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Home > Blogs > Mindful Money > As Spain pays nearly 6% on her benchmark bonds and the UK pays 2%, is euro membership worth that?

As Spain pays nearly 6% on her benchmark bonds and the UK pays 2%, is euro membership worth that?

As Spain pays nearly 6% on her benchmark bonds and the UK pays 2%, is euro membership worth that? Mindful Money

The last week or so has since something of a gathering storm for Spain as two effects have coincided. Firstly the efforts of the European Central Bank to indirectly help her (some would argue directly…) have begun to wear off. The provision of over a trillion euros of three year liquidity to Europe’s banks allowed them to use some of the money to purchase sovereign bonds which offered a higher interest rate on them than the one the banks had to pay for the liquidity. This allowed Spain not only to benefit from lower bond yields but also to issue new debt more cheaply than looked likely back in November. Bulls of her situation were quick to point out that she managed to issue around half of the planned debt sales for 2012 too. As recently as the beginning of March her benchmark ten-year bond yield had fallen to 4.87% which was a vast improvement on the 6.7% of late November 2011.

Where did it start to go wrong?

If we put aside for one moment the fact that such central bank aid was always only likely to be temporary and an example of kicking the can only a short distance we see several problems. If we remain in the arena of possible actions by the ECB it had begun to crow about the ending of its Securities Markets Programme’s purchases of peripheral government debt which meant that re-starting them would not only be yet another embarrassing volte face it would create new fears. For example why was it again necessary? The ability of the ECB to shoot itself in the foot has been one of the features of this crisis.

Spain’s economy is weakening fast

This problem has continued to build as weak economic reports have followed each other. Back on the 27th of January I suggested that Spain was in fact on the edge of an economic depression as her housing market and banks were suffering heavily from the boom and bust cycle they had seen. The consequence was an unemployment rate of 22.85% and retail sales which had fallen to 2005 levels.

Industrial Production in February

The declining trend is reinforced by today’s latest numbers.

The interannual variation of the Industrial Production Index for the month of February is -3.0%, half a point below that registered in January.

If we look at the detail of this series we see that in both January and February the main driving force was declining durable goods orders. As this is an erratic series there is briefly some hope of a rebound until we see that the underlying durable goods index is at 50.9 where 2005 is the base of 100. The overall index reading of 81 suddenly does not look quite so bad!

In recent times there has been a debate in the UK and US over seasonal adjustments to economic figures and their tendency to offer a rose-tinted view at times. Well not here. The Spanish seasonally adjusted figures show the underlying index at 79.7 and durable goods at 49.7 with the monthly decline of the overall index increasing to -5.1%.

Spain’s housing market

It would appear that there is little solace to find here either.

The number of property transfers recorded in the land registries, from public deeds previously registered, was 150,422 in February, that is, 8.7% less than for the same month in 2011, and 0.5% lower than in January 2012.

The Spanish statistics institute breaks these numbers down to exclude sales due to inheritance and other factors and comes up with this.

In the case of registered merchantings of property, the number of transfers was 67,217, representing an interannual decrease of 22.7%, and a decrease of 6.2%, as compared with the previous month.

So a grim series which comes on the back of an already weak property market. Although those who follow a website with a Zero in its name not quite as grim as its tweet that Spanish house prices had fallen by 30% in February on a year on year basis. In case you were wondering registered merchantings of used urban dwellings fell by 37% if you want a real fall but whilst that will no doubt depress prices it is not a price measure.

Spain has a new business confidence indicator

You may wonder about the logic of introducing a new business confidence indicator at a time like this but it does have the benefit of not being comparable with the (better) past! And you can report this.

The Harmonised Business Confidence Index (HBCI) of the INE stands at 101.39 points for the second quarter of 2012, indicating an improvement of 1.39 points, in the confidence of businesspersons, with regard to the first quarter (base 100).

Unfortunately the good news evaporates somewhat if you actually read the report and see this.

8% of business establishments are optimistic regarding the future performance of their business as the quarter commences, whereas 43% are pessimistic.

So the net balance is -35%. Which leaves us with an underlying message that Spain’s economy is expected to continue to deteriorate but maybe at a slower rate.

Spain’s service sector

According to the Markit, purchasing managers report Spain saw further declines in the output of her service sector in March. The reading of 46.3 was an improvement of the severe 41.9 of February but the benchmark for growth is 50. She has seen nine months of declines on this measure. Perhaps even more ominously considering her already high level of unemployment we saw this reported.

Employment declined at a considerable, and accelerated pace in March. Staffing levels have now decreased in each of the past 49 months.

The last thing Spain needs now is euro type austerity

If one looks at the economic data it is clear that Spain’s economy will decline in 2012 and on its own that would lead to a worsening of her budget deficit as tax revenue declines meet increased social security payments. Unfortunately for her this comes on the back of a poor performance in 2011 where her budget deficit came in at 8.5% of her economic output rather than the official forecast of 6%. Not only had Spain missed the target for 2011 she had further ground to make up to hit the 2012 target of 4.5% of economic output.

Even worse Spain has taken with her a bow wave of future problems as I reported back on January 27th.

Spain’s 17 regions owed pharmaceutical companies 6.37 billion euros at the end of 2011, lobby group Farmaindustria said today in a statement. That debt has risen 36 percent from a year earlier as payments were delayed by an average of 525 days, according to the group.

If you wished to make yourself look like a repeat of Greece then copying its failure to pay its pharmaceutical bills is one of the ways you can do it. This disappointing theme is reinforced by the fact that it is Spain’s regions which have not paid these bills and it is a continual theme of her economic life that they ignore government requests to control their budget. As they are a larger influence in Spain’s economy than is usual in Europe this is a serious ongoing issue.

Spain has won a dispensation from Europe so that it now only targets a budget deficit of 5.3% of her economy’s size in 2012. The catch is that this requires an improvement equivalent of 3.2% of her economic output which is a large adjustment and it comes on top of an already shrinking economy. If Greece has taught us anything it is that there is in these circumstances this cycle. Economic weakness begets austerity which begets more economic weakness which requires more austerity and repeat in what so far has appeared to be an endless cycle for Greece.


The way forward for Spain is a very difficult one with many problems ahead. What she badly needs is some economic growth but as the Rolling Stones pointed out some time ago.

You can’t always get what you want
You can’t always get what you want
You can’t always get what you want
But if you try sometimes well you might find
You get what you need

She desperately needs economic reform and better still a combination of this and a lower exchange rate. The “internal devaluation” model of the eurozone has wrecked Greece’s economy and has pretty much wrecked Portugal’s too so a change of tack is needed for Spain if she is to avoid the same fate. Rather than negotiating slightly less austerity she needs to negotiate a new exchange rate and soon.

If we look at the markets there are contrary signals. Her ten-year benchmark bond yield has retreated from yesterdays 6% peak to just below 5.9% but the market in credit default swaps has remained at the highs. These will ebb and flow but I am reminded that the equivalent UK Gilt benchmark just missed touching 2% yesterday. So is euro membership worth paying an extra 4% a year on your benchmark bonds? Is anybody willing to make that case?

It was not so long ago that Spanish bonds were the cheaper ones…

This article was written by Shaun Richards and originally published on Mindful Money under the title: As Spain pays nearly 6% on her benchmark bonds and the UK pays 2%,is euro membership worth that?

Tags: banking , central banks , European Central Bank , European Monetary Union , eurozone , financial crisis , Greece , Greek debt , inflation , regulation , sovereign debt , Spain , Spanish banks , Spanish debt , UK
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