceivably, fewer mortgages than sales as banks shore up balance sheets by not lending money.

A five-year moratorium on the implementation of Basel III might be a thought.

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Closet economics

2011-12-19T20:24:00.001+01:00

Oh good!!! Edward's back... and just in time for Christmas.

After a seemingly endless absence, Edward Hugh has started pumping them out again at A Fistful of Euros (as well as all the usual slew of content farms, we suppose). In his latest he has it that Finland, rather than being a card carrying member of the Hanseatic League, is in fact a Closet Peripheral.

Readers may wish to slog through the usual several thousand words on just about everything under the sun - including the apparently astonishingly high 19-point spread of government bonds over 10-year Dutch debt. Others might want to save themselves the bother.

The above chart may assist this latter group.

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Airing out the shorts

2011-12-19T19:00:00.000+01:00

On the left, this year's Banco de España Christmas card. José Guardia thinks it depicts 'Two guys about to let another drop in the abyss...'.

We think it's just a pair of central bankers hanging a bond short out to dry - and right appropriate in light of the latest action. The Spain 2-year now yielding 275 points less than on November 25th.

H/T Trebots.

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All euro, all the time

2011-12-17T11:16:00.000+01:00

Noting that the FT Alphaville opinion that the success of this week's Spanish bond auction can be exclusively and entirely attributed to the collateral policies of the ECB has now osmotically converted itself into gospel truth via information suppression utilities like Google...

The Tesoro posts their statistics with a couple of months of lag, so it will be February before we can know what the retail contribution to this week's debt auctions was. In the meantime, with numbers current through October, there is already some indication that our domestic political, non-end of the euro, take might have merit.

The chart shows individual holdings of government debt at month end since January 2010. Readers should note that the PSOE government - knowing full well that polls showed them being slaughtered - announced, on July 29th, that elections would be advanced from March 2012 to November. The certain prospect of the removal of Zapatero and his party's replacement by the PP (not to mention lush yields) brought the local money out as soon as the homies got back from the beach.

Readers with good memories might remind us to update this in the future.

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Goodwill to all debt

2011-12-15T13:20:00.000+01:00

Way back in October of 2008, we penned a piece based on our conversation with a worried Spanish architect and property developer. Despite his being a socialist sympathiser, his belief was that a right wing government would do wonders for the domestic investment climate in Spain. If, as seems probable, Tuesday's immense retail demand for Spanish letras carried over to today's auction of longer term obligaciones then our friend's assessment is proving itself to be prescient. This week's auctions are the last prior to the new PP government, with its historically strong mandate, taking office next Monday.

The Spanish Treasury this morning completed its 2011 bond issuance schedule - gross value of 93 billion euros - on a relatively optimistic note. The mishmash of 4-year, 9-year and 10-year paper, originally targeting 3.5 billion euros took in a tad over 6 billion. Yields, with bids-to-cover of 1.5 to 2.2, were such as to force down their approximate secondary market counterparts between 20 and 35 basis points.

The big beneficiary of this, and Tuesday's auction of letras, has been the crucial - at least in its role as a gauge of confidence - 2-year. Its yield, at 3.75 percent, is down 85 bps since Monday close.

Whether or not the move has legs to get the payout down to the mid- to low-3's characteristic of much of the past year is yet to be seen, but the results seem to suggest an overwhelming domestic vote of confidence for Mariano Rajoy.

Of course, we might be mistaken. FT Alphaville concludes that today's auction results are further proof of how bad it all is in the eurozone.

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Take a number

2011-12-13T19:35:00.001+01:00

Curiously, last week we were going post a short piece on the writer's wife's recent trip to the Bank of Spain. We didn't, and now wish we had. It would have gone something like this:

After accompanying her recently retired brother down to Alcalá, 48, following his decision to invest in the following week's issue of letras, she remarked that:

At 11 AM, he was assigned ticket number 260 for the retail window and that number 152 was the last number called;

and that almost everybody in line was noticeably old - this in the eyes of someone pushing 60.

....................

Eight days later, Expansión reports:

The Treasury issues more than the announced maximum in the face of strong retail demand.

Despite the coming apart of everything euro, with a 3.1 bid-to-cover the 12-month yield, at 4.08 percent, was 112 bps lower than last month's issue. The 18-month yield dropped 107 bps to 4.25 percent - b/c of 5. The total issue was expanded from 4.5 billion euros to just shy of 5.

Yields of all maturities reacted by coming down in the secondary market - the 2-year by 31 points.

Big losers in all this are the banks and their 4.5 percent term deposits.

And, speaking of banks, rumours abound that the large collection of ratty former cajas, Bankia, is actively seeking an amalgamation with either BBVA of CaixaBank. Prattle from the couple of bank managers that we're on friendly terms with has it that, within 'a couple of years', there won't be more than '4 or 5' retail financial institutions operating in the country.

We're not exactly sure about the timeline, but the general gist is pretty realistic.

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What's in a metaphor?

2011-12-11T19:05:00.003+01:00

A regular has popped in with a comment on our prior post. Referring to Heidi Moore's osmotic twitter utopia, he or she notes that osmosis has the added benefit to a journalist or blogger of not requiring any input of energy. To which we add:

1). That osmosis takes a place across a semi-permeable membrane - one which only permits the entry of small, simple and commonplace molecules from the solvent side into the realm of the larger, more complex, and perforce rarer, constructions on the solute side.

and

2). The end result of unconstrained osmosis is that the complex fluids on the solute side become virtually indistinguishable from the primordial, lowest common denominator stuff emanating, for example, from Twitter.

A heartfelt thanks to Candide. But does Heidi know that she nailed it?

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When news is the news

2011-12-11T13:52:00.000+01:00

Atlantic Wire's series, 'What I Read', features seasoned Wall Street reporter Heidi Moore - inadvertently informing us as to why the probability that news reporting (and its parasite spawn, the noise-o-sphere) will provide anything that merits the title of 'information' is so abysmally low.

'Twitter is absolutely the first and last thing I do every day to check news. I always dream that a perfectly curated Twitter feed will just allow the most important news to osmose into your brain,...'

'When I retweet I look for stories that are retweeted multiple times, so I follow a lot of news publications. Generally, if I see an article in my feed once I may not click on it right away but if I see it twice I will.'

Apparently, the primary challenge facing journalists in the internet age is to ensure that their names become attached to the viral trend du jour.

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On which date will the euro die?

2011-12-04T20:28:00.001+01:00

Trevor has nicely narrowed down the possible answers to this theological mystery.

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Unemployment - Spanish style

2011-12-03T12:10:00.002+01:00

The writer, in his other life as an olive grower, currently finds himself in the novel (and at first nerve racking) position of having to organize and work with an almost entirely new team of pickers - only one of which he had known previously. The culprit behind this was the government decree published on July 22nd that reversed the two year-old decision that had given Romanians full EU rights in Spain. Seeing as this legislation was specifically created to give a statistical boost to the paralysed PSOE cartel that governs an equally paralytic Andalusian economy in the runup to March elections, we'll avail ourselves of the opportunity to talk about the miserable Spanish unemployment situation.

On the social strife front, it's worth noting that work stoppages protesting government policies have almost all been on the part of functionaries - specifically medical personnel, school teachers and prison guards. These people are the 'haves', not the 'have-nots' - who are shown in the green and yellow lines on the left.

Muddying the economic issue considerably is the fact that two of these three groups have, and avail themselves of, full recourse to the 'societal benefit' argument behind which to conceal whatever portion of their complaint is purely the protection of their own interests.

A rather curious defence of this apparent unwillingness of some government employees to even consider the possibility that they might have to make a sacrifice comes from the next chart. The age group assigned the colour red will not be well represented in the ranks of the placard bearers, but many of those who are - especially the blues and the purples - will be the parents of that lot and are providing them with financial support.

This does nothing to justify the apparent fact that the entire system is upside down. The 25 to 34 year-olds should be contributing to the soon to be tapped pension plans of that swelling group approaching retirement - not the opposite.

As an interesting aside, the graph on the left shows the progress of unemployment rates as a percentage of recent up cycle minima for various countries. Two things, to us, stand out.

First would be that the Spanish 23 percent UR is worse, but not overwhelmingly so, than the American 10 percent if one considers that 2007 or 2008 figures represented full employment for both countries and then measures the unemployment rate with respect to those years. There's a comment here on the assumed cross-cultural portability of statistical series.

Secondly, the bars at the bottom right of the chart - representing the same calculation for Germany, France and Italy - seriously cast doubts on the long term benefits of economic cycles driven by uncontrolled real estate prices. The latter three countries did not undergo property bubbles. The first two did.

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Leadership - the eurozone version

2011-11-27T20:44:00.000+01:00

We find Nicolas Sarkozy's recent clinging to Ms. Merkel's leg with respect to a strict and centralized eurozone fiscal policy... charming.

Puzzling, on the other hand, is why any country, let alone Germany, would be willing to cede protagonism to France on the matter.

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It's that time of year

2011-11-25T17:38:00.000+01:00

The very sharp chap that writes España Economia y Noticias thinks that Spain should leave the euro - no ifs, ands or buts. We don't agree with that, but we do with his insistence that the task that falls on to president-elect Mariano Rajoy's shoulders is one of leadership - not only in Spain, but also in the eurozone. That writer expresses our sentiments perfectly (translation ours):

'It has to be explained to Ms. Merkel that Spain, like Germany, has prepared a plan to exit the euro, a plan that can be put into effect in any moment in which circumstances recommend it and if the long- and short-term legitimate interests of Spain are not taken into account.'

Rajoy has received an indisputable electoral mandate to enact promised reforms within the Spanish economy. Once in progress (and taking the short odds bet that Germany won't budge), he will have the right to question a northern Europe that uses his country to pluralize pork. We hope he's got the guts to play hardball.

Partly in this regard, the following headline appeared on Reuters today:

'Exclusive - Spain's new government mulls outside aid'

The map at the top shows what we, barring inclement weather, will be occupying ourselves with over the next couple of months - starting tomorrow. To derive acres, multiply the figures by 2.5. Posting may be sparse. Or perhaps merely terse.

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When events don't toe the line

2011-11-22T20:24:00.000+01:00

Last weekend, we were mildly impressed by the quaintly devious fashion in which The Guardian once again contrived to keep their Hispanic heartthrob, Francisco Franco, alive and well in the hearts of their readership. Referring to a historical police-conducted burning of a Casas Viejas farmhouse occupied by 120 (if we remember) anarchists:

Even in Benalup (same place, ed.), where the Socialists once won 90% of the vote and which still remembers the bloody suppression of an uprising by local anarchists in the 1930s, the vote is now sliding to the right.

Readers could be forgiven for thinking the obvious (and The Guardian is obviously counting on it), given the juxtaposition of the decade, modern voting preferences and 'bloody suppression'. In fact, the year was 1933... and the government at the time, headed by the republican Alcalá-Zamora, was most assuredly of the left.

But that's nothing compared to the pile of garbage that appeared in today's edition in which Sunday's massive PP election victory is interpreted as a clear victory for the Spanish precursors of the Occupy Wall Street movement - the indignados. Here's the clincher:

...the number of spoiled ballots on Sunday was double that of the last election in 2008 – numbering, with abstentions and blank votes, 11 million: more than voted for the rightwing victors,...

Unless our command of English grammar has suddenly failed us, the unfortunate halfwit that wrote the piece, Katharine Ainger, is actually saying that 'spoiled ballots' numbered 11 million.

Actual election results, (with 2008 numbers in parentheses) are as follows:

Participation - 71.7% (73.85%)
Abstentions - 9,710,775 (9,172,740)
Destroyed ballots - 317,866 (165,576)
Blank votes - 333,095 (286,182)
Partido Popular - 10,830,693 (10,278,010)
PSOE - 6,973,880 (11,289,335)

An alternate interpretation might suggest that turnout was impressively high for an election the results of which had been a foregone conclusion for months.

Hat tips to Trevor (with a chart of historical voting patterns in Spain that gives him tenure at Ibex Salad) and David Jackson.

Election statistics from Wikipedia - 2008 & 2011.

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Time Machine

2011-11-22T14:17:00.000+01:00

Sorry Mr. Wolfe, but apparently one can go home again.

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Election day

2011-11-20T12:41:00.001+01:00

Those that believe that the economic portion of the Partido Popular's election platform consists in an attempt to implant 'neo-liberalism' on Iberian soil may not be entirely wrong. But we have a hard time believing that Mariano Rajoy, nurtured as he was in the monopolistic cabal of the Spanish property registries, is actually capable of being a true believer in any extreme form of that notion.

The program (available here in English) seems to us to correctly, if unconsciously, identify the problem facing Spain - too much foreign debt causing a collapse in internal demand - and to outline a reasonable, we believe, long term course of action to remedy it. In short form, the country cannot afford to repay all that money with internally generated earnings.

Essentially, the PP intends to foment this end of attracting money from abroad by:

1). Making Spain a more inviting place to in which to invest by simplifying paperwork, by undermining the anachronistic two-union dominated, Franco-era monolith of collective wage negotiations and by reducing impediments to workforce reorganization;

2). Providing incentives to companies willing to enlarge themselves beyond the circled wagons of the Spanish family business - so that they can then avail themselves of the ample assistance to be made available to firms wishing to sell their production internationally.

One way or another, be it through increased exports and foreign investment or through default and bailout, the money must come from outside. Running with the hands down winner of the last few years, the currently too small to carry the load export sector, is the appropriate course of action.

It's also interesting how the party attempts to deal with the banking/real estate morass. As if to write off internal growth for the foreseeable future, the platform proposes reducing the tax burden on personal savings - which are defined so as to include principal residences. Encouraging hoarding in a recession is more than a touch pro-cyclical, but tracing a direct tax route from term deposits to home purchases will eventually take some load off the banking sector.

The chart at the top shows the age distribution of employment over the last number of years. A change of regimen is probably not going to be very well accepted by those in the middle. But at either extreme - the fortunate oldest because they're set up and about to retire anyway, and the unlucky youngest because the current plan just isn't working, resistance might be less than imagined.

On a personal level, voting for a party that is a coalition of about a dozen groups, ranging from pure franquista to modern centrist, united only by their being not-left pains the writer considerably.

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Meanwhile, back in the real world

2011-11-17T19:46:00.000+01:00

Something to think about when considering if France, being core Europe, would actually be interested in subscribing to the turbo-charged currency that would be the result of the casting off of the periphery...

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No news is bad news

2011-11-15T20:26:00.000+01:00

The unsettling curiosity of the current spike in Spanish sovereign yields is that it does not appear to be news driven. In fact, the babble in the noise-o-sphere, by no means yet verging on flattery, recently seems to have it that maybe Spain is being keelhauled by events that are neither within its control nor are its responsibility, The question here is that if news is not driving bond prices down, can we expect other news to revive it? We suspect that George Papandreou's declaration, and then withdrawal, of the Greek referendum proposal was the end of the line in that regard. Shame he backed down, say we.

The instigator of all this, in our opinion, might be the ideological structure of the European Union itself. Just as Malta and Germany each have one vote on EU matters, the Union itself is underpinned by a philosophy that it will not be permitted that any country lose from the deal. There is more than a passing similarity to the paradox of thrift in all this.

One interviewee (we can't remember where) noted that a miniscule 10 million euro sell order for a given Spanish government bond is currently capable of moving the price four basis points. If the cause of all this volatility is a buyers' strike, as the above indicates, then there is no reason for us to believe it will end until the EU comes out and makes a choice.

Has anyone failed to notice, by the way, that there are now two European nations being led by non-elected officials?

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Sentiment change?

2011-11-12T22:23:00.000+01:00

Seems that around about the end of August the house rant suddenly was deemed a bit more interesting.

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La Mancha can't catch a break

2011-11-12T11:24:00.000+01:00

A couple of weeks ago we mentioned that the dormant Ciudad Real Central Airport was built with the intention of reselling it to some greater fool or another. That notion, not entirely dead apparently, was given a body blow by the Policía Nacional's recent dismantling of a very large cocaine smuggling operation.

Aside from the 27 million euros in cash found in a house in Rivas-Vaciamadrid, a reported 75 million in other patrimony and 300 kilos of the substance of interest - also in a certain abeyance are the gang's ongoing negotiations to buy the airport's cargo terminal. The plan, according to police, was to use it to bring in '8 to 10 tonnes' a month.

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Dumb idea meets its maker

2011-11-09T23:34:00.001+01:00

A theme that got some traction over the summer had the euro splitting into two currencies - one for the north and another for the south. Neat and cute for those who (not entirely correctly, as long time readers know is our opinion) assume that the fundamental problem in the eurozone stems from its multi-sided currency peg, our immediate reaction was to ask ourselves:

Who in his right mind would enter into a currency union dominated by a country that was never able to concoct a stable government until someone enlisted Bozo the Clown to lead a political party?

The above chart of certain sovereign yield spreads registered today shows how the idea might be expected to work in real life. Pardon us if we feel vindicated.

In other eurozone zero sum news, we read somewhere that the Spanish government was fighting back against the European Commission's attempt to expand the list of sanctionable imbalances to include things like current account deficits. Although with the Spanish version of this measure heading for the three percent level (approximately in line with France and Italy and down from 10 percent in 2008) it is less of an issue, the local argument is that there is no way this flies unless there's a countervailing suppression of surpluses.

Just between the reader and ourselves... is Germany not a little like a wife that insists that her husband go to a marriage counsellor - alone?

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On the other hand

2011-11-07T11:06:00.000+01:00

...no one seems too concerned about Intesa San Paolo or Unicredit.

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Good morning

2011-11-07T10:08:00.000+01:00

...and good luck.

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A good blog on Spain

2011-11-04T17:09:00.000+01:00

We've come across, thanks to a hit registered by Site Meter, a truly excellent blog written by a Spanish-resident American historian. Offering takes and advice on living in Spain, illuminating commentaries on Spanish society and customs, travel suggestions, cuisine and anything else that might be interesting to an outsider wishing to acquaint himself better with a country that generally gets reduced to beach, sangría, flamenco, the civil war and (more recently) membership in PIIGSworld in the eyes of foreigners, the great writing eases visitors through what are often detailed looks at whatever topic is at hand.

Although we're not exactly convinced by how they've decided to categorize their link to Ibex Salad, Not Hemingway's Spain gets our full 5 garbanzo rating.

Sorry, SP. Ain't gonna happen. For reasons like this, we like to know something about whomever is reading us.

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Silk purse from sow's ear

2011-11-03T19:27:00.001+01:00

In the wake of the MF bankruptcy, there's been a bit of noise-o-sphere banter about the Jeffries Group's exposure to eurozone debt. The investment bank in question has had the gall to answer critics with a claim that their 104 million dollar long exposure to Italian sovereign debt (with lesser amounts to Greece, Portugal and Ireland) has been offset by a 178 mn short position in the Spanish version.

Assuming that this is an outright short position put on prior to the August ban (and that readers know that yields move opposite to bond prices), the chart shows the change in Italy-Spain 2-, 5- and 10-year spreads since that date.

A look at the yield chart in the side bar will also reveal that the strategy could only be described as working from May, 2010 to February, 2011. At that maturity, it's lost 100 basis points since then. In the case of a 2-year - nearly 200 bps.

Of course, without knowing the ratios and the entry points it's hard to jump to conclusions. But there's lots of scenarios in which these hedged positions just turn out to be a bunch of bad trades.

Then again, there's probably a lot of folks that covered their long SocGen with a short Santander, as well.

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Silvio does sovereign debt

2011-11-02T19:40:00.003+01:00

EurActiv is reporting that Luca Cordero di Montezemolo, chairman of sportscar maker Ferrari, has called for Silvio Berlusconi to step down as prime minister of Italy in favour of a government of 'national salvation'.

What Italy is to save itself from is concisely illustrated by our chart on the left - a home rolled combination of spread and curve designed so that no one misses the point. The Italian short end, the point at which investor fears of default express themselves, is starting to go spastic. The Italian 2-year is currently yielding a mere 20 bps below the Spain 10.

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Minor signs of intelligent life

2011-11-01T18:18:00.001+01:00

Making a wild guess that the ECB, in the case of Spain, had targeted the 5 to 5.5 percent, post-Merkel burden sharing 10-year yield range with its secondary market bond purchases - and then noting on this right stressful day in the debt markets that the upper limit more or less held, whilst the Italian version tagged an all-time high of 6.34 - we'll pass on a couple of observations we've made recently courtesy of the pages of FT Alphaville.

The table on the left, grabbed from an October 27th entry, show Albert Edwards' calculation of total - on the books and off - net liabilities as a percentage of GDP for various of the world's larger economies. For those wishing to have the obvious pointed out, Spain is second from the left.

Then, earlier today in a good, long piece on the complications involved in realistically calculating a nation's indebtedness, Lisa Pollock pops up a Deutsche Bank table outlining the bond redemption liabilities for eurozone countries in 2012 through 2014. For the first of those years we've retooled it all as percentage of 2010 GDP.

Spain can be seen third from the left.

Today's banking sector carnage, by the way, repeated a pattern to which we have drawn the reader's attention before. Spanish banks BBVA and Santander ended the day off an average of 4.37 percent. The remainder of the top 9 euro banks averaged down twelve-point-five.

Another interesting tidbit is that the Italy 5-year is now yielding 54 bps more than the Spanish 10.

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The day of the dead

2011-11-01T13:05:00.000+01:00

Nine a.m. on the Day of the Dead, and following an interminable full 2 or 3 minutes for the equity market auctions to arrive at certain opening prices:

SocGen, DB, BNP Paribas, Credit Agricole and Allianz down over 9 percent;

EUR/USD off 2 cents;

Bund yield down about 200 bps;

The Italian 10-year paying 6.2 percent.

Funny, isn't it, how markets assume that Greek voters will reject the bailout terms if given the opportunity in a referendum? We would suggest that prime minister George Papandreou is not nearly that stupid... if he's not diplomatically ploying to lead his country out of the eurozone. Also curious is how it comes after a few days of a notable increase in the euro racket* on the noise-o-sphere.

Ibex Salad suspects this is a buyable event. Now to find a bookie that'll take pocket lint as collateral.

*An always reliable measure of this is the frequently amazing flotsam to be found bobbing about the seaweed, jellyfish and bloated carp at Seeking Alpha, for example. But our current favourite is here.

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Cooking the books

2011-10-31T15:28:00.000+01:00

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

2011-10-30T12:56:00.000+01:00

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

2011-10-27T21:29:00.000+02:00

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

2011-10-26T20:16:00.000+02:00

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

2011-10-25T15:04:00.001+02:00

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

2011-10-24T14:28:00.000+02:00

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

2011-10-20T18:31:00.002+02:00

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

2011-10-19T18:58:00.002+02:00

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

2011-10-17T17:26:00.001+02:00

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

2011-10-08T17:22:00.000+02:00

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

2011-10-01T21:40:00.000+02:00

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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Win some, lose some

2011-09-29T10:50:00.000+02:00

Hot on the heels of our having mentioned something about the security of the Santander dividend, the number two Spanish bank BBVA has announced that they will be funding the next portion of their 44 cent, 7 percent payout via a dilution equal to 1.78 percent. The stock up 5 percent on the day of the announcement.

One outfit that has decided to not compete in that league is Loterías y Apuestas del Estado. The government yesterday decided to cancel the much-awaited IPO of the Spanish state-owned lottery company - what would have been the second largest public offering of the year in the world, according to Victor Mallet. General market conditions accompanied by a veiled threat on the part of the soon-to-be-governing Partido Popular to rectify what they claim is a bad decision combined to generate investor interest that indicated that receipts from the operation would fall 40 percent short of Elena Salgado's expectations.

Probably a missed opportunity. How often does one come across a cash cow like this paying out 95 percent of profits - and distributing them on what was reported to be a monthly basis?

As an aside, Rodrigo Rato's decision to forge ahead with the Bankia IPO last July, despite the predictably less than stellar results, now looks prescient.

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Tourism alive and well.

2011-09-28T12:36:00.001+02:00

The Spanish tourism sector is having a banner year. Aided, we imagine, by societal tensions in various countries on the south shore of the Mediterranean, the INE reports that the number of nights stayed over August in hotels by foreigners was 16 percent higher than 2007. The actual number of guests greater by 14 percent. Domestic tourism, probably assisted by the severe recession taking place in the country as vacationers stay close to home, is also at record levels by both counts. The months prior over 2011 are also at maxima for all categories.

The effect on Spain's balance of trade and current account is notable. The Banco de España reports that, through June, the trade surplus in services through June is 28 percent greater than for the corresponding period in 2010. It's worth noting though that the trade deficit in goods was also reduced by 8 percent over the first half of the year on higher levels of both exports and imports. The current account deficit has been reduced by a further 11 percent over the period.

Readers should note that the graph states the reference year as 2001. It's January 2006 in real life. We might fix it when we get a moment.

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That Santander Dividend

2011-09-26T09:31:00.000+02:00

We know that we were caught touting the Santander dividend on a couple of occasions last year when the stock was yielding 8 percent. But do we feel the same now that the eurozone banks turmoil has raised that figure to around 11 points? Less than the reader might imagine.

The accompanying chart shows the ratio of the number of new mortgages constituted to houses sold since 2007. That they are approaching equality indicates inexactly to what degree Spanish banks are compensating for an unfriendly credit environment by neglecting what is their real business in this world - that of making loans* - in order to shore up their reserves. Simple logic would have it that the profitability that fuels the dividend will be affected, and the 60 cent disbursement will be under siege.

*Ibex Salad's readership includes people from both within and without the finance industry. Out of respect for the latter, without wishing to talk down to the former, we'll repeat that mortgages are loans, to be used for any purpose, guaranteed by a property. Nothing more, nothing less. That the number of residential mortgages being issued is approaching the number of house sales contracted makes it clear that Spanish banks are almost exclusively lending to clear embargoed homes off their books. Purely the picking of poisons.

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Another camp evacuated

2011-09-24T18:34:00.007+02:00

As Barry Ritholtz kindly points out with regard to the margin adjustment that took a touch of lustre off the metal that will carry us to the promised land:

As of this Monday, the minimum cash deposit for trading gold futures will be $11,475 per 100-ounce contract — at $1700 per ounce, that is a $170,000 position. The leverage is nearly 15 to 1... At 15-1, a less than 7% move against you wipes out your capital entirely.

Much as the comment-section simians at the Millionth Monkey might have gone completely bananas, does anyone else note a slight disconnect between the 'safe haven' theory of the price of gold and the level of indebtedness used to get that mattress stuffed with it?

The chart shows occupation levels at various thought-to-be-welcoming economic refugee camps compared to the day before the Swiss National Bank started pitching the vagrants out. They are gold, the bund (that proxy for the new deutschmark), the Swiss franc and the US dollar. The shaded area depicts the disaster zone from whence they have fled. It's the Eurostoxx Banking Index.

Ourselves shuddering to think what would come out if he really tied one on, John Hempton thinks it's about to all fall apart in Euroland. But we're more tempted by the possibility that the Bund Camp is next on the list.

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July Spain Home Sales Statistics

2011-09-22T13:03:00.001+02:00

Readers might note the new Spain home sales charts on the left. Improvements (is that the right word?) include incorporating everything from the monthly shot in the yearly sum graph and the inclusion of the mysteriously opaque, yet utterly crucial, category of 'otros'

In English 'others', it refers to transfers of any kind of property - rural, lots or homes - that do not fit into the official list comprising purchase, donation, inheritance and payment-in-kind. The types of transactions that the INE has chosen to not differentiate between include the unification of, mostly country, properties, the horizontal division of apartment blocks undertaken by their promoters prior to the sale of the resultant individual units, repossessions and - dations in payment - the much discussed practice of Spanish banks and cajas to voluntarily take back underwater properties in lieu of balance owing rather rather than through the legal process of forelosure. The advantages of this strategy for the lender were that it is cheaper and quicker and, most importantly, it prevented lots of non-performing loans from being recorded as such on their books. The benefits, however, accruing to the follower of the Spanish real estate market are best categorized as 'negative'.

Simply put, in the act of a bank's accepting a finished home as payment for a debt owed the eventual resale by the creditor of a never occupied house or apartment gets itemized in the second-hand sale registry - and nobody can know even approximately at what rate the economy is absorbing that exorbitantly large stock of new dwellings. The 12-month rolling sum chart, though, can give us an idea of how interesting that number might be.

Sketched in an unavoidable lurid purple, a simple glance reveals that it has declined less than any of the other series pictured. Back in 2007, much of the 500-odd thousand transactions registered would arise from the horizontal division of finished projects, later to be marked as new home sales. But, as time goes by that kind of activity declines, according to the Ministerio de Fomento, at about double the rate of 'other'. Readers should accept as fact that much of the latter's resilience is a result of the daciones en pago that are being recorded in that column and, although perfectly up to the task, are eliminated as candidates for removal from the new home inventory.

We have no opinion as to how high or low that number might be.

The home sales charts continue to show a fairly depressing, and depressed, tendency. Between the very tight credit conditions forcing banks to maintain reserves by not doing their job of granting loans (new residential mortgages were equal to home sales in July, meaning that banks were lending next to nothing not house purchase related even with a collateral guarantee), the possibility that the banks and cajas may have sold most of the desirable places in their catalogues, a general air of anxiety as to the direction of the economy and the uncertainty concerning what the tax treatment of house purchases will be following November's general election, people are wisely 'postponing their decision', as they say.

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Wrong, wrong, wrong

2011-09-17T17:31:00.000+02:00

Our eurozone equity market-conducted bank stress test continues to separate the wheat from the chaff (or perhaps better the chaff from the pieces of grit, insects and dried bird shit that also get picked up in the harvester).

Banco Santander has 60 billion euros of exposure to Spanish government debt on about 1 trillion euros of assets. Unicredit has a 49 billion exposure to Italy and Greece on assets of around 1 trillion. Why has the latter's equity underperformed the former by nearly double in this summer's sovereign exposure rout while the bond market continues to assess both as approximately equally risky.

One of these markets has it wrong.

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Sometimes you win, others not

2011-09-13T10:53:00.000+02:00

Last week's fool-headed Ibex Salad prediction that the SNB intervention might have served as a warning to eurozone bond investors has proved itself, umm, wildly optimistic. Total intervention by the ECB last week was around 14 billion euros - and this week is starting off on the same foot.

On the other hand, our July criticism of Edward Hugh's really ignorant remarks on the Spanish inflation rate is turning out to be correct. As we said at that point:

Mr. Hugh chooses to bring the matter up a mere 5 days before the first anniversary of the tax increase - the day on which the effects on the inflation rate will fall off the statistical record and it will return to a eurozone standard in the mid 2's.

The chart is screen grabbed from today's INE press release.

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Trichet takes off the gloves

2011-09-08T20:08:00.001+02:00

Hard on the heels of the Swiss National Bank's inhumane gassing of the hordes of economic refugees that had, despite prior warnings, continued to land upon the shores of that once peaceful republic, we now have ECB president Jean-Claude Trichet taking aim at a question posed by one of the lowest common denominator retards that compose the content of the noise-o-sphere. His response to a question that seems to have gone along the lines of...

'What is your answer to German people and economists who want the return of the DM?'

... lasts the entirety of 5 minutes and 56 seconds of Reuters video. Salient points are that the ECB's mandate has always and only been price stability - which they delivered - and that the three countries that were denied a requested pass on the Stability and Growth Pact in 2005 were Italy, France and who else but Germany.

We can now imagine, for example, Elena Salgado being faced with a barrage of questions from some idiot economic illiterate recently promoted from the Swansea police beat...

Idiot Illiterate: Ms. Salgado, at what point do you feel that Spain's debt burden would become unbearable and a bailout inevitable?

ES: Thank you for your question. I, like yourself, do not suffer from perfect clairvoyance. But it seems to me that if the current level of debt costs the Spanish government 2.2 percent of annual GDP to service (compared to 2.4 for Germany, 2.6 for France, 3.2 for the UK and 4.8 for Italy) that we probably have a fair bit of margin at our disposal.

II (insisting): But the current level of interest rates must be of some concern?

ES: Well yes, obviously. Our main preoccupation right now is that our current cost at issuance is only 20 basis points below the average cost of our outstanding debt. Just like any sensible person (like yourself), we also batten down the hatches when the bank lowers our credit card rate.

This writer, always the optimist, has taken the very muted response to the SNB's intervention in FX markets as a sign that belief in that inane economics construct that has it that price is always and only the best allocator of resources - and its obvious corollary that markets are a regulatory no-fly zone - has all but become extinct.

Next up would be the notion that the press, as it currently conducts itself, is the optimal arbiter of information content. With any luck, the days of having to treat each and every cretinous query and the subsequent stupidity that is its spawn with the same kid gloves are numbered.

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Swiss bail out Merkel

2011-09-07T18:39:00.000+02:00

An interesting bit, commenting on the effect of the SNB's announcement that it will defend to the death the 1.20 euro/SWF exchange, from International Financing Review...

Chapeau! The Swiss National Bank had today proven what many had either suspected or known but nobody has dared to talk about, namely that the days when central banks couldn’t challenge hedge funds are over...

...Had all this happened a few years back, the SNB would now be standing there with a bloody nose and some hedgie would have made his annual P&L in a morning. But it is clear that the appetite to take on a central bank is no longer there.

Altogether, we have been watching the power of hedge funds gradually diminish over the past couple of years and what we see today is in some ways the invitation to the funeral.

Notable, and likely related, were today's eurozone bond markets. Italian and Spanish yields came down 18 to 25 points right across the curve, with the Spain 10-year actually briefly tagging 4.99. We won't find out until next week, but we're willing to publicly guess that this effect didn't prove very costly to the ECB. Anybody holding short positions on EZ debt won't be hanging around waiting to find out exactly how all those rate fixing euros will find their way to the periphery.

For reference, the first four weeks of intervention produced 22, 14, 6 and 13 billion euros in secondary market purchases.

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A plan that works

2011-08-31T12:43:00.001+02:00

Nomura has initiated coverage of the newest listed members of the Spanish banking community - Bankia, CaixaBank and the much smaller Banca Cívica. Faithfully reporting respective ratings of 'reduce', 'neutral' and 'buy', the English-language press seems, nonetheless, to be lacking a certain amount of detail. Spanish investors, however, have not failed to note that the last of the three was assigned a target price of 4.40 euros by the Japanese brokerage. With the stock trading a touch shy of 2.30 at the time, that represents a projected upside of about 90 percent.

We congratulate the principals, led by Caja Navarra, of this fusion of ex-cajas de ahorros because - and this might be of interest to investors that give some weight to less formal information - they were the only grouping of savings banks that was not dragged, kicking and screaming, through the door that turned them into listed banks. They were the first to announce that they were going public, the first to demote the importance of their regional components behind the banner of the new bank and the first to devise a marketing plan as a reborn entity. That there was a considerable delay in coming to the market was because other cajas continued to sign on to the program - under the same conditions.

They deserve the recommendation if for nothing else than their seriousness.

Compare this admission of failure and determination to find a solution to any of the others - including Bankia, which was plagued with internal power struggles right up to its IPO date. Or NovaCaixaGalicia which can't accept that their books don't balance and whose rotating presidency plan (not to mention its unpronounceable name), meant to calm local jealousies, is a loser. Or CAM - now intervened and soon to be auctioned off by the FROB - financial arm of the provincial fiefdom of Alicante (controlled by one PP politician and one large builder), which to the moment of its death could not comprehend that the mushroom model of business practice just didn't cut it any more.

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Doth Fritz protest too much?

2011-08-30T14:31:00.000+02:00

Alphaville has put up the table on the left. A brief glance at the column entitled 'Greece % of Core Tier 1' for banks raises the possibility that the frequency and vehemence of German verbal attacks on profligate peripherals may be closely correlated to the degree of stupidity of its own bankers.

Commerzbank sports an astonishing 30 percent and Deutsche Postbank, 25.

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As bad as we'd imagined

2011-08-30T13:26:00.000+02:00

Economics Intelligence puts it succinctly:

It takes a Nobel laureate to talk about banks, hedge funds and financial intermediation for half an hour without even mentioning the current financial crisis. Myron Scholes, the creator of the Black-Scholes formula who received the prize in 1997, accomplished this amazing achievement last week in Lindau, Germany.

Stiglitz's presentation is worth half an hour of the reader's life, however. The high point is possibly when he points out that the Federal Reserve Board's model of the American financial system does not include an input for the banks.

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In a subjunctive state of mind

2011-08-28T21:05:00.002+02:00

Used primarily in modern times to provide the emotional underpinnings of boleros and Johnny Hartman ballads, the subjunctive mood fell into near total disuse in the English language over the course of the twentieth century. One of the regrettable results of this loss of communicative precision is that it has become seductively and irresistibly easy to present purely hypothetical proofs as if they were factual. Had it never taken place the human race might have ended up not being subjected to an unending barrage of contrafactual non-events posing as evidence supporting various indisputable tenets of finance and economics.

The uproar raised by the folks pictured above when, on August 12th, a number of eurozone countries temporarily banned the short sale of financial stocks and derivatives provides a pertinent example. The Millionth Monkey puts it best:

There are those who say the upcoming short selling ban in all stocks in Italy and France, which according to CNBC will take place as soon as after the close today, or in one hour, will be beneficial to stocks. Then there are facts. To those who may have forgotten, on September 18 (ed. 2008), the SEC banned the shorting of all financials here in the US. Below is a chart of the carnage that ensued... The same chart is coming to Europe first. End result: 48% drop in under a month.

Lacking the grammatical tools necessary for the task, what the intellectually challenged (and incredibly confused about the temporal order in which arguments are presented) writer of that piece is attempting to claim is that if the SEC were not to have banned short sales on financials three years ago that the outcome with respect to US banking stocks would not have been materially different. It’s that simple – the SEC kicked out the hyperthyroidic short specs and the market crashed anyway. Kindly, for its part, nature has recently provided us with a second opinion on that relationship – the Europe to which their chart is ‘coming to’.

Assuming, correctly we believe, that the effect of the directive can be measured from the moment that the rumour mill declared it a done deal and the shorts started covering in earnest – the lows of August 11th – the following lists the performance of various Eurostoxx banks affected by the ban through this Friday’s close.

Santander - +8.5%
BBVA - +6.9%
BNP Paribas - +2%
Credit Agricole - +10%
Intesa - +5%
Societe Generale - +6%
Unicredit - +1%

German Banks, however, were not subjected to the indignity of a prohibition.

Deutsche Bank - -3%
Commerzbank - 0%

We’ll take all this resultant calmness in the market as an incipient proof of the point we made the day after the ban was implemented – that the short position statistics, at least in the case of Spanish banks, indicated that ‘real’ money was not participating in the sell-off. Under circumstances like these, in other words, the strategy works.

Had the ban not been implemented, and were the banks to have ceased to fall further regardless, then the other possibility would have been that the market authorities have entered into the game of market timing by hiring a CTA to bolster their staff. The chart on the left shows the Eurostoxx 50 support level at which the intervention was effected.

Nice play, guys.

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The big pow-wow

2011-08-24T18:50:00.000+02:00

In recognition of this week's celebration of the economics version of the Nobel Laureate Meetings at Lindau, we present a statement uttered by Friedrich Hayek in his acceptance speech for the 1974 Nobel (from Wikipedia):

In his speech at the 1974 Nobel Banquet Friedrich Hayek stated that if he had been consulted whether to establish a Nobel Prize in economics he would "have decidedly advised against it" primarily because "the Nobel Prize confers on an individual an authority which in economics no man ought to possess... This does not matter in the natural sciences. Here the influence exercised by an individual is chiefly an influence on his fellow experts; and they will soon cut him down to size if he exceeds his competence. But the influence of the economist that mainly matters is an influence over laymen: politicians, journalists, civil servants and the public generally."

Aside from the above noted position of influence attained by, and the one million euros currently presented to, a winner of this award, it appears that another benefit conferred by the prize is that the average lifespan of a Nobel laureate is no less than 1.4 years greater than that of his or her immediate peers. The curative powers of an inflated ego, it seems, is the cause.

The event should be good. Price-as-God cheerleaders Myron Scholes and William Sharpe being forced to endure a Joseph Stiglitz rant on the failure of economics.

----------------------------

Trading Places

2011-08-24T00:52:00.000+02:00

Finally catching on to a point that Ibex Salad has been making for a long time, El Pais yesterday published an article* on the fairly remarkable progression of Spanish exports over the course of the current recession. The title says it all (translation ours) - 'For the first time, Spain sells more to the EU than it imports'. A glance at the chart on the left confirms this general trend. The number has been positive with respect to the eurozone countries - those with which Spain is presumed to be a weaker partner in a common currency death dance - for 7 of the 9 months leading up to June. Currently at 493 million euros, the improvement since the low of the 3 months ending December 2007 is no less than 12 billion euros. Turning positive for the first time, the balance with respect to the OECD nations has turned around to the tune of 16 billion since the same date.

There are those, however, who would have it that the trade balance figures are primarily a relic of a flat, or recessionary, Spanish domestic economy consuming fewer imported goods. Certainly not irrelevant, but the pictures on the left of actual exports might put paid to that notion. Sales to the EU 17 made an all-time high in May. To the OECD, surpassed the April, 2008 record last March - and remain above through June.

Just for a bit of colour we add two countries with which Spain registers a trade deficit. Exports to Japan are at all time maxima, but the case of China is certainly worth noting. Total exports to that great devourer of the world's current accounts have nearly doubled since the 2009 depths of the crisis.

Of course, we couldn't possibly post a piece on external trade without taking another shot at that most dangerously useless of economics constructs - the real effective exchange rate. According to the Bank for International Settlements' disclaimer to their REER series:

Looking carefully at all the different measures of competitiveness cannot but instil a good deal of reticence about basing strong conclusions on any one measure.

As if to prove their point, the BIS July, 2011 calculations for Spain, Germany and China report, respectively (and keeping in mind that a higher value implies lower competitiveness), figures of 101.73, 95.45 and 117.86. We sincerely hope that the Chinese government has taken note of the imminent demise of its economic model.

*Those who don't read Spanish will have to cut the Google Translate version a whole lot of slack. It's terrible - and for no good reason.

----------------------------

Is that clear then?

2011-08-23T12:36:00.001+02:00

What better than an election - an early election - to add some confusion to a situation. On the heels of the Spanish opposition PP's promise to reintroduce the principal residence tax deduction (worth maybe 400 euros a year to most home owners and abolished only in January) the governing PSOE has now decided to reduce the value-added tax rate on purchases of new homes, which they raised from 7 to 8 percent a year ago, to 4 percent. Long sentence. Have we got all that?

In point form...

July, 2010 - PSOE guv raises new home VAT from 7 to 8 percent;

January, 2011 - PSOE eliminates income tax deduction for principal residence for most owners;

July, 2011 - opposition PP (almost a shoe-in to win November elections) promises to reinstate said deduction;

August, 2011 - PSOE lowers VAT to 4 percent.

Real estate promoters and builders seem to like this plan. The degree to which it helps out banks which own repossessed homes is not entirely clear. The Spanish legal definition of a new home is that which is described as obra nueva in the deed. Repossessions that actually were recorded as a change in ownership in the property registries will not be able to avail themselves of the new regime. Those that were transferred prior to their first registration will.

We suppose it will bring some buyers out of the woodwork, but nothing works as well as the expectation of higher prices in the future - and it will be a long time before it gets to that along the Mediterranean coast.

For those with an immediate interest, the new measure is already in effect.

----------------------------

The trend continues

2011-08-18T20:22:00.001+02:00

Markets are still a long way off last week's intraday lows, but today's big ugly continued to improve the outperformance of Spanish banks. Now at +14.5% with respect to a basket of German, Italian and French large banks, the spread is 2.5 points wider than last Friday.

For readers who don't have time to read the whole, very good article, a quick look at the tables and charts in an August 12 post at Logic of Finance might go some way to explaining what, to some, may be an anomaly.

Great publication, btw, for those who don't have some sort of moral objection to people who do their own research - before coming to conclusions.

----------------------------

All risks, all the time

2011-08-17T11:47:00.001+02:00

If any phrase were to describe the editorial policy of FT Alphaville it might be, 'All risks, all the time'. So we were more than slightly surprised to find them this morning touting a blog post by Eric Falkenstein entitled, 'A Perennial Risk Problem', in which the writer complains that merely reporting everything that might go wrong, without any attempt to prioritize by cost and probability of occurrence '...is quite useless and not profound'. The take-home sentence from the piece is:

'Enumerating a long list of disparate things that may happen, without any probabilities, may work for Nouriel Roubini, but he's a charlatan'.

An apt explanation as to why Ibex Salad has transformed itself from being a quaint expression of its writer's parochial interests (if not his grotesquely inflated self-image) to actually having an entry category entitled 'Press and blogs'. Readers seeking to assign blame for this transformation could do worse than spend a couple of hours on a fog-bound day going through Edward Hugh's 'Spain Economy Watch'.

Let there be no misunderstanding here - we are not meaning to imply that FTAV or its writers are no more than a collection of mountebanks. But, just as investors are required in many jurisdictions to disclose whether they hold investment positions in securities mentioned in a given piece, perhaps some public admission that they and the grand part of the world's 'information' providers - due to the sociology that determines readership share and, thus, content and profitability - currently hold massive long positions on disaster would be in order.

We can think of various ways to do this, but would be more than satisfied if the disclaimer attached to any article were a mere 'If it bleeds, it leads'. In the case of the Spanish press, they could add, 'Si un anglo lo dice, se lo repite'... for example.

----------------------------

Spanish home sales stats

2011-08-16T14:59:00.001+02:00

We don't know if we're being passé or merely retro, but here's our now less-than-regular glimpse at Spanish home sale statistics. Most notable, of course, is the continuing effect of spikes in activity last year - both related to changes in the tax treatment of purchases. In one year, we have consequently seen two multi-year highs - and two series lows. Mariano Rajoy, for his part, is now adding to the confusion by promising that the PP, if elected November 20, will reinstate the income tax deduction for a principal residence - with retroactive effect. Knowing politicians and their promises, exactly who is going to sink their money into a new home until he makes good on his word? Or fails to.

Meanwhile, trailing 12-month sales continue their downward drift. Currently at 422 thousand, we can imagine them hitting 400 before Rajoy clears the air on this matter and banks solve their reported liquidity problems.

Long time readers will remember when we railed and ranted about the inadequacy of using the unadorned American-style house price-to-income ratio to measure the affordability of Spanish homes (newer victims might poke around the 'real estate economy' category for the autumn-winter of 2009-2010). With regard to our incessantly repeated point that home ownership costs not related to purchase price or financing were so much higher in the U.S. than in Spain that they rendered any analysis based on price alone utterly inane.

Those familiar with Spanish carrying costs (and still interested in the matter) should take a look at this NPR article on what American banks are financially up against with their stocks of foreclosed residences. Or they could go and look at Credit Sesame's interactive map showing average property taxes in all 50 U.S. states. Placing the mouse pointer over any state produces statistics to the right of the map.

Louisiana is the state in which annual taxes as a percent of house value, for example, most approximate the same in Spain.

----------------------------

Fascists in the faculty

2011-08-15T20:14:00.001+02:00

We are, admittedly, not very big fans of the indignados movement that took over Madrid’s Puerta del Sol in the lead-up to May elections. We think that what we privately refer to as the 'Gravy Train Revolution' is making the ruinous decision to attempt to parlay a misdiagnosis of the malaise from which we currently suffer into a wholly inadequate cure. Nonetheless, we were impressed by the pacific and civic manner in which they expressed their grievances. So we’re going to do these people who were so quick to rightly dissociate themselves from the coincident violence that took place at the investiture of the new government of Catalonia a favour – and point out exactly how a recent, widely-circulated publication by two Pompeu Fabra economists describes their demonstrations as being equivalent to both riots and assassinations.

The piece, published in précis form last week by VoxEU (and since sleepily making the August rounds in the noise-o-sphere) and entitled ‘How much will they hate it? Unrest and budget cuts over the long run’, posits that a statistical analysis its writers have performed reveals a significant correlation between government cutbacks and social strife since the end of World War I. Penned by Jacopo Ponticelli and Hans-Joachim Voth, it’s a pretty curious piece of work.

At face value simply one of the millions of publish-or-perish studies that clog up the creative arteries of social science departments (Oops! We seem to be including economists) everywhere with attempts to render into numbers the comings and goings of the human parade, the article reveals a disconcerting ideological tendency.

A few quotes...

August 2011 has seen days of rioting in London and other cities in the UK. In Spain, demonstrators known as indignados recently occupied town squares and demanded a full-scale change of the political system.

What drives such outbursts of violence against property and people, leading to buildings and vehicles burned, confidence in civic institutions and the police severely dented, and ultimately lives lost?

We look at five different types of instability – anti-government demonstrations, riots, assassinations, general strikes, and attempted revolutions – in Europe over the period 1919-2009.

As expenditure cuts start to bite, the number of anti-government demonstrations, riots, general strikes, attempts to overthrow the established order, and political assassinations increases dramatically.

Are we the only ones to notice that two legally-guaranteed, democratic expressions of political will – the general strike and the demonstration - are thrown in the same insidious basket with armed rebellions, killings and incidents of mob rule?

Were Franco still alive, the generalísimo would be awarding these two authoritarian apologists a medal – not to mention tenure and a statue in some town square.

-----------------------

When the piece first appeared on August 10, it contained a phrase indicating that the correlation had ceased to be significant from the early 1990's. It seems to have since disappeared, but as the writers note on page 17 of the full-study pdf:

The fall of the Berlin wall saw the spread of Western-style democracy
eastwards. The overall connection between austerity and social instability now
changes sign, and becomes in (sic) insignificant.

----------------------------

A good trade, with reservations

2011-08-13T19:26:00.003+02:00

What is fairly typical following a bout of panic selling and voracious shorting is that, when it is over, the names most castigated also rebound harder. Why, given that they were the least punished of most eurozone banks, the two Spanish international banks, BBVA and Santander, managed to continue to outperform their brethren - even on the reversal (adding another 1 percent to the spread, pushing it up to +12 since July 1) - is partly answered by a late Friday piece in FT Alphaville.

Written mostly in defense of their editorial stance against both the necessity and utility of the short sale restrictions put in place in four European countries, the post shows the readers the charts on the left showing the actual short interest (as a percent of float) for stocks placed in the no-fly zone. Among the details to be gleaned are...

First, as is Joseph Cotterill's main point, the shorts - especially in the case of the French market - were by no means all over these companies.

Second, Spanish stocks, which displayed the highest maximum short interest of all, saw their detractors increase their stake rapidly over the first three weeks of July before tailing off to some degree. French and Italian positions were already established before the breakdown, from which they marginally decreased.

Third, the large Spanish banks showed an average 22 percent decline from July 1 to August 13. The French and Italian (no chart for Germany included) banks, 36. A 14 point spread.

Fourth, this difference seems to show that 'real money' selling, accompanied by scarce replacement buyers, was a significant factor behind the Italian and French declines. In the case of BBVA and SAN, it seems that long term investors did not bail out en masse or that other buyers of the same ilk were glad to take up the offer. The heavy lifting here was done by that doubling of the short interest over three weeks - with apparently scant assistance from those with a more measured view of things. A stress test if there ever was one.

Money was likely made, but managers looking back on their bets will at least note the overly large opportunity cost of that concentrated bet.

Readers should note that the person who prepared the charts seems to have reversed the colour scheme in the Spanish version.

----------------------------

Leap of Faith

2011-08-12T19:22:00.000+02:00

Circled on the liturgical calendar since the early years of Christianity, August the 15th marks the day on which legend has it that the Virgin Mary – with no lack of vitriolic dispute among the experts as to whether alive or dead at the time – was teleported from the earthly realm to her deserved place in the afterlife. Many Europeans, as well as all South Americans and the grateful folk that populate the Philipines, will be taking Monday off work to celebrate this event which, thanks to its elevation to the unimpugnable status of infallible dogma by Pope Pius XII, also honours the labours of economists throughout history – The Feast of the Assumption.

Perhaps, on this one day of the year that the coldly calculating practitioners of the dismal science (sic) might allow themselves to indulge in the mystical raptures more the turf of pneumatologists and return on Tuesday and reveal to the world exactly how the calculation of the real effective exchange rate manages to assign 116 to China – with its 22 billion euro trade surplus with Germany - and 95 to this latter.

Those not reborn by their religious experience will, rightly, answer that ‘it’s only an index measuring rate of change’. The chosen few, however, will actually come to question what in heaven’s name the REER is actually good for.

------------------

As for reading material for this long weekend, we recommend a piece by an essayist who really knows how to use a metaphorical hook to seduce the reader into reading ostensibly dry material. Writing in the most recent Vanity Fair, Michael Lewis weaves a tale that takes the reader from an anthropologist’s study of German folklore into the more current matter of how many of Germany’s banks were disastrously duped into buying repackaged American mortgages (and Greek government debt). It’s seventeen pages long and worth every minute devoted to it.

Readers, for their part, might note the point in which an interviewee describes Germans as people who do not think the other party to an interaction is lying – and imagine what domestic mayhem can break loose when they find themselves married to a culture that has not the slightest expectation that the counterparty to even the most banal of street corner conversations is actually telling the truth. Forget Greek economic competitiveness, Spanish labour market rigidity or any of the myriad other assessments of the dilemma. This is the unbridgeable divide that separates the north from the south of Europe.

----------------------------

Random rubble observations

2011-08-10T19:42:00.002+02:00

The chart is a continuation of the point we made about sovereign risks as perceived by the stock market 3 weeks ago.

On a similar tack, the ECB bond buying program, put into effect on Monday, has succeeded in bringing yields at 10 years and under back into the lower part of the range set by Angela Merkel's burden-sharing proposal. If it were accompanied by spreads under 200, we'd think it successful. But 270 seems to be the number for the Spain 10-year. They're going to have to throw more money at the problem.

Interestingly, longer-dated yields have crashed right through that barrier. Reports, however, have it that the ECB has been buying 5's and 10's.

Have readers noticed how many public commentators are touting this rout as a buy opportunity? When the mainstream press and the pro's both simultaneously agree that dividends are the play - beware. There's something wrong with that picture.

----------------------------

Party over?

2011-08-07T19:41:00.001+02:00

A short note on the risks of spending too much time entertained by brightly coloured figures moving about on one's hand-held device whilst riding a bicycle.

The market's five-week long fixation on headlines emanating from Brussels, Frankfurt, Madrid, Rome or Washington came to an end on Wednesday with the sudden realization that it had managed, in its rapture, to blindly pedal from the credit crisis fairground on to the economy autobahn. The result is obvious on the left.

The industry-stacked Dax underperformed the bank-heavy Ibex 35 by about 3.2 percent over the course of the mayhem.

Of course, this may all be an irrelevant sideshow, what with a certain palpable sense of panic in the air with respect to Monday morning.

----------------------------

Rolling Over

2011-08-03T09:57:00.002+02:00

With a 3- and a 3 & 1/2-year (an off-the-run 5 from 2010, actually) being auctioned tomorrow by the Tesoro as secondary market yields spike, it might be interesting to look at what it would cost them to roll various terms - this morning at 8:55, say*. Using average yearly yields taken from their statistics site and Bloomberg.

In the event that high rates continue for the next couple of years, the 3-year roll would be about 150 bps more costly in 2012 and 2013, the 5- about 55 cheaper, and the 10- about 100 bps more expensive by 2013.

*On the other hand, we could have done this at 9:50 and shaved 20 basis points off the whole thing. Was there an announcement, or something?

----------------------------

Northward bound

2011-07-25T08:14:00.002+02:00

A couple of notes before the writer disappears to Holland for a week...

The Bank of Spain, wasting no time in the wake of the successful Bankia and Banca Cívica IPO's, has intervened in the operations of Caja de Ahorros del Mediterráneo - giving the boot to its board of directors in the process. The FROB will inject a reported 2.8 billion euros in equity capital and provide a 3 billion credit line before auctioning CAM off in the autumn. Seeing as now all of the significant players in the caja space are now seized or fully capitalized and converted into banks, we'll leave it to the reader to calculate how long it will take to get to the 127 billion euro guess at the system's capital requirements that was spewed out of the arse of some ratings agency or another late last year. Having done their sums, Ibex Salad fans might ask themselves if Moody's, et al, actually serve any purpose that is not the promotion of the speculative trend du jour.

Statistics watchers should note that non-performing loan figures for Spanish financials now no longer distinguish between cajas and banks and are quoted for the entire system. Makes sense considering the former have effectively ceased to exist. Wonderful invention at the end of the 19th century, but the euro turned into their personal Peter Principle.

Bankia went public at 40 percent of book. The support this bank will receive from what will almost certainly be a PP national government following elections next March makes it a 'buy'. This is, after all, still Spain.

Look for some improvement in the availability of credit in the near future. Lending was certainly suppressed by both Bankia and Cívica in the lead-up to their debut in the market.

Bankia's principal shareholder, BFA, cannot meet its obligations relying solely on the dividends it receives from its holdings in that bank plus Iberdrola and Mapfre. Continued pressure on housing prices will be the result of their selling off the property holdings inherited from the various cajas from which it sprang.

Hasta la vista, baby.

----------------------------

True grit

2011-07-23T21:49:00.000+02:00

The thing about this year's Tour de France is, as we've said before, that no one showed up with a team fit for the job. The end result was a cutthroat race that depended solely on personal bravery. Lots of kudos to go around in this regard...

1). Cadel Evans - wheel sucker no more, he ground it out with the help of no one and won the race on a magnificent time trial;

2). Thomas Voeckler - defended the yellow jersey like no one;

3). Andy Schleck - saw that Contador was on the verge of bonking (which he did) and disappeared up the line - 60 kilometres out;

4). Alberto Contador - no horse in the race but his dignity following Thursday, he attacked 90 km from the finish. That lasted for 60. Then he did it again on the first ramp of the Alpe d'Huez. Topped it off with 3rd in the time trial.

The bad stuff - all strategy...

1). Leopard-Trek - for not trying to bust Contador and his swollen knee in the Pyrenees;

2). Saxo Bank - why didn't Riis send a couple of guys with Thursday's breakaway?;

3). Andy Schleck - should have held off when an out of contention Alberto broke away on Friday. Between his team, BGM and Europcar, they had the interest - and the legs - to run him down later. He didn't, and gave the race to Evans.*

The regret...

Again, Bradley Wiggins' withdrawal. The same stuff that had Evans win it would have seen him right there at the end.

Best quote...

1). Alberto Contador following Thursday's debacle - (from memory) ' I tried for the double (Giro/Tour) and, in the end, couldn't do it'.

*A reasonable guess would be that he thought they would open up an unbridgeable gap on the Australian. He could have done that on his own if he'd stayed with the peloton.

----------------------------

Bankia day one

2011-07-20T18:18:00.003+02:00

After having lowered its minimum expectations about 25 per cent to make sure the deal went through (at the worst moment since early 2009 to stage a bank IPO), Bankia made its long awaited debut at the Bolsa de Madrid at 12 o'clock this morning. As the Yahoo! chart shows, BKIA immediately fell off a 6 percent cliff, recovered quickly to around 3.67 euros and proceeded to meander its way upward for the next 4 hours to close unchanged from the 3.75 issue price.

Below, courtesy of Expansión, is a rundown of the brokerages involved in the first hour and twenty minutes of trading.

In the right column, the houses representing sellers - lots of retail customers dumping what their Caja Madrid manager had cajolled them into buying. And who did the buying? J.P. Morgan almost exclusively. Being one of the deal's bookrunners, we wouldn't be a bit surprised if JPM, not wanting to let a touch of retail panic ruin an already bad situation, were buying for their own account. As we said last week... 'Readers could expect banks (even if it turns out to be the book runners themselves) to fill whatever breach there might be.'

Most interesting were the 26 million shares that crossed at 3.72 euros at 15:36.

----------------------------

Stress tests, v.2

2011-07-19T18:55:00.000+02:00

The folks have been howling that the recent EBA stress tests conducted on euro zone banks failed to include the possibility of of defaults, haircuts, burden sharing or whatever affecting the value of their sovereign debt holdings. One would have to assume that equity markets, however, have taken this into account.

The included charts, notwithstanding that Spanish guvvies are yielding more than their Italian counterparts, give some indication as to the probabilities assigned by equity investors. Spanish exposure was far less penalized than Italian since July 1st. Click on them to read the explanatory material.

The data were provided by Olaf Storbeck through his website, Economic Intelligence. He's taken the enormous trouble to list on a spreadsheet the peripheral sovereign debt exposure for each and every of the 90 banks submitting to the stress tests.

Some people really do add something extra to the internet - but they're so very few and far between.

----------------------------

Random notes from the cliffside

2011-07-18T17:49:00.000+02:00

A few observations as the yield on the Spain 10-year gets to 6.3 percent (with the tesoro planning to auction 7 billion this week):

1). The equity trade to be in today is long Spanish banks/short German, Italian and French. At the time of writing it has turned 2 percent since Friday close. (SAN, BBVA vs. ACA, GLE, DBK, CBK, BNP, UCG, ISP - half to each group, equally weighted);

2). The euro refuses to credibly break below 1.40 to the US dollar. Although that may well be a comment on the relative nitwittery of political leadership. Merkel's truly bad, Zapatero and Berlusconi are hopeless fools and Sarkozy is simply missing in action, but nothing short of the regular parliamentary fisticuffs in the Ukraine compares with the United States congress;

3). The front month bund contract, calculated free of contango, can't seem to get above last summer's highs. Will anybody really want to be long the deutschmark at 2 euro-equivalent to the buck? We'll take the peseta, any day.

Along the usual lines of how difficult it is to actually extract information, beyond the trend of gossip, from the media... the lunchtime TVE news reporter from the Bolsa de Madrid had it (translated from memory) that 'the premium that investors had to pay to invest in Spanish debt had risen to 6.3 percent'. Magic realism.

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What we're up against

2011-07-17T16:18:00.000+02:00

Having had ample experience at adding recurring content to Ibex Salad, and then abjectly failing to follow through (in the end, the remuneration we receive might be a factor), we hesitate to add a weekly feature singling out the really blatant sins of both omission and commission committed by the English-language press in its Spain coverage. Tentatively we'll call it 'What we're up against'. Suggestions regarding a title - and content - are welcomed in the comments box.

The publisher of the widely read and deservedly well regarded blog The Big Picture, Barry Ritholtz, is know for his well thought out diatribes against the misreporting of facts in the public media. Mysteriously though, his critical eye seems to go blind on the rare occasion that he ventures beyond the safe shores of United States To tell the truth, he seems jump right to the front of fact-free bandwagon.

Referencing a WSJ article which simply relays that the incoming PP government in the region of Castilla-La Mancha (producing 3.4 percent of Spanish GDP) is claiming that the budgetary deficit left by the prior PSOE regime may be around double the previously claimed, he manages to come up with this...

Spain’s budget deficit may be more than twice as large as had previously believed.(sic)

We'd hate to think he's taking one for the team here, but a certain 'CHB' points this error
out to Mr. Ritholtz in the comments - to no apparent avail.

----------------------------

Tour Update

2011-07-16T18:08:00.000+02:00

That Thomas Voeckler has not seen his hold on the yellow jersey in the least threatened through about 5 hors categorie climbs in the Pyrenees should give readers an indication exactly what a shame it is that Bradley Wiggins* abandoned with a broken collarbone in the first week of the Tour de France. As to why Andy Schleck has not shown up with a team capable of marking the difference in the mountains is beyond us, by the way. Really bad race all 'round.

*For the writer, the sport which occupies the apex of the primate athletic pyramid is bicycle racing - on the track. That a guy could make the transition from the boards to being a contender in the TdF had us tickled pink.

----------------------------

Bankia Update

2011-07-13T19:48:00.001+02:00

Readers will find out if we are right or wrong about this as soon as next Monday, but it seems to the writer that one of the immediate benefits of Monday's virulent outbreak of true European credit contagion will likely be a warmer welcome for the institutional segment of the IPO of what will be the eurozone's newest top-10 bank - Bankia. What has always been a matter of state for the Spanish government, the success of this endeavour will now also be a continental priority. Readers could expect banks (even if it turns out to be the book runners themselves) to fill whatever breach there might be.

With barely concealed glee, on the other hand, el economista accidental informs us that one of the book runners, Barclays, has availed itself of the opportunity offered by Bankia's announcement of the maximum price of the issue to modify its commitment* to Rodrigo Rato's baby. Yesterday's submission to the Spanish market supervisor, the CNMV, notes (besides fixing 5.05 euros as the maximum) that the British bank had decided to only take up 6.41 percent of the retail, non-institutional, portion of the IPO - rather than the previously agreed 8.97. A quick calculation, based on the 60 percent that Bankia intends to sell to the public, reveals that Barclays is backing out of 1.54 per cent of the total issue.

For readers not familiar with all this, the book runners (or primary underwriters) agree to buy up entire portions of an equity or debt issue with the intention of reselling at a higher price. Barclays decision comments not only on the minimal interest in Bankia among foreign retail investors but also, by the small allotment size, the minimal expectations with regard to this group on the part of the principals.

----------------------------

Safe haven

2011-07-12T20:04:00.000+02:00

The safe haven spreads in the eurozone world of large banks since July 1st have been (depending on one's selection of names), approximately:

1). Long Germany vs. France, Italy, Spain - 4% returned;

2). Long Spain vs. the other three - 2% returned.

The 5 percent jump in SAN from low to close and the 46 bps drop in the Spain 10-year yield from high to close - lots of blood flowing from the short crowd. The only news was the usual - that somebody in the EU might be doing, or might be considering doing, something about it all now or at some yet to be determined date in the future. Guerrilla warfare defined.

----------------------------

The Rubicon

2011-07-11T17:17:00.004+02:00

A few remarks on today's eurozone sovereign debt chaos...

1). Ostensibly triggered by 'concerns' over Berlusconi's funhouse, the Italy-Spain 10-year spread remains unchanged from Friday. That measuring press headline references has gone ballistic;

2). At last, the short end of the Spanish yield curve is taking it on the chin - the 2-10 has flattened 33 bps in two days. Being the opposite of what we observed only three weeks ago, it is unequivocally bad news;

3). The whole thing is turning into Rodrigo Rato's worst nightmare. The drubbing being taken by Spanish banking stocks, if it continues, will make a mess of even his low estimate issue price for Bankia. A cancellation of the IPO, however, would most certainly set in motion a whole series of even more undesirable events much higher up the food chain. In this regard, our prior comment on the impossibility of covering your impending rent payment with a punt on the sixth race becomes even more pertinent;

4). Last, a mere question. Do the European Union and its member states have a 'Plan B'? Or is it sálvase quién pueda?

As we hit the 'publish' button, the yield on the Spain 10-year is crossing 6 percent.

Quick update: Alphaville has posted lists of the big eurozone stock and corporate credit market losers on the day. Not a Spanish bank to be found - although Telefónica and Iberdrola bonds do figure.

?????????????

----------------------------

Feature? Or bug?

2011-07-09T19:54:00.000+02:00

Although having no strong opinion at all on the matter, we find it fascinating that this week the argument that Italy did not rightfully belong in the PIIGS club because most of its public debt was held domestically is now being touted as a reason for its immediate inclusion. As FT Alphaville points out:

'They absolutely are up there with Japan and the UK in managing to tailor issuance of a lot of bonds to a big, domestic investor base. True, but on the other hand, all this complexity might end up working against Italy one day if it needs to find foreign buyers.'

We did notice, however, several comments from people who actually trade these things for a living that the mob might be moving on, having taken a few stop-loss lumps on those Spain shorts that just won't go anywhere.

Time will tell.

----------------------------

Red Giant, Black Hole

2011-07-05T11:46:00.000+02:00

The following is more suited to a flow chart. But seeing as the writer can not read them properly, let alone design one, words will have to do.

The long awaited Bankia IPO has been in progress since last Thursday. Its almost assured success (between Rodrigo Rato's lowered valuation expectations, the hard sell inflicted on retail customers, the circling of the wagons by corporate Spain and an intense lobbying effort among certain sovereign wealth funds) merits a short commentary on the relationship between what will certainly be a rich dividend, its ownership structure and which group will end taking the lumps for all those bad property developer loans.

First, a couple of quotes from today's Spanish press (both from Expansión, translation ours):

Bankia considers selling more than 50 percent of its capital;

Rato tells institutional investors that the Bankia dividend will be 7 percent.

Now, in point form, the ownership structure of what is, cobbled together from the amalgamation of Caja Madrid, Bancaja and several other cajas de ahorros, the third largest Spanish bank:

Until the IPO is completed, the 100 percent owner of Bankia is an unlisted bank by the name of Banco Financiero y de Ahorros;

In turn, BFA is owned in some semblance of proportionality (although Bancaja ended up over-represented) by the charitable institutions which remain of the cajas following their passing over of all of their banking assets to this entity.

Now, who owns what of the mishmash of assets from the original partners:

BFA ends up with most of the bad real estate assets - NPL's, repossessions, equity-for-debt transfers, etc.) - all of the dividend producing industrial portfolio (Iberdrola weighing heavily here) all of the not-high-yielding-enough unsecured retail debt known as participaciones preferentes and the four and a half billion euros in convertibles that constitute the state bailout fund's contribution to date;

Bankia keeps the live banking assets, the non-dividend producing equity holdings and the normal course-of-business wholesale and retail debt - including deposits.

A few points that need to be understood:

BFA, despite being characterized as a 'bad bank', has to be able to pay the high interest on the FROB funds (as well as pay back the principle in about four years) and it must show a profit. Failing to do either allows the state to intervene, in which process the Banco de España becomes the dominant shareholder in Bankia. Hence, the handing over of the dividend-paying equity portfolio (including what ends up being their final share of Bankia). As an aside, Bankia is taking advantage of the situation in order to deal with Basel III accounting standards which lower the value of equity holdings in a bank's capital structure;

Bankia needs to raise something approaching four billion euros from the IPO in order to achieve an eight percent core capital ratio;

The end result of these fixed monetary requirements is twofold:

Bankia, as the reality of investor interest has become manifest, has had to approximately double the percentage of itself that it is selling off;

As this public portion expands, in order to accommodate the income required to keep BFA solvent and to continue to feed the NGO's that remain of the original cajas (whose sole income will be the BFA dividend), Bankia has to increase the dividend yield as the initial price drops. A rough guess - keeping in mind how truly bad the writer is at these estimates - as to how much has to be turned over would be 280 million euros a year.

So, who takes it on the chin when things don't turn out exactly as planned? That's simple. The original cajas via the BFA dividend which, by force of nature, will be the shock absorber of first and last resort. That means fewer stupid, brand new and underused community centres in the thousands of small towns which dot, like an outbreak of measles, the Spanish administrative and political aspect and more bankruptcies and disappearances of second and third division football teams - the support of which somehow falls under the legal definition of obra social.

The upside to the above is that the situation has the potential to align the political and financial incentives of regional hot-shots that control the disbursement of the caja's funds with those of the folks charged with administration of Bankia. Simply put, Bankia's enormous capacity to reduce duplicate branches and otherwise achieve economies of scale will be less resisted by the homeboys if the BFA dividend is at stake.

Bankia stock, in our opinion, will (besides being a no-growth proposition for the foreseeable future) probably drop in value following the IPO. But that 7 percent is juicy - and safe.

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Gold amongst the dross

2011-07-03T01:08:00.002+02:00

Edward Hugh has published a massively verbose 5,731 words on what mostly ends up as an attempt to defend, against all evidence to the contrary, his belief in the lack of international competitiveness of the Spanish economy - and, by corollary, the merit (nay, necessity) of his 'internal devaluation' prescription. Despite its displaying his normal misunderstanding, and consequent misinterpretation, of the economic data which he presents, it does contain some interesting little tidbits.

Pale as it might when compared to his truly incredible 2010 masterpiece of statistical illiteracy and self-delusion, in section number five of his entry he puts up the chart on the left as 'proof' of an ineffectual Spanish export sector. Readers will probably be as surprised as we were, notwithstanding Mr. Hugh's conclusions, that exports from Spain - expressed as a percentage of the same from a booming Germany - appear (judging by the upward slope of the line in the lower right hand corner) to have increased since mid-2010.

Just a detail.

Sublimely fascinating, however, is the graph of the Spanish and German CPI's on the left. Before moving on to the really fine little nugget contained therein, we'll lightly mention Hugh's failure to note that the 2010 surge in the Spanish version was the result of an increase in the country's value-added tax and is categorically not a symptom of uncompetitiveness - especially considering that exports are not charged the IVA.*

But the truly interesting point on the chart is that the inflation rate spiked, not on the July 1, 2010 introduction date, but in what appears to be March or April prior. We think it is more than a coincidence that, in late March, giant retailers Carrefour and Mercadona announced that they would not be passing the tax increase to their customers. Why bother when you can do it three months earlier, when nobody's looking, and pocket the difference?

*Curiously, Mr. Hugh chooses to bring the matter up a mere five days before the first anniversary of the tax increase - the day on which the effects on the inflation rate will fall off the statistical record and it will return to a eurozone standard in the mid 2's.

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Where's my IPO

2011-06-28T22:06:00.000+02:00

Was anyone, other than ourselves, wondering what happened to the Bankia IPO. Scheduled originally for last Thursday, it was postponed to yesterday so as to not to conflict with St. Jean Baptiste celebrations in Québec. Then nothing.

Cinco Días is reporting that the entire plan will be postponed, possibly until September, if the Greek parliament does not approve a creditor-mandated austerity plan.

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Quick Follow-up

2011-06-21T18:40:00.000+02:00

Possibly confirming some of what was said in yesterday's post, the bid-to-cover for today's auction of 3-month letras was a huge 9.49.

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Abominable Snowman

2011-06-20T21:30:00.004+02:00

In the wake of the very numerous recently reported sightings of the peripheral contagion yeti over the last couple of weeks, a brief glance at the available evidence proving the existence of this beast might be in order.

On the left, readers might note that the amount of Spanish sovereign debt in the vaults of foreigners continues to approximately keep pace with increased issuance. As of the end of April, the great undifferentiated mass of guiris is the lender of record of 53.69 percent of the total circulating.

But this easy soaking up of Spanish encumbrances has not been tit-for-tat right across the curve. Again on the left, readers can see that the benightedly fearless foreigner has vastly increased his appetite for short-dated paper. In percentage terms, foreign holdings of outstanding letras del tesoro have increased from 12.76 to 55.11 since the end of 2007. The progression for bonos and obligaciones over the period has been from 42.64 to 54.26 percent.

This change in tastes must be of some concern to the people at the Tesoro - from whose figures these charts are derived. Despite this switch in preference, they have been attempting to maintain the average term of their outstanding debt at something just shy of 7 years. The natural and inevitable result of this conflict between the desires of lenders and borrowers is that the yields on long bonds - from 10 years and out - have recently been setting, if marginally, euro-era maxima. Five years and under, the super stressed zone on the Greek curve, have not.

With regard to contagion, a glance at one symptom of the disease is worth the effort. On the left is graphed the yield differential between the 10-year and the 2-year for Greece, Spain and Germany. Presumably, the previously described state of affairs is serving to 'unnaturally' steepen the Spanish yield curve. But the abominable snowman hasn't shown up yet.

As an aside, Alphaville today made mention of last week's not totally successful issue of obligaciones, referring to it as a 'busted' auction - quite clearly avoiding using the word 'failed' by at least a millimetre. Unfortunately for their take, however, the very piece in which it appears sheds some light on why Spain shut the door short of midway between their expected and maximum targets - upsetting markets in the process. The cited DB report makes mention that Spain has already issued 16 billion euros over its actual funding requirements to date this year. There's a message there for fishers of yield.

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Early returns indicate

2011-06-16T11:42:00.002+02:00

The public news sources aren't carrying it yet, but the Bloomberg intraday yield chart seems to be saying that the auction may not have gone that well.

Will real money continue to love at 5.70, what they consistently have fallen head over heels for at 15 bps less?

Just in: The apparent difficulty is neither the yield (under secondary in the case of the 15-year), nor the bid-to-cover (2.13 for the 8- and 2.57 for the 15-year). Apparently, the Tesoro fell short of its maximum sales target. The stuff of nervous markets.

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Waiting for the draw

2011-06-16T10:52:00.000+02:00

Awaiting with bated breath the results of this morning's Tesoro auction of 15- and 8-year bonds. At this moment, the secondary market is demanding a yield of 5.63 percent from the 10-year, 4.83 from the 5 and 3.53 from the 2. Regarding the peripheral contagion thesis, these are respectively 5, 17 and 43 basis points below the maxima set on November 30, 2010.

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Form follows function

2011-06-14T11:00:00.000+02:00

True to form, the Spain 10-year yield, in the lead up to today's auction of 12- and 18-month letras, yesterday tagged 5.55 percent - and turned south.

More interesting, though, is the Tradeweb graphic published by the Financial Times on Sunday. It compares bond market volumes for the 10-year benchmark for Spain, Italy, Greece, Ireland and Portugal in both July of 2007 and May, 2011.

This week's calendar also features a 15-year on Thursday. Total for all the issues is 8-9 billion euros.

Also true to form was FT Alphavilles's take on the mother ship's article. We all know that they have a strict editorial policy with regards to admissible eurozone peripheral news, but to describe their hand tooled graph as evidence of 'dying peripheral bond trading volumes' is beyond the pale. For the record, summing the values in Tradeweb's chart shows PIIGS 10-year volumes increasing by 3.5 billion euros over the period.

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Beggars and choosers

2011-06-13T18:50:00.002+02:00

Way back in October of 2008, in a piece which straightforwardly places the responsibility for our current mess in the hands of Sigmund Freud, we revealed to our readership what we consider to be the fundamental law governing the outcome of bets on future events - often referred to as 'investments'...

- you can't cash a ticket in a one-horse race on the 31st of the month if your rent is due.*

It is, of course, of no real concern that Telefónica has decided to delay the IPO of its Atento unit because of miserable equity market conditions everywhere. But Bankia is another matter. Planning to begin its own initial public offering next week with a July 13th target for the first trading day, the unholy, very large and tremendously needy alliance of a variety of cajas de ahorros - led by Caja Madrid - is on the verge of postponing the event until the autumn for the very same reason.

This is something Rodrigo Rato wanted to avoid, because it will then take place into the teeth of what will be one of Europe's biggest, and likely the most appealing, IPO of 2011 - that of Loterías y Apuestas del Estado. The Spanish national lottery operator, most famous for the annual December drawing of 'el gordo', is said to be going to offer some 10 billion euros of itself to the public. Resistant to the vagaries of economic growth and decline (one really has to live here to understand how that works, although the photo shows the aftermath of a win in a lucky town), LAE seems to be promising to disburse around 80 percent of its profits in the dividend. The real feature, however, is that the payout will be made on a monthly basis. As if Bankia didn't have to wonder how selling its stock to its own depositors could truthfully be described as progress in the battle for capital, a Spanish standard-issue 5 percent yield from the lottery would provide serious competition to everybody's entry in the term deposit wars.

*Those still waiting for another 2000-style stock market crash might consider waiting until the industrialized world's real beggars, the pension funds, are all in. According to Pension Pulse, UK pension funds are currently 19 points short of their year 2000 record allocation of 74 percent of assets. Looks high enough for at least a minor setback, though.

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Spain House Sales Statistics

2011-06-11T00:57:00.006+02:00

We’ll chalk up the mere existence of a recent remarkably inane bit of ‘research’ on the Spanish banking/real estate conundrum emanating from Nomura (via Alphaville) to a last ditch attempt to pressure the issue price of the now imminent Bankia IPO and limit ourselves to remarking that the piece likely, seeing the level to which the enemy’s arguments have been reduced, bodes moderately well for the market debut of Rodrigo Rato’s amalgamation of Caja Madrid, Bancaja and various others. What is of interest however, especially seeing as the INE’s home sales statistics were released on Friday, is the tremendous recent disconnect between these figures and those produced by the Housing Secretariat of the Ministry of Public Works – the ones used by Nomura in its analysis.

Regular readers will have noted that, last June, we related that the MVIV index (as it was known then) fairly consistently reported more house sales than the Instituto Nacional de Estadística. Since then, we hadn’t really followed the issue, so one can imagine our surprise when today we saw that the former reports 26,246 new homes as having been sold in the first quarter, whilst the INE places this number at 60,991.Tracking backwards along the chart at the top, it can be seen that this pronounced state change took hold in the third quarter of 2010.

Part of this discrepancy can be attributed to the differing methodologies of the two organizations. Fomento uses figures reported by the country’s notaries, and the INE from the property registrars. The latter, despite the lag in reporting times, is the only proper measure because it reports all transactions that were actually completed. We had attributed the excess reported by the former to notarial agreements not meeting the legal standards of the registrars, being returned, redrafted and then double counted. The notaries are not equipped for, or interested in, this kind of record keeping. The registrars, through their national database, are. But to have turned in vastly smaller numbers of transactions... that will take some explaining.

Our immediate, dumb guess is that, because it became an open secret over the summer of 2010 that the original keepers of the MVIV figures – the Ministerio de Vivienda - were to be eliminated and folded into Public Works, or Fomento, as a cost saving measure (an event that took place in late October), their already shoddy statistical department found itself even less equipped to do the job it had been assigned – part of which was surely coaxing the numbers out of a disinterested College of Notaries. In any regard, somebody’s got some explaining to do.

The charts of the INE numbers show that both new and used sales are setting series minima – the demise of tax incentives to buy and the falling of Easter week. Again, it will be a while before one gets a fix on what is now normal.

We won’t grace its conclusion with a critique, but readers who have clicked through to the Alphaville piece might like to know that:

1). The 300 billion euro total real estate sector debt is correct. For the purposes of the piece, loans to the commercial real estate sector have to be backed out of the total;

2). Entirely apart from whether figures from Fomento (likely erroneous) or the INE are used, new home sales alone do not properly report the depletion rate of new housing stock. ‘New’, in the legal sense, only refers to whether it is the first time that a property has been registered to an owner who is not the promoter. Some not insignificant percent of second-hand sales will in fact be brand new, never occupied homes that had seen an intermediate title change through repossession or an equity-for-debt exchange.
Also interesting is that a variety of Google searches failed to show the Nomura thing as getting any traction at all in the noise-o-sphere. Apparently, even the Millionth Monkey wouldn’t touch it.

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Parallel Universes

2011-06-06T22:56:00.002+02:00

Pity the lot of the poor economist required to opine, if not actually pontificate, on the basis of numerical data. Readers might witness the graphic on the left. Tracking the near mirror image courses of productivity* and unemployment in Germany and Spain since 2002, the picture reveals exactly how wide, despite nearly identical administrative procedures, is the definitional gap between these two countries.

In the case of Germany, the unemployment insurance system explicitly subsidizes continued employment in an economic downturn - workers are retained but a portion of their wages are transparently supplied by the government. In that of Spain, the support is similar - but that it is implicit and opaque - as workers resort to the social security system to make up for a shortage, but not complete absence, of work or a lowering of wages. This is to say that many, along with their employers who retain them on a part-time or as-needed cash basis, cheat the system.

The end result is the lines visible particularly from the end of 2008. Spanish unemployment and productivity absolutely soar as the drop in official employment overshoots that of real economic output. In Germany, the opposite happens. The relatively flat UR in no way reflects the straits in which the economy found itself at the time, and the brunt of the effect is to be found in the productivity figures.

Interesting, though, is the fact that German productivity peaked in the same year that the Spanish equivalent made a bottom - 2005. In the latter case, we would attribute it to the truly vast amounts of unregistered, foreign labour used by a then turbo-charged construction industry. As for Germany, we have no idea.

*No particularly good reason for using this measure of productivity - except that the Eurostat database churned it out. One accepts what one gets when dealing with that clunker.

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Amusement park opens for summer season

2011-06-04T10:46:00.004+02:00

What better way to counter the now imminent arrival of yet another oppressively bleak summer season than to have the information zoo repeat - no less than 580 times*, according to Google - 'We Are on the Verge of a Great, Great Depression".

For ourselves - and our political movement, the Partido Monotonista - debt-derived recessions are essentially really boring, range-bound events. The edited Bloomberg chart of the recent history of the Spanish 10-year bond does nothing to disabuse us of our fantasy (although the original spike threatened to). The peak intra-day yield following Merkel's 'burden sharing'-induced runup last November reached 5.67 percent. The predictable reversal brought it back down to 4.95 over the following week. Those two figures have now defined the range of the bono for 6 months straight.

*The items are a reference to a CNBC interview with the Sultan of the Simple Metaphor, Peter Yastrow. Here's an example of him hauling out that intellectual black hole, Newtonian physics, as a model for economic growth.

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Audience outsourcing

2011-05-25T20:06:00.002+02:00

We thought that it was about time that we contributed to the new, improved Iberosphere. Our piece, covering some aspects of the frankly odd credit market reaction to the Sunday's PP landslide municipal and regional election victory, begins (perhaps predictably) like this...

Absolutely true to recent form, a week ago Tuesday the two immediately upcoming Spanish government bond auctions which were to lead up to the weekend’s municipal and regional elections were put into journalistic – and might we add – speculative play by an article in one of the world’s news sources of reference.

...and, well, just gets better.

It can be read here.
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Editorial policy

2011-05-25T13:15:00.004+02:00

Having tactfully failed to point out to our readership that the Spanish economic 'mystery' recently encountered here by our old favourite, Edward Hugh, may be attributable to his comparison of seasonally-adjusted sector data to nominal GDP, we now just cannot resist asking the following question...

Does anyone else find it odd that Hugh's latest piece, Italy is the elephant in the euro room, not Spain, did not manage to find itself posted in his death-of-Spain flagship blog, Spain Economy Watch?

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Spain kicks the bums out

2011-05-22T23:35:00.003+02:00

Experience would have it that a normal electoral reaction to an economic crisis as deep as that being experienced by Spain would be to kick out incumbents of any stripe. What happened in today's municipal and partial regional votes, on the other hand, was that the PSOE was turfed almost everywhere, but the PP which is the main beneficiary has escaped unscathed in its own fiefdoms.

Two interesting datapoints are:

1). In the unredeemed old school socialist region of Extremadura, the PP is currently (with 90 percent counted) one seat short of an absolute majority;

2). Despite an unemployment rate three points above the national figure and a government embroiled in a variety of corruption scandals, the Valencia region PP has managed to amplify its majority with respect to 2007.

A living testimony to exactly how incredibly badly José Luis Rodríguez Zapatero's PSOE is perceived to have handled the country's economic situation.

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Radicalism rehashed

2011-05-20T11:18:00.007+02:00

The parent organization behind recent anti-politician protests currently taking place in Spain, Democracia Real Ya, offers readers the opportunity to affirm their support for its manifesto by filling out a form at the bottom of the cited page. As of this moment, a grand total of 27,589 persons have done so. This figure, despite the phenomenal amount of media coverage that the acampada in the Puerta del Sol is receiving, calculates out to about zero-point-five percent of the country's 4,900,000 unemployed as reported in the last EPA survey.

It is not surprising that this 'revolution' has not escaped the same fate of irrelevance that its adherents claim to so discredit conventional politics. Their platform, rather than being the break with the past that it touts itself to be, is little more than a recycling of the utopian, lowest common denominator and subsidized lunch for everyone theme teleported directly from 1968 - with revealing token bits of modern detritus such as the insistence that the law prohibiting free downloads of copyrighted entertainment be rescinded.

Count this writer as being tremendously disappointed.

Kudos, on the other hand, to its organizers who have apparently done a good job of getting participants to behave in a civil manner.

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March Home Sales

2011-05-16T19:55:00.004+02:00

A notable relapse in home sales in Spain following the boost given by January's demise of certain tax breaks.

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Trichet Digs for the Evidence

2011-05-15T18:15:00.005+02:00

Courtesy of Público, a photograph of ECB chief Jean-Claude Trichet personally stress testing the really sick caja de ahorros, CAM, from the standpoint of liquidity. This during a two day pow-wow in Madrid last week.

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Water for an Elephant

2011-05-07T20:20:00.007+02:00

Rumours are swirling about that the regional government-owned company that supplies Madrid’s drinking water, Canal de Isabel II, will be taking a 7.5 percent stake in Bankia, the domestic banking giant being formed by Caja Madrid, Bancaja and several others, when they go public – scheduled for early summer. Ignoring for a moment the merit which the howls of ‘¡pucherazo!’ might have – it certainly would guarantee the continued control of the former caja by the Madrid PP – the manoeuvre does have its merits.

Recent reports have had it that Rodrigo Rato’s efforts to take his ward public have not been meeting with much enthusiasm on the part of the institutional investors which were being counted on to take about five percent of the IPO. Combining, however, Isabel II’s involvement and their stated intention to take 49 percent of themselves public in the near future we end up with a fairly elegant, albeit back door, solution to what is a near life and death matter not just for Bankia or Madrid, but – due to the sheer size of the bank - for Spain itself. The canal, income generator (last year’s profits were 115 million euros and they claim to have enough cash on hand to do the deal without recourse to credit markets) that it is, would remain appealing to international capital.

Addendum 1: Readers should note that the canal would take 7.5 percent in lieu of the 5 that private capital was being offered. Combining this with the recently-hatched common wisdom that Bankia will be floating 30 percent of itself rather than the 20 that was thought to be the case a few weeks ago, it would be reasonable to assume that Rato has dropped his intial price by 33 percent – and it’s still not flying. The goal was to come up with 3 billion euros of Basel III bulletproof capital.

Addendum 2: The ownership structure of this new bank has the amalgamated, bank-ized cajas owning, through Banco Financiero y de Ahorros, 70 percent of Bankia, a large (some, much, most or all, we don’t know) portion of the bad loans and repossessed real estate portfolios of its constituent parts, most of the industrial portfolios of these same, all of the nearly 5 billion euros of convertible preferreds sold to the Banco de España through the FROB and apparently... all (many, most, some) of the participaciones preferentes held by its retail customers. Notwithstanding Rodrigo Rato’s vigorous protests upon hearing BFA described in the press as a ‘bad bank’ intended to hold garbage assets, and his insistence that it would show a profit from day one, it should be noted that the preferentes – perpetual junk bonds that are mostly fobbed off, yielding about half what similar would in public markets, on deposit holders – universally are subject to the clause that states that interest will not be paid, or accrue, in any year that the issuer shows a loss.

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Probably Possible

2011-04-23T13:00:00.004+02:00

An interesting short piece in VoxEU on public perceptions of the chances that a low probability event with serious consequences will occur - in the wake of one having actually taken place. Think predictions of tsunamis following a tsunami, stock market crashes following a stock market crash... or lottery ticket number combinations.

...an extreme example from the Bulgarian 6/42 state lottery illustrates the point. In September 2009, the exact same six numbers were drawn in two consecutive weeks. While no player picked the winning numbers in the first draw, 18 players did in the second draw. These players then had to share the jackpot and lost about 94% of the prize money compared to the case with only one winner.

A possible lesson to be garnered is that ex post compensation for highly unlikely events that did in fact take place may not provide the returns imagined in the future.

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Citi hires Zapatero

2011-04-21T18:36:00.008+02:00

Not that we want to get him off the hook for his Pavlovian reaction to an opportunity to resume his hard wired good-news-all-the-time mindset, but Mr. Zapatero's inopportunely erroneous announcement that the China Investment Corporation was to sink no less than 9 billion euros into Spain's cajas de ahorros does not represent the first time that a western politician has returned from negotiations over that way with no clue as to what had been achieved, or not. If our memory serves us at all, we recall U.S. President Gerald Ford* gleefully claiming that he had a firm agreement from one of those other nations where the meaning of 'yes' is greatly complicated by the near non-existence of its opposite - Japan, in that case to open its borders to American rice.

Other items contributing to this week's trashing of eurozone peripheral debt, including that of Spain, were:

1). A recent public berating of Banco de España governor, Miguel Angel Fernández Ordóñez, by BBVA's president Francisco González;

2). Mr. Fernández's apparent refusal to play hardball with either CAM or NovaCaixaGalicia - two of the countries true financial basket cases;

3). An unfounded rumour, apparently emitted by someone at Citigroup, (with the world's press and bloggers dutifully repeating it in their role of information providers) that Greece was to restructure its sovereign debt this weekend;

and lastly, and beyond a doubt the most important...

4). Easter Week. What better moment than one of holiday sloth, abandonment and inattention to take yet another kick at the can?

Not that anyone can convince us that PP leader (and probable President 14 months from now), Mariano Rajoy, is going to have the cojones required to take on the Valencia contigent of his own party and put CAM out of its misery, it would be convenient if the utopian simpleton currently at Spain's helm were to pass the controls on to someone who has not emanated from a tarot deck.

*Readers should feel free to straighten us out if we got the wrong guy.

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February House Sales

2011-04-13T09:44:00.003+02:00

The Future

2011-04-08T10:32:00.004+02:00

Below, a table of the yield on a series of 12-month term deposits on offer (although we're not sure it's being advertised) by a caja de ahorros in Andalucía. The bank in question is one of the weaker links in an IPS that insists that it will be listing itself on the bolsa in the foreseeable future. The depositor has the option, but does not commit, to renew at the posted rates.

Year-Rate
1 - 4.0%
2 - 4.0%
3 - 4.5%
4 - 4.5%
5 - 5.5%

Embedded here are opinions on future interest rates, how long they believe the Spanish deposit war will continue, how much they are going to able to raise from equity markets... and possibly a guess as to how long it is going to be before reasonably priced non-mortgage credit will be flowing from this institution.

The winners when economic growth resumes will be Santander, BBVA and most of the other pre-restructuring banks, CaixaBank, the Basque cajas, Unicaja and its underlings and possibly Banca Civica - which may not be totally healthy, but at least has a marketing plan that breaks with the past.

Places like the subject of this post won't even exist tal cual by the time that term deposit expires.

----------------------------