Cornered Spain gets desperate

Desperate times call for desperate measures and, as far as country's economies go, things can't get much more desperate than Spain right now.  So it's no surprise to see some government measures being announced that would ordinarily never see the light of day.

Spain's plight is well known - a seemingly endless "crisis" (pronounced cree-see in Spanish) which has resulted in mass unemployment and a shrinking economy.

The immediate problem however is avoiding default. Spain has to sell bonds to finance its deficit and the fear is that if the interest rate on those bonds rises to 7% the government will have to seek a bailout from the EU and the IMF.

Last week's bond auctions saw demand for Spanish debt at 6% so there is not much margin for error.

This is why the government is trying all sorts of things to raise money which are causing massive controversy in Spain.  No one wants to end up being the next Greece but there is widespread anger at some of the measures:

- an amnesty for tax dodgers who can get repatriate funds hidden offshore no questions asked and just pay 10% in tax.  The government thinks it can raise €2.5 billion but everyone else thinks it's unfair.  The opposition want to block it in the courts as "unconstitutional" because it undermines the right to equality among citizens.

- making pensioners pay 10% of the cost of their previously drug prescriptions has caused a huge outcry even though the amount they pay has been capped at €8 - €18 a month depending on their level of income and non-pensioners pay far more (up to 60%).

- As I predicted in February (Spanish electricity bills set to soar) the government has hit energy costs with electric bills up 7%.  They now stand 60% higher than they did in 2007 when the crisis first began.

Will all this keep the bond markets happy?  Probably not as all the pain inflicted by the government just makes it harder for the economy to grow which in turn will push the deficit targets further out of the reach.

That is so obvious it hardly needs stating but what else is the government supposed to do?  Imagine if it just shrugged at the deficit and carried on regardless (which is more or less what the French seem to be doing).

Spain is chasing its tail and it's hard to see it ending in anything other than a bailout.

From our website:  Taxation of rental properties in Spain

Spoilt for choice - the next bubble to burst

They say hindsight's a wonderful thing but actually, particularly when it comes to money matters, it mostly leaves you rueful and feeling slightly foolish. How come you didn't see that great looming disaster when all the signs were staring you in the face? For example, did you see this last recession coming? The various property crashes we've had in the UK over the years? The dot com boom turning to bust? Or did you spot before anyone else that Japan was going to fall from economic star to the land of the permanent slump overnight? Maybe you did. Because none of these things came out of the blue; there were plenty of warning signs and sceptical voices pointing them out.

It occurs to me that there are some great crashes in the making at this very moment. There are certainly plenty of booms going on. Surely some of these are going to come to a juddering halt and go into reverse causing mayhem. So as we turn towards the last week of 2010 what would you nominate as the most likely boom-to-bust story in the making? What will we be talking about in the next few years like we talk about Greece and Ireland or the Sub Prime crisis? Here are some candidates:
China -

A bit like Japan in the 80s - the turbocharged economy that just continues to move astoundingly upwards and the country that everyone thinks is the future. There are apparently 65 million empty unsold properties in China, making Spain´s million or so property overhang look pretty puny. This article is typical of the sceptical view The China Syndrome - A Building Bubble
Gold -

Up more than 500% in less than a decade. Dinner party conversations about how much Cash4Gold gave you for granny's locket. I don´t see it myself but many people are calling a gold bubble e.g. 11 signs that gold is in a bubble

US Dollar -

A more or less permanent and enormous trade deficit. A massive fiscal deficit and a central bank that prints money for fun. The mother of all bubbles? Scary YouTube video says yes The Dollar Bubble
Government Bonds -

Government bond yields in most countries like Japan, Germany and America have slid and slid as a decades long bull market in sovereign debt has barely paused for breath. Cracks are appearing now though surely?
The Euro -

Sceptics have called this a disaster in waiting since its birth but it hasn't fallen apart yet. Matter of time?

Oil and other commodities -

A two year high for oil - 93€ Are they having a laugh? That can't be sustained with the weak recovery we are having.


Or maybe you think none of the above; everything is cool. Of course, with the possible exception of the Euro which is very much a political issue, these bubbles - if that's what they are - are all related. A super dollar bubble that has been blowing ever bigger since the 70s.

For what it's worth I think the Euro will avoid mayhem and destruction because the politicians will do whatever it takes to avoid a collapse however much it costs their taxpayers. I don't think the high gold price is a bubble even though, short term, there is a risk of a correction as interest rates rise next year. Oil and commodity prices merely reflect the inflationary consequences of the policy choices made by the US and China which lie at the heart of the whole show. The question is not "will it all end in tears?" but when and who will start blubbing first. I am not even going to hazard a guess though I can easily see the US Treasury market unravelling before the great China crash.

Latest article on the Advoco website covers these sort of themes in a review of the prospects for investors in 2011 What Should You Do With Your Savings in 2011
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Zapatero gets the message

If he means what he says (a big if since he is a politician) it seems like the Spanish PM, Jose Zapatero, has finally got the message. At a meeting with business leaders to discuss reforms this week he said all the right things:

Zapatero accepts the need to accelerate reforms

He's talking about reforming pensions by February and restructuring the weakest savings banks by Christmas. In addition he says that regional governments, who account for about half of Spain's public spending, must start reporting their deficit-cutting progress every quarter.

Up until now he has dragged his feet on reforms, mindful of how unpopular they are on the left of his party and indeed with the electorate as a whole who I suspect mostly don't accept that things need to change if Spain is going to survive and compete. Now Zapatero talks about "accelerating reforms to the max" ... "whatever the personal cost". His new-found zeal as a reformer presumably owes its origin to the Irish crisis and the widespread view that Spain could go the same way ("The difference between Spain and Ireland is timing").

Another reason for urgency is the need to restore some credibility ahead of the first 4 months of 2011 when, according to Barclays, Spain and its banks need to raise 70bn€ in the bond markets, which they think will lead it to ask for a bail-out next Spring. Sounds plausible if you think Zapatero' reforms are too little too late, the Spanish banks are in worse shape than they admit and that austerity measures announced so far will push the economy back into recession. In this case now would be a good time to reduce your exposure to the Euro (or even short it if you are feeling brave) because this will be a calamitous bail-out too far for the currency to bear. On the other hand European leaders know this and may have a few tricks up their sleeves to ensure Spain pulls through e.g. I could easily see the ECB printing money to buy Spanish government or bank debt. Whatever happens it's going to be an interesting 2011.

Latest articles on our website: Spanish autonomo tax burden

More coffin nails for the Spanish economy?

Spain has always been a long way behind when it comes to making efforts to ban smoking from public places. When I first started to live here I was amazed to find bank tellers and government officials smoking while they attended you. I was outraged when I went to register the birth of my first child and found the Registro office so smoky that my 2 week old baby had to be kept out in the corridor while we attended to the paperwork. A year or two later when I helped set up a play centre in the local town, I had to accept that smoking would be allowed in the café or “no one would come”. But it seems this is about to change and Spain is about to get some of the toughest anti-smoking laws in Europe.

After a botched and watered down attempt at a ban on smoking in bars and other public places a couple of years ago, this new “antitabaco” law looks like the real deal. The new law would, from 2^nd January 2011, ban smoking in all bars, restaurants and other enclosed public spaces with very few exceptions. Also some outdoor places like the grounds of health centres and playgrounds are included in the ban. Terraces attached to bars which are not enclosed by three or more walls will be exempt. There are exceptions for some private clubs and certain proportions of space in hotels and prisons.

Another victory for health campaigners then and, despite not being militantly anti-smoking myself, I think on balance these kinds of laws quickly become accepted as the norm and the vast majority of people – smokers included – find them an improvement after a short time. The issue though is less about smokers’ rights and more about the effects on business, specifically the large and vitally important catering and hospitality industry which has been lobbying against the ban. Some people also think tax revenues from cigarette sales will hit the government’s finances and tobacconists are expected to suffer.

"The new law enrages barowners "

http://noticias.lainformacion.com/noticias/la-nueva-ley-antitabaco-enfada-a-hosteleros-y-estanqueros_L35ilG1cO6AdcBznocQyv3/

There could be something in these economic warnings. The Spanish economy and the government’s finances are in a precarious enough state and the UK’s experience that banning smoking, however desirable public health grounds, has had a negative effect on takings at some types of premises. I haven’t heard restaurants or hotels complaining about the smoking ban but pubs and clubs have certainly seen revenues decline over recent years. Not all their woes can be blamed on the new legislation: social trends which go back decades have left traditional pubs and places like working men’s clubs and bingo halls losing market share. The recession has taken its toll. We have been drinking less and less beer as a country for years. And there is more competition, including websites and the lottery in the case of bingo and supermarkets in the case of pubs. Some pubs, like the Wetherspoons chain, have taken on the decline and changed their offerings to, for example, capture the breakfast and coffee crowds.

What does all that mean for Spain? I think the effects could be quite significant. The small café and bar is a staple of Spanish life as, sadly, is unabashed smoking in front of other people. I can see the firm ban hitting business and shutting some of the weaker establishments. This is not a justification for putting off doing something that could save lives and set a better example for children but it’s one more reason to think 2011 won’t see any kind of rapid turnaround in the Spanish economy.

related http://www.independent.co.uk/news/uk/politics/smoking-ban-should-not-cover-pubs-and-clubs-2105331.html

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Spanish tax forms explained

The Pain in Spain - who is to blame?

I read an interesting debate recently between leading economists about whether the Spanish economic crisis was of Spain's own making or whether Spain was the victim of failings in the Euro or of the global crisis more generally. My view is obvious from the title of the article I wrote on the subject which was published recently here: The Pain in Spain is Mostly Self-Inflicted | Alrroya

Governments love to blame international forces beyond their control for economic ills at home. Gordon Brown was a dab hand at this. But when a boom which involved a tripling of debt and house prices ends in a bust should we really be surprised? And could the governments of Spain and the UK not have stepped in to end the excesses long before their economies got addicted to debt? I think so and let us hope they don't let booms get carried away again although looking at both countries the next boom seems an awfully long way off.

History of Spain's crisis

Labour reform: fiddling while Spain burns

With 4 million unemployed, the economy practically paralysed and the public finances in crisis, something has to be done. Even if inside Spain there does not seem to be a clamour for radical action on the economy (people still in employment too comfy with the status quo and fearful of change?), the EU and the IMF are demanding reform. First came the austerity package (see post Spain's economic crisis turns nasty) and now the government is pushing through labour market reforms.

They are causing a lot of fuss. The unions are threatening a general strike over the reforms but the government has vowed to press ahead anyway (Zapatero to approve reforms with or without agreement) . They have been negotiating changes to a system which clearly does not work for almost two years now. Even with 44% of young people out of work and numerous others working in the black economy, the unions are unhappy because redundancy pay rights are being reduced.

But even if the reforms get pushed through will they make much difference? Looking at the fine print and they are not exactly earth-shattering - redundancy pay down from 45 days pay for every year worked to 33 days. Even that small reduction is only for new contracts not existing workers.

It will still be very expensive to hire and fire workers which is why so many employers needing staff get them unofficially - "sin contrato" - although they need to be wary as one of the new measures is to increase the number of labour inspections specifically to pick up such illegal practices.

The other measures in the package are mainly shuffling subsidies around and actually increasing the burden on employers e.g. by making it harder to offer temporary contracts and extending the requirement to pay redundancy packages. Full details here - Employing Staff in Spain

If Spain was serious about tackling the horrendous employment situation they need a dramatic cut in social security payments by employers and the self-employed, right across the board. Perhaps they could pay for it with an end to the 3 billion € a year they spend on subsidies for encouraging employment which clearly do not work.

Spain's economic crisis turns nasty

If you thought 2010 was going to be back to normal with the economy and the year of recovery, looks like you are out of luck. A dreadful week for the Spanish economy ended yesterday with the administrators moving into CajaSur a major savings bank in the south of the country. Depositors should be reassured that there is deposit protection insurance of €100.000 per person so that a joint account would have up to €2000.000 of their deposits safe.

Another Caja, CAM, is in merger talks with other banks after it too has got into difficulties.

All this comes after the government announced a series of austerity measures. These come on top of the VAT and investment tax rises that were announced in January. The new measures include a cut in public sector pay (5% on average), ending the 2.500€ gift to new mothers (nicknamed the baby cheque) and a freeze in most state pensions.

The government has also promised to bring in some increased taxes for "the rich" but won't say what they are or who they consider rich. The press is speculating that the wealth tax may be brought back for people with assets over €1m.

This comes just as the economy was reportedly growing again albeit by a miserly 0.1%. You wonder how long such a weak recovery can last in the face of such bad news. The austerity measures are designed to cut the deficit by around 8% of GDP so that's a massive chunk of demand to come out of the economy. The banks' woes will make mortgages even harder to come by we can safely assume which does not augur well for the housing market. On top of this the unions are threatening a General Strike (article) in protest against both the austerity measures and proposed labour market reforms.

The Advoco website has a full guide in English to the economic crisis charting its development and underlying causes from the beginning up to the present day: Spain's economic crisis.

2010 Spanish property market outlook

New Year - fresh dawn of optimism on the Spanish property front? I have posted on Spanish property prices a couple of times mainly to update readers on my downbeat August article "Ten Reasons Why Spanish Property Prices Will Stay Depressed". The ten reasons basically hold but I was hoping for some reasons for cheer by now. Perhaps some sign of prices stabilising with Euro interest rates set to remain low and economic recovery elsewhere in Europe under way.

Instead the New Year has bought bad news with a depressing ring of familiarity to it. First up we have news that several more British owned properties in Almeria are to be demolished as they are illegal builds. The attendant publicity in The Telegraph, Sun, Mail etc could hardly be a worse start to 2010 for those charged with persuading Brits that buying Spanish property is safe. "Happy New Year - We're Going to Bulldoze your homes" was the Mail headline.

http://www.dailymail.co.uk/news/worldnews/article-1239219/Bulldozer-threat-Britons-villas-Expats-Spain-fight-save-homes.html

Secondly came headlines about a tidal wave of repossessions and banks dumping their property portfolios onto the market as a result of changes to accounting rules. The respected website spanishpropertyinsight has the full story:

http://www.spanishpropertyinsight.com/buff/2010/01/11/tidal-wave-of-repossessions-in-2010/

Where does this leave us? With many of my 10 reasons why property prices will remain depressed still in place (particularly the surplus of properties on the market and sterling weakness) 2010 doesn't look to clever. BBVA said in December they expected a further 12% fall in 2010 - worse than the 9% seen in 2009. Let's hope things are better than that.

What Spanish pigs can teach us about economics

The contribution of the humble porker to economic theory has been pretty negligible up until now but, after reading about the crisis in the Iberian ham industry, I was struck by how perfectly the story illustrated a crucial but little-appreciated piece of economic theory that goes a long way to explaining the crisis.

First the problem piggies. Iberian pigs are renowned for the quality of their meat and dry-cured hams from acorn-fed free range herds are a prized delicacy in Spain and among gourmets around the world. But as the FT reported recently ("Austerity takes a slice out of Spanish ham sales") demand has plummeted in the recession and taken prices of some grades of ham 50% lower. Priced at up to 60€ a kilo, jamon serrano is a luxury that some people, particularly companies who used to buy whole legs for corporate hampers, have dropped in these straitened times.

At this point you might be thinking, "but what insight does that give us into economics?" The recession has crashed demand for all sorts of products (my last post was about the travails of the Spanish car industry and Spain's scrappage scheme); surely falling demand can be blamed on the recession but doesn't explain the crisis itself. Time to introduce the theory and then see if we can tie it back to the pigs.

Some economists point to the "intertemporal misallocation" explanation of the business cycle as a good way to understand and view the crash. Many have argued that interest rates around the world were held too low, for too long in the years before the crash, causing a boom and then the inevitable bust complete with debt hangover. But the intertemporal explanation takes this view a step further and explains the real danger in holding down interest rates.

Generally we see interest rate cuts as a "good thing" as they "stimulate" the economy. Low interest rates encourage more consumption and make it cheaper to borrow to invest to meet the increased demand, thus setting a up a virtuous cycle of economic activity. But there is a flaw in this logic and it relates to the job interest rates do allocating an economy's resources over time: they make sure that current consumption does not crowd out investment for the future and that, when the future increase in production arrives, there are consumers willing and able to buy it because they have savings. If rates are too low then the signals get distorted: people save too little while companies borrow and invest too much. The economy hots up for a while but the contradiction soon reveals itself. Companies have new production/supply coming on stream just at the point where their customers are borrowing and consuming less to enable debts to be repaid. Back to the pigs.

The collapse in demand for hams was only part of the story. The industry association was quoted as saying: "With overheating fuelled by easy credit, and permissive regulations protecting all types of pork meat, a lot of businessmen, including many property developers, went into the ham business and started mass production." The supply of top quality ham rose 33% in the ten years to 2009 and the lower grade production increased by over 400%. But does Spain really need so much ham? Did the country save enough to be able to afford the increased production? Obviously the answer is no on both scores: Spain was the victim of low interest rates which sent out the wrong signals to producers and consumers alike. The same story was repeated across all sectors most tellingly in the case of property. So next time you see a boarded up shop, empty car showroom or unfinished apartment block think back to a herd of pigs munching acorns and what they can teach us - low interest rates can hurt just as much as high interest rates.

Please contact me if you need a Spanish accountant or tax adviser for your New Year "to do list". My personal email is jb@advoco.es or see the website www.advoco.es Happy New Year