The Government are continuing to cut costs, in an attempt to regain the confidence of the markets and the EU. Last week came the turn of education and health. The aim is to save 10,000 million euros on education and, 7,000 million on the health sector. The so called `health tourism’ was attacked in Spanish newspapers (see our comment ‘End of Health Tourism’). Costa del Sol: Foreigners in focus
The Malaga newspaper Sur reported that there are 400,000 EU citizens living in the province of Malaga and using the provincial health services without paying, costing 300 million euros per year. The Andalusia Government reports that only 5% of them are ‘empadronados’ (registered at their town hall)).
Shaky ‘Schengen’
Be prepared for more border controls when traveling from North to South in Europe. The Schengen Agreement for free movement between the member states is becoming shaky under the onslaught of illegal immigrants on the eastern and southern borders of the Community. France and Germany wants to re-establish border controls. Switzerland permits only the entry of citizens from 8 eastern European countries, blocking Bulgarians and Romanians.
The good news: More foreign tourists
Each week we are searching for some good news, to animate our readers. This week it is that Spain had 2.6% more foreign tourist in the first quarter of the year, compared with last year, mainly from UK, Italy and the Nordic Countries.
Andalusia, ex-minister in prison
Antonio Fernandez, a former Employment Minister in the Andalusia Governments of Chavez and Griñan, has been detained in prison on 6 criminal allegations in connection with a false employment scheme, which may have cost the region 646 million euros.
King apologises
‘I am so sorry. I made a mistake and it will not happen again.’ That was the statement King Juan Carlos made upon leaving hospital with a new hip. A public survey found a majority of Spaniards are willing to forgive him, even though they condemn the elephant hunt. Nevertheless, the Kings hunting escapades will be aired in Parliament.
Computer virus on smart phones
A smart phone virus has been found in Spain which uses money transfers to obtain information for tapping bank accounts. We recommend readers who have used their smart phones for such money transfers to check their accounts.
Parties with high debts
Spanish political parties have large bank debts. According to the Court of Accounts, in 2007 Partido Popular had debts of 59.3 million euros. The governing PP party received 86.5 million in subsidies this year, but collected only 10.7 million in fees from its members.
Main opposition party PSOE had bank debts of 59.9 million in 2007, receives 60.8 million in subsidies, but managed to collect only 8.9 millions in membership fees.
The bankrupt CAM bank approved PP and PSOE loans of 3,016 million up to the end of 2011. The Valencia Government has loans, credits and guarantees of 64,667 million from the same entity, and the provincial ‘Diputacion’ in Alicante has another 8.069 million.
Maybe some cuts in this area could save education and health!
Spain’s decreasing population
Since start of the crisis, the population of Spain has not grown. Over the past year, the trend has been even more pronounced. In 2008 the population increased by almost one million, but in 2011 the increase was only 170,000.
There are 5,711,040 foreigners living in Spain (12.1% of total population) 40,447 less than a year ago.
Also important is the age of the Spanish population, with only 15.8% under 16 years and 43% over 45.
Waiting list for food rations
There is now a 23 day waiting list for those who need free food, distributed in the city of Barcelona. The leader of the PP group in the town council has demanded a reduction in the waiting time.
At the same time, public employees in the Diputacion Provincial in Malaga are defending their ‘perks’ including interest free loans, subsidised meals at 2.50 euros, school support for children, up to 150 euros subsidy for new spectacles and 565 euros for a dental prothesis ….
‘Bad situation in education’
According to a recent survey, 38.2% of Spaniards consider the standard of education to be only ‘average,’ 17.8 that it is bad and 5.8% very bad. At a time when the government is cutting education funding, 56.8% of the population believe the State and the Regions do not invest enough in education.
Fitch: Property prices will continue to fall
Rating agency Fitch expects property prices in Spain will continue to fall due to the ‘enormous’ surplus of dwellings, lower income level of families, difficulties in obtaining financing and the recession in the economy. The Agency has calculated that Spanish banks are selling-off the dwellings they take over from non-paying clients at 48% less than their valuation at the time they granted the mortgages.
The government reports a 7.2% fall in the sale price of dwellings in the first quarter of this year, compared with the same period last year. Valuation Agency Tinsa maintains the fall was 9.2%.
‘La Caixa’ lets 3,000 dwellings
‘La Caixa’ bank wants to let 3,000 of its un-saleable dwellings all over Spain at prices of 85 to 150 euros per month. In Madrid it found 72,985 interested clients for 99 properties, another 26,274 in Barcelona, 15,941 in Seville, 5,865 in Malaga and 5,742 in Gerona.
On the much reduced SIMA (Salon Inmobilario de Madrid) even representatives of the promoters are recommending letting the enormous number of unsold dwellings.
Un-saleable properties to blocked companies?
The Minister of Finance, Luis de Guindos, is desperately trying to avoid more banks going down due to the strain caused by the unsold properties on their balances. The Ministry is considering creating companies, 51% owned by private investors, not controlled by the banks, headed by independent property expert. The banks un-sold properties would be transferred to those companies, which would be required to keep them for 10 years before selling.
With this operation, the funds the banks have been setting aside for the properties on their balance sheets, may be freed up, reinforcing their banking business.
Another crisis week
The financial crisis is back with a vengeance:
On Monday the ‘Country Risk’ increased to 436 points, and the interest on long term Government bonds rose to over 6%. In a mini auction by the Treasury of 3 and 6 months bonds, only 1,900 million euros worth of the 2,000 million offered, were sold, even with a higher interest rate than in previous auctions
The EU confirmed the information from the Rajoy Cabinet, that the actual deficit in 2011 was 8.51%. The State deficit in the first quarter was 1.85%, 73.2% more than in the preceding year.
The Gross Domestic Production shrunk 4% in the first quarter, in a recession that has now lasted 6 months
Another 290,000 joined the list of unemployed during the first quarter, bringing the total to 24%
According to the International Monetary Fund, Spain will drop from the 8th place in the list of the biggest economies in the world, which it held in 2007, to 15th place by 2017
The number of new mortgages approved fell 45.7% in February compared with the same month last year, and 9.4% on January
The bottom seems to have fallen out of the Spanish stock market. 12 months ago the IBEX reached 11,000 points, Monday if fell 2.76% to below the psychological 7,000 points barrier
Unless the European Central Bank continues to buy Spanish Government bonds at a high cost, Spain’s melting point may be reached in a few weeks
Andalucía to Form a Stable ‘Progressive’ Government
By Lenox Napier
While the finer details remain unclear (writing on Wednesday morning), the PSOE and the IU have agreed to form a government ‘of maximum stability’ for Andalucía for the next four years after a vote by 6,000 IU party members agreed on Tuesday to support the plan. ‘A radical government is very bad for Andalucía’ said the leader of the party with the most seats, Javier Arenas, leader of the Andalucian PP, who agrees with José Bono (the Socialist ex President of Congress) that the PSOE should have pacted with the PP.
Such a pact between the PSOE and the PP was always going to be unlikely. The remaining alternatives would be a minority government of the PP or the support by the IU of the PSOE candidature for president of the autonomy but without entering into a coalition. The IU coordinator Diego Valderas had supported a full partnership, while the thorn-in-the-side Juan Manuel Sánchez Gordillo, mayor of Marinaleda and now Andalucian parliamentarian, is strongly against any alliance which, he says, would spell the end of IU – ‘We must emphasize our anti-capitalist character and not climb into the sinking ship of the PSOE’.
Thus, with the support of the IU, the candidature of José Antonio Griñán as president of the Junta de Andalucía in Thursday’s new parliamentary session is assured. In deliberations leading up to this situation, the PSOE had agreed to the ‘minimum conditions’ of the IU (the ‘Izquierda Unida Los Verdes-Convocatoria por Andalucía’ to give it its full name – a loose coalition of far-left groups dominated by the Partido Comunista de España). These are the departure of those civil servants in the Junta de Andalucía connected to the estimated 700 million euro ERE fraud (the Ex-Councillor for Employment was jailed without bail on Monday for his part in the scandal); the creation of a ‘public bank for Andalucía’ to manage seed money for small and medium businesses; the prohibition of evictions by foreclosures of the banks (a petition will need to be sent to the Central Government in Madrid, which has the power to implement or otherwise this); a basic income for all Andalucian families and the offer of four months of public scat-work for the unemployed. Furthermore, agreements have been reached to increase taxes, introduce fresh wealth taxes, inheritance and gift taxes, and to implement an environmental and tax-fraud watch.
So, it remains merely to see which departments of the new government will come under the IU. My guess – they’ll take the department of the environment (watch out foreign home-owners with ‘illegal’ dwellings) and some other major department.
End of health tourism
By Per Svensson
Spain is cutting costs in all areas to help reduce its chronic budget deficit. The turn has now come for the so-called health tourism, where the government expects to save 1,000 million euros on the health costs of European citizens, and another 500 million on foreign immigrants.
In a press conference the Minister of Health and Social Affairs, Ana Mato, has announced changes in the Law on Foreigners, so that only foreigners who really live in Spain will qualify for Spanish health services. Until now it has been sufficient to be ‘empadronada’ (registered on the town hall registry of inhabitants). The Minister wants to add ‘fiscal residency’ to the criteria (meaning those who pay taxes in Spain).
Non-resident tourists will continue to receive emergency assistant in the event of accidents or illnesses contracted during their stay.
Also, the Government in the Region of Valencia has declared an ‘end to the health tourism’ by imposing ‘mechanisms of direct billing for foreign patients’ to create a yearly income of 10 million euros.
Confusion and cheap arguments
Over the years the Spanish law makers have created much confusion by not differentiating correctly between the various groups of foreigners (EU citizens resident in Spain, resident citizens from other countries with agreements with Spain on health services, legal immigrants working in Spain and their direct family and ordinary tourists). We have all been lumped together as ‘foreigners’ and collectively given the blame for the deficits in the Spanish health system.
Demagogic regional politicians have on several occasions used this confusion to place the blame on the ‘foreigners’ for the empty coffers in their treasuries, whilst at the same time going on promotion tours to the north to encourage the sale of dwellings.
There have been, and certainly still are, non-Spanish citizens exploiting the good Spanish public health centres, hospitals and medical staff. I have on several occasions attacked this cheating.
But the exploitation was only possible because the laws and rules were vague and imprecise. We have over several years been proposing to the national government improvements to the registration and documentation of foreigners in Spain, but without getting much response from the powers that be.
Law abiding majority
The great majority of the EU-citizens living in Spain are law abiding people, paying their taxes and charges of all kind, and trying to comply with the ever changing rules of residency and registration. Their health costs in Spain are paid for by private insurances or the bills are sent to the health administration in UK, Germany, Holland, Norway, Sweden, Denmark or other Northern European countries, and are paid more promptly than the regional governments pay their providers in the health sector.
In a period where there are a million dwellings in Spain which promoters and banks sorely need to sell, and almost no new buyers, it is not advisable for the politicians to lump this large majority of Northern Europeans into the big sack labelled ‘foreigners’. It could lead to a substantial flight of Northern Europeans from Spain.
Spain Mortgage Defaults May Double on Joblessness By Sharon Smyth and Ainhoa Goyeneche (Bloomberg)
Spain’s mortgage default rate may double in the next year or two as government austerity measures boost an unemployment rate that’s already the highest in the developed world, according to Carmel Asset Management LLC.
The CHART OF THE DAY shows that unemployment was 24.5 percent when the mortgage default rate peaked at 5.5 percent in 1994. Even as the jobless rate rose to 23.6 percent this month, defaults are half as high at 2.7 percent.
“Default rates will rise dramatically,” said Jonathan Carmel, founder and money manager at New York-based Carmel. “Given the further fall in house prices that we see over the next two or three years combined with continued high unemployment, mortgage defaults could double in the next 12 to 24 months.”
Home values in Spain more than doubled in the decade through 2007 before starting to fall in the first quarter of 2008. Asking prices have dropped around 30 percent since then, according to a survey by real-estate website Fotocasa.es and IESE Business School. Carmel predicts another 35 percent decline over the next two to three years.
“Spanish unemployment will remain high, perhaps reaching the high twenties, and the extent of the reforms undertaken combined with potential wage cuts will determine where this number goes,” Carmel said. “Giving people less job security or cutting their wages are both detrimental for mortgage defaults.”
Spain’s government forecast that unemployment will reach 24.3 percent by the end of this year. Standard & Poor’s estimates that mortgage defaults in the country may rise to 3.2 percent this year and 3.6 percent in 2013.
Spanish epiphany as depression deepens?
By Ambrose Evans-Pritchard
Spain’s industrial output is sliding at an accelerating rate, as is entirely predictable if you enforce draconian fiscal tightening on an economy in deep recession with no offsetting monetary stimulus or exchange rate devaluation.
The latest data show that output fell 5.1% (y/y) in February, after 4.3% in January and 3.5% in December.
Durable goods fell 14.8pc, the sixth successive monthly fall. Capital goods output fell 10.6pc, according to Raj Badiani from IHS Global Insight.
This is politically untenable. Unemployment is already 23.6pc on the Eurostat measure. David Owen from Jefferies Fixed Income expects this to reach 27.5pc by the end of the year (which is roughly 32pc using the old measure from the 1990s, based on a Bank of Spain study).
Prof Jesus Fernandez-Villaverde says the German-imposed drive to cut the budget deficit from 8.5pc to 3pc over two years in a slump is a «recipe for disaster». It will not fly in a country where the two main trade unions are «living in the 19th century» and where there is no national consensus on the nature of the problem at hand. There will be a revolt.
Indeed, the interior minister today introduced new measures to prevent plots using «urban guerrila» warfare methods to incite protests that pose a grave threat to public order. Is this the start of coercion? I hope not. Spanish democracy is worth more than a mere currency.
The professor told me that Germans were «crazy» to try to impose such self-defeating austerity. The EU dictates should be resisted. Premier Mariano Rajoy should take a leaf from David Cameron’s book and risk a full-fledged showdown, instead of quibbling over details in mini-spats that achieve little. «What is the EU going to do? Send in the army?»
In a joint oped piece with other Spanish economists in El Mundo he said EU-IMF rescues for the eurozone are pointless because they don’t go to the root of the crisis. They do not restore lost competitiveness through devaluation.
They argue that Spain’s is sliding towards a full-blown crisis and an EU bail-out on the current policy settings. This must be avoided at all costs because the terms of these packages are shaped and enforced by the EU creditor states with their own interests at stake, not by a neutral IMF acting as an honest broker.
Having followed the Spanish press closely over the last five years or so, I am surprised by the sudden change of tone – as if the country has gone through an intellectual epiphany.
Articles calling for Spain to withdraw from EMU – or at least exploring the idea – are no longer rare. They are appearing every day. Here is one today by Federico Quevedo in El Confidencial: «The only alternative for Rajoy: take Spain out of the euro».
Loosely translated, he says «the only way out for Rajoy is to force Brussels and above all Berlin to make the ECB act as it should act – as a lender of last resort for economies with problems such as ours – by threatening to leave the euro, and even if the threat becomes reality it would surely be the least of our problems and might even be the solution».
What is striking is the response on the comment threads of such pieces. My impression over the last month is that a large bloc of informed Spanish opinion has reached the conclusion that EMU is dysfunctional, and increasingly destructive for Spain. Many posters seem extremely well-informed, using terminology such as «debt-traps», «internal devaluations», and «relative unit labour costs».
Many point the finger directly at Germany, correctly stating that Berlin seems to think it can lock in a current account surplus with Club Med in perpetuity. Clearly, such as an arrangement is mathematically impossible within a currency union – unless Germany is willing to offset the surplus with flows of money for ever, either through fiscal transfers or loans or investment. These flows have been cut off.
Opinion is divided, of course. The pro-euro camp is still a majority. But the smothering conformity of past years has been obliterated.
The Spanish reading public now has a very good grasp of the fundamental realities of EMU. This will have consequences. Spain is not on the fringes of the Balkans, terrified of being cast into Ottoman banishment. It is not a small country that can be pushed around for year after year.
How and when all this will end is anybody’s guess but I have suspected for a long time that Spain is the lynchpin of the system. The intellectual atmosphere has changed entirely. Politics must surely follow.
Just when you thought the world economy might be improving, along comes Spain. It’s Europe’s next economic domino, struggling to cope with big budget deficits, massive unemployment and an angry public. Will it fail — and, if so, with what consequences?
As it happens, the $80 trillion world economy splits roughly 50-50 between advanced countries (the United States, Europe, Japan and a few others) and developing countries (China, India, most of Asia, Africa and Latin America). Since the financial crisis, the advanced economies have struggled. In 2012, they will grow a meager 1.4 percent, forecasts the International Monetary Fund. Much of Europe is in recession; the United States (up 2.1 percent) and Japan (2 percent) grow slightly.
Although developing countries have done much better, their economies are now slowing, too. The reason: Rapid growth raised inflation. In China, inflation went from 3.3 percent in 2010 to 5.4 percent in 2011. India’s inflation peaked at 12 percent. So central banks in these and other countries (their Federal Reserves) boosted interest rates to dampen price increases.
If Spain’s crisis deepens Europe’s recession, it could tip the entire world economy into a stubborn slump. The ramifications would be enormous, including: reduced odds of Barack Obama’s reelection, assuming a weaker U.S. recovery; less political cohesion and more social unrest in Europe (even now, the European Union’s unemployment rate is 10.2 percent); and growing pressures in many countries for economic nationalism and protectionism.
Spain is suffering a hangover from what economist Desmond Lachman of the American Enterprise Institute calls “the mother of all housing booms.”
Just so. At the peak in 2006, “Spain started nearly 800,000 homes — more than Germany, France, Italy and the United Kingdom combined,” noted a 2009 IMF report. Construction workers represented one in eight jobs (the U.S. figure at the height of the American real estate bubble was one in 18). Even after correcting for normal inflation, Spain’s home prices more than doubled from 1995 to 2006.
One cause was a prolonged period of low interest rates coinciding with the introduction of the euro in 1999, says economist Jacob Funk Kirkegaard of the Peterson Institute. Another was that many property and construction loans were funneled through Spanish savings banks, cajas, “that were controlled by local and regional governments that had an interest in economic development,” says Jeffrey Anderson of the Institute of International Finance, an industry think tank.
The bubble’s collapse crippled the economy, left cajas with large losses and vastly expanded government deficits. Unemployment is almost 24 percent; among those under 25, it’s 50 percent. Tax revenue has dropped sharply. In 2011, the budget deficit was 8.5 percent of the economy (gross domestic product). For 2012, the IMF projects a deficit of 6 percent of GDP compared with a target of 5.3 percent.
Spain’s predicament is agonizing. To borrow at reasonable interest rates requires convincing financial markets that huge deficits are being reduced. But cutting spending and raising taxes risk deepening the slump, widening the deficit and fostering more street protests. The dilemma is plain: Austerity may produce more austerity, while the absence of austerity may produce a crisis of confidence. In addition, Spain’s banks need more capital. Who will provide that?
Previously, Greece, Portugal and Ireland succumbed to similar predicaments. After interest rates soared on their bonds, they had to be rescued by loans from other European countries, the European Central Bank and the IMF. The trouble is that Spain’s economy is twice as big as Greece’s, Ireland’s and Portugal’s combined. And financially precarious Italy has an economy that’s 50 percent larger than Spain’s. Is there enough money to bail out these countries?
In truth, no one has a neat solution to end Europe’s financial nightmare. Maybe Spain and Italy will escape calamity. Or perhaps more last-minute loans will buy time until the rest of the world economy revives and pulls Europe from the abyss.
Or perhaps not.
The weaker Europe becomes, the more it may drag down the rest of the world through three channels: damaged confidence and investment, fewer imports, and less credit to businesses and households. Remember: Europe is about one-fifth of the world economy, roughly equal with the United States. The 27 members of the European Union are the world’s largest importer (excluding exports to each other), just ahead of the United States. And European banks operate globally.
The foreboding is undisguised. “For the last six months, the world economy has been on a roller coaster,” Olivier Blanchard, the IMF’s chief economist, said last week. “One has the feeling that, at any moment, things could well get very bad again.”
Spains banking problems dark cloud
Reuters – Europe must deal urgently with Spain’s banking problems, which hang like a dark cloud threatening global economic recovery, Sweden’s Finance Minister Anders Borg said on Monday.
Failure to recapitalize Spanish banks quickly could throw Madrid into a bailout program, even though its current fiscal situation is manageable, Borg told the Peterson Institute for International Economics.
Solvent banks need their core capital shored up, problem banks need resolving and the European Central Bank needs to show flexibility by providing liquidity support, he said in addressing the institute.
«They (Spanish authorities) have to move on these issues because the uncertainty that we are now seeing in the stock market and in the world economy is to a degree that there is a banking cloud hanging over the recovery,» he said.
The euro zone fiscal crisis is abating and banks — particularly in Spain where bad loans have risen to 8.2 percent of outstanding portfolios and analysts estimate that $50 billion (30.9 billion pounds) is required to sort out the problems — now pose the greatest threat, Borg said.
European shares fell to a three-month low on Monday, and euro zone banks sank nearly 4 percent to levels last seen in late November. Investors were roiled by the collapse of the Dutch government over budgets and fears over Spanish banks.
Borg said policymakers have the capacity to tackle the banking problems, and the method — be it direct injection of capital into Spanish banks or through its government — is less important than the speed of action.
«We now have an European firewall and we have an IMF firewall, so the resources are there. But I think it is urgent to deal with these remaining bank issues, otherwise there is clear risk to the recovery,» he said.
The International Monetary Fund this past weekend won promises of $430 billion to strengthen its crisis-fighting funds and the European Union has set up a $1 trillion bailout fund giving financial policymakers the capacity to prevent a worsening of the euro zone’s sovereign debt crisis.
The IMF has proposed that the EU directly recapitalize banks and close troubled institutions, combined with EU-wide bank supervision. While Borg said he would be «very happy» for centralized bank supervision, he doubted it is politically feasible in the next six months when it is opposed by UK officials, France is in the middle of a presidential election and the Dutch government has collapsed.
«If that cannot be done in a short period of time, then I think we need another flexible way to do it,» he said.
Spain’s finance ministry and central bank are competent and well aware of the problems, he said, but must determine a course of action. Failure to tackle Spain’s banking problems threatens to push the country into an EU-IMF bailout program, like Greece, Ireland and Portugal, he warned.
«Spain is not in the same situation as Greece. Let’s not force it into a program because they don’t need a program, but sort out the banks. Identify the problem and then inject capital,» Borg said.
ECB HAS ROOM
The ECB can help facilitate a resolution of the banks now that the euro area’s fiscal situation is improving and as long as inflation expectations remain well anchored around 2 percent. «They have some leeway to very active,» Borg said.
He welcomed the ECB’s actions to date in providing three-year funding at low cost to banks in the euro area. «I would support them being more flexible as they are; I would trust them to take the right decision,» he said. But they must be left to make their own decision without political pressure.
«If (ECB President) Mario Draghi and the ECB are going to be flexible, we cannot have French candidates attacking central banks for not taking growth into account,» Borg said referring to calls for a pro-growth role for the ECB from French President Nicolas Sarkozy, who is battling against socialist candidate Francois Hollande.
«The less politicians attack central banks, the more flexible the bank will be,» Borg said.
