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Kiron Sarkar
September 19, 2011
Hi there,
As you know, I believe that the market has not fully recognised the
economic and financial problems in Spain. The Bank of Spain recently
reported that 17 semi autonomous regions had outstanding debt of
E133.3bn (12.4% of GDP) at the end of the 2nd Q, up from 11.6% in the
1st. Indeed, YoY, provincial debt has risen by 24% and the amount
outstanding has doubled since 2007. Last week, Fitch downgraded 5
regions, including importantly, Catalonia and Andalucia. Moody's state
that regional governments have not met their deficit targets and expect
to issue further downgrades.
The 17 semi autonomous regions had a budget deficit of 1.2% of GDP in
the 1st half of the year - their target is for a budget deficit of 1.3%
for the WHOLE year. As a result, Spain will not meet its 6.0% budget
deficit target for this year, though the current administration has
embarked on numerous "creative accounting" schemes. These "smoke and
mirrors" schemes include bringing forward some E2.5bn of revenue from
next year to this year and, in addition, not paying its bills, both at a
regional and Federal level. Currently debt to GDP amounts to 65.2%, as
compared to the governments year end forecast of 67.3%, which was
reduced from 68.7%. The current administration is set to lose the next
general elections, to be held in November this year and are just
"massaging" the figures until then.
With overall unemployment above 20% and youth (under 25) over 40%, Spain
has very little flexibility. Spanish property prices have declined
(according to official figures) by just 15% from the peak - its over 40%
and declining in Ireland. In reality, you cant sell most Spanish
residential property unless you are talking about 40/50% discounts from
the peak. Spanish banks have not provided sufficiently for losses on
property loans and given the recent hikes in interest rates by the ECB,
the level of bad debts relating to mortgages just keeps increasing. The
private sector (especially individuals) remains highly indebted, due to
property loans on housing. Worse still, homes with mortgages represent
only 30% of all residential homes, which given the huge mortgage debt
outstanding, suggest that these borrowers are heavily indebted. Spanish
GDP is also heavily dependent on consumption and is likely to turn
negative shortly. Not a pretty picture.
The above, I believe, illustrates the seriousness of the Spanish fiscal
position just now. Whilst Italy clearly has its own problems and, in
particular has a higher (120%) debt to GDP, it still has a primary
surplus and has lived with these levels of debt to GDP for years. It is
also a much richer country and savings are higher than in Spain.
(Moody's has extended the time it needs to complete it's review of
Italy's Aa2 rating by 1 month - on balance, the risks are on the
downside, given the situation in the Euro Zone).
However, personally, I believe that Spanish bond yields will exceed
equivalent Italian bond yields in due course - it's the reverse at the
moment.
Markets are very weak today. FED and upcoming World Bank/IMF meeting are
the most important prospective events this week, as is news re Greece.
The Troika are to have a telephone discussion today, with the Greek
Finance Minister. I still believe that, on balance, Greece will get the
next tranche of aid, but the one after in December....
Best
Kiron
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