Friday, 3 January 2014

Spain's "Sucess"

Big news this week was that the ESM had successfully ended the support towards Spanish banks, a story which came in addition to the already positive outlook for the country. In the words of the Spanish Finance Minister "2014 will see the net creation of jobs, higher even than we predicted in September in the budget, and the jobless rate will fall". The ESM has also provided us with a list of the positive developments in Spain which made it possible for it to exit:
1. Bank restructuring is well underway.
2. Transfer of impaired assets to an asset management company (SAREB, i.e. a "bad bank") has been completed.
3. Steady reduction of Eurosystem funding.
4. Positive banking results in 2013.
5. Markets acknowledging Spain's progress.

While these are all good news, there are still many problems which have been kept hidden under the carpet. First of all, we 'll start with the infamous unemployment rate, currently at the staggering 26.7%, meaning that more than one out of 4 people in Spain is unemployed. Add to that an astonishing 56.1% of youth unemployment and you get a much better picture of how things are doing in the country. Oh, wait there's more: 7.1% of the labour force in the second quarter of 2013 was just working part-time, brining the percentage of the people working full time is just 66.2% of the population.
What does high unemployment indicate*? Since people tend to consume out of income, it means less consumption. The trend has been obvious in Spain over the past years:
With less consumption, firms will be facing more trouble than before, with the trend of new orders and firm bankruptcies continuing:
Don't let the decrease in Q3 bankruptcies fool you: remember that the Spanish economy is highly seasonal (as are most of the periphery countries, especially those with a large inflow of tourists) and as restructuring specialists commented "2013 is going to be the year with the most bankruptcy filings in Spain's history, without any doubt".

All of the above have important consequences to the health of the banking system: overall Bad Loan ratio climbed to 12.7% in September 2013 compared to 12.1% in August, while the severe deleveraging of the banks' balance sheets continues as we speak. The ESM focuses on the positives, yet the problem is that they use just Q2 data, which allows them to focus on what they like. For example, in Q2 industrial production rose by 0.8%, making some very happy. Yet, the Q3 data show that the increase was not permanent:
One cannot be certain of how Spain will fare in 2014, yet the popular opinion (and the one shared by yours truly) is that the coming year will be better than 2013. This has also been shared by the market: with the danger for a Spanish or an Italian default reduced, bond yields have decreased over time. Yet, whether the over-optimistic estimations of the Spanish Finance Minister will occur is something which is really doubtful. For significant growth, we need stabilization and Spain has unfortunately not yet stabilized.

The fact that the ESM stopped its backing of the Spanish economy is rather irrelevant to the stabilization of her economy: the credit provided was just the amount needed for her banks to continue functioning and nothing more. The Spanish authorities have agreed to exiting the ESM based on the fact that the worse is over. We agree on that; but it doesn't mean that the situation will get better. If anything, optimists would expect the situation to stabilize over 2014, with some quarter-to-quarter growth after the stabilization as the austerity-based new budget, with more cuts in spending and more wage-freezing for public servants. The country's increased exports make it more prone to external shocks and the payments for the debt assumed in order to revive the banks will drive policy for some years to come.

So, ESM, let's be realistic: Spain is anything but stable. Don't focus on just the positives and please give out up-to-date data. 2014 will be good for stabilizing the economy and some slight growth if the increased austerity does not cause more harm in the end. Everything else is just wishful thinking.

*Some argue that unemployment fell in December 2013. The problem is that the hires were highly seasonal and in addition, the Spanish labour force appears to be shrinking as Euronews reports. Thus, the good news are nothing but the absence of bad ones

1 comment:

  1. So in Spain it looks like things are getting worse more slowly.

    That sounds like success in the Eurozone.