Eurozone Recovery Meme: Reality vs. Hope

Euro zone sees light at end of tunnel, pitfalls remain | Reuters.

Euro-Area Unemployment Increases to Record 12.1% Amid Recession – Bloomberg.

Markit Eurozone Retail Report.

Eurozone Retail Sales

Eurozone Unemployment 04.2013

Eurozone GDP Performance

Eurozone officials see “a light at the end of the tunnel.” That’s great.  Is the light bright enough so that they can examine the charts above? No matter what anyone says, there is no sign that the Euro Crisis is stabilizing, let alone ending.

Within the Brussels bubble, everything seems copacetic.  Money printing has flooded markets with currency forcing down yields where they may be.  This has changed perception, but the reality remains the same.  Let’s check out the statements made in this article, and see how they hold up:

Ireland’s rescue program is on track.  German and French banks got bailed out of their poor investment choices at the expense of the Irish taxpayer who continues to suffer underneath a 14% unemployment rate and stagnant economic growth.  Unemployment would be much higher, except that many Irish have left.

Greece and Portugal hope for a recovery next year.  Since 2010, Greece and Portugal have been hoping for a recovery.  If the mainstream media keeps predicting a recovery in these countries next year, eventually they will be right but not in 2014.

Slovenia’s banks can be dealt with.  This statement implies that there is a banking crisis in Slovenia.  Fortunately, this is spun to be good news as they “can be dealt with.”  By whom and for how much?

And although Malta’s banking system is vast compared with its economy, it is not structured in the same way as in Cyprus. The same goes for Luxembourg.  I didn’t know there were problems in Malta and Luxembourg.  Why are these countries mentioned out of the blue in this article? This cannot be good.

Spain’s bank restructuring appears to be working.  It depends on what you mean by “working.”  If one means that the banks are being kept afloat by the Spanish taxpayer while they continue to buy Spanish sovereign debt, then, yes, the restructuring is working.  If one means that these banks are healthy and can lend money to spur economic growth, then, no:

Spanish Loans to the Private Sector

By the way, nonperforming loans are still rising in lockstep with declining property values, so do not be surprised if Spanish banks require more capital prior to year end.

All the skeletons are out of the closet.  There are no major issues in the pipeline.  The only closet that is empty is Jason Collins’.  The Eurozone remains chock full of potential disasters.  A change in investor sentiment will send Spain or Italy into the icy, cold embrace of ESM or OMT.  Greece can always surprise.  Portugal still cannot finance itself, and France may soon join the party.

Yet none of that means the bigger issues underpinning the crisis are resolved. While the existential threat may have passed, the need to implement tough and unpopular structural reforms remains, and plans for tighter oversight and control of banks via a ‘banking union’ are not even half-way there.  The existential crisis remains, because the only way to guarantee the continued exist of the euro is joint and several liability for each others government and financial system debts with draconian economic reforms for each country.  In order to achieve this aim, the rich countries will have to pay, and everyone will have to relinquish sovereignty.  There is little support for this among the states or their citizens.

“With Cyprus, we have hit the lowest trough of the crisis,” said Peterson’s Jacob Kirkegaard of the Peterson Institute for International Economics, a think tank in Washington.

“Although we might be down here for a little while longer, due to risks of an aggravated euro-area credit crunch, there is light at the end of the tunnel. Cyprus is now focusing minds on the structural repair of the euro area, such as banking union.”

The bottom has been called several times since the onset of the crisis.  Yet, GDP continues to shrink and unemployment continues to rise.  As long as these countries continue to save the euro, they will suffer because the euro is the problem.


More Pain For Spain in 2013

Bank of Spain sees deeper gloom in 2013 –

Spain has two bureaucracies issuing dueling economic forecasts, the Economy Ministry and the Bank of Spain.  The latter is generally seen as more reliable because the former is firmly under the control of the politicians.  While the Economy Ministry is forecasting a 0.5% drop in GDP for 2013, the Bank of Spain calls for a 1.5% decrease, a figure in line with estimates from the IMF and European Commission.

Both bureaucracies forecast a return to growth in the second half of 2013 claiming that the Spanish economy has already hit bottom.  This Financial Times article actually calls out this claim referring to it as the “government narrative of an economy that has ‘touched bottom,’ and is now slowly starting to recover.”

There is a reason why economic forecasts assume a hockey stick formation when charted.  Economists forecast accuracy is respectable up to 90 days out.  After that window, economists do no better than random guessers at predicting what the economy will do.  Why not predict good news hoping that this will increase consumer and business confidence?

Spain shrank in the 1st quarter and numbers indicate a continuance of the depression.  In fact, the trend of decreasing GDP is accelerating:

Spain GDP Shrinkage

Do the other numbers back this trend up? GDP is a relatively simple figure to compute: Consumer Spending + Investment + Government Spending + Trade Balance = GDP.

Let’s check out each component:

Spain Consumer Spending

The downward trend in consumer spending continues with a particularly nasty fall late last year.  There is no sign of a bottom in this chart. Investment is also dropping as banks continue to decrease lending to the private sector:

Spain Loans to Private Sector

Once again,  the decrease in private loans dropped precipitously in January and shows no signs of finding support.  Government spending is also shrinking because of Spain’s ongoing austerity efforts:

Spain Government Spending

The only component of GDP that is rising is the balance of trade.  Note that it is still negative and therefore subtracting from Spain’s GDP:

Spain Balance of Trade

Even this number took a turn for the worse in January.  All of the components of Spanish GDP are shrinking simultaneously, and these trends show no signs of abating.  Taking these numbers into account, the Bank of Spain’s forecast appears to be optimistic by about a point or so.  Expect Spain to shrink by up to 2.5% in 2013.

The best thing that can happen for Spain is a continuing political quagmire in Italy.  The mainstream media can only focus on one country at a time, and if Italy is in trouble no one will notice Spain’s deteriorating financial picture.

Internal Devaluation Insufficient to Cure Euro Woes

Even Greece Exports Rise in Europe’s 11% Jobless Recovery – Bloomberg.

The Smoking Gun Of Spain’s Unsustainability | Zero Hedge.

The Eurozone’s crisis fighting plan consists of two parts.  Basically, the ECB provides liquidity to prevent market panics while internal devaluations in the periphery are given time to work.  In the case that ECB actions are insufficient, the ESM and bailout apparatus of the troika stand ready.

The plan is flawed because the internal devaluations will not be sufficient to achieve the necessary level of competitiveness for the periphery to share a currency with Germany.  Essentially, no matter how everyone tries, the Spanish will never become Germans.

Other countries have devalued in the wake of a financial crisis:

Let’s compare how each country performed after the devaluation:

Spanish Economic Charts Cembalest

Spain either the worst or second worst performer.  Moreover, after twenty months all the crisis countries had achieved their former high GDP and continued growing.  Spain’s economy is still shrinking, and this is the factor most responsible for its current account balance performance.

In order to run a current account surplus, Spanish wages must decrease 25% in total.  Since wages are sticky, this implies that additional reduction in wages must occur through increased unemployment.  A further increase in the stratospheric 26% official unemployment rate will lead to additional shrinkage of GDP with an increase Spain’s budget deficit.

While there may be improvement in the current account balance in the short run, in the long run the internal devaluation will fail.  What will happen in the periphery when it becomes apparent that a change in tactics is necessary?

Greek Monthly Bad News Drop

Greek PMI Jan 2013Greek inflation evaporates, slump hits property prices | Reuters.

Greek manufacturing slide enters 41st month in Jan: PMI | Reuters.

Greece is the cradle of Western civilization and bad economic news. Inflation no longer exists in Greece as it moves into a deflationary spiral.

This article discusses how wage adjustments are bringing down inflation, but that is really not the case. Wage and pension cuts are a relatively small percentage of the sapped purchasing power of the Greek consumer. What is really driving deflationary “wage adjustments” is the fact that at least 27% of the country is earning no wages at all, because they do not have jobs.

According to economists, Greek GDP will only shrink by 4.5% this year. Unfortunately, I think this figure is too optimistic. PMI numbers are still in line with last year’s 6.5% drop. By the way, if the Greek economy shrinks this much, the resulting tax revenue shortfall ensures that Greece will require more bailout money in the summer right before German elections.

Rajoy Plays Politics as Usual


Spain’s Rajoy tries stimulus as recession deepens | Reuters.

Spanish Contraction Deepens in Fourth Quarter –

A fall in economic output of 0.7% from quarter to quarter is a huge drop, 2.8% on an annualized basis. Spain is caught in the classic debt trap where attempts to cut debt paradoxically create more debt. Budget cuts are decreasing GDP while tax increases sap the spending power of consumers.

Rajoy is in a tenuous political position. He must continue austerity to appease his Eurozone and ECB overlords, but at the same time he must be responsive to his constituents so that he may retain power.

In an attempt to balance the conflicting demands of these groups, he has crafted a stimulus plan. The unemployed are a very important constituency because they comprise over 26% of the electorate. To garner their support, the plan includes a provision to extend long-term benefits until the unemployment rate falls under 20%.

Auto manufacturing is the largest industry in Spain. All of the major European automakers have operations in Spain, and they have increased production in Spanish plants to take advantage of cheaper labor costs. To ensure that they continue to do so, Rajoy offers financial assistance for new car purchases.  This is also a giveaway to the rich who are the only people who can afford to purchase new cars.

Youth unemployment has reached stratospheric levels, so it is important that Rajoy at least give the perception that he is doing something about it. The third element of the stimulus plan allows people under 30 to pay only €50 a month for social security, a savings of €200 from the minimum contribution.

The first portion of this package is a good idea. People have paid social security contributions for all of their working lives, and it is important that these benefits are delivered during this time of severe economic distress.

The next two parts of the plans are window-dressing and pork. Subsidies for new car purchases merely give those who were planning on buying a car anyway a taxpayer funded discount. This is exactly what happened during the American cash for clunkers program. Purchases were brought forward causing a spike in sales followed by the inevitable crash.

The last part of the plan made me chuckle and shows why Spain needs to drastically reform its economy if it is to have any hope of leaving its depression. If you start a new business in Spain, you have to pay €250 a month in social security taxes whether or not the business in making any money. In addition to start up costs and supporting yourself, there is an additional €3000 ($4000) a year in taxes courtesy of the Kingdom of Spain.

Certainly, cutting this tax is a step in the right direction, but eliminating it entirely would spur more people to open new businesses. Could you imagine what the state of Silicon Valley would be if we charged Americans $4k a year to be entreprenuers?

While Spain slowly suffocates, it seems like it is politics as usual. One of these days, one of these politicians will offer an alternative, which will include leaving the Eurozone, and the people will start listening. In the meantime, expect more perception plays and more austerity.

Spanish Flu Worsens


Spain Recession Scars Exposed as Jobless Seen at 6 Mln – Bloomberg.

For about two months, I have been writing about the “recovering Eurozone meme” that has become prevalent in the Mainstream media. I debunked the Spanish last month here:

so I thought it would be a good time to examine the true Spanish economic picture. Conveniently, Bloomberg published an article detailing the worsening conditions in Spain. The piece is excellent but makes a standard mainstream media error. It attributes lower bond yields with investors jumping back into the Spanish debt markets, but this is untrue. Foreign holdings of Spanish bonds plunged from 54% at their peak in 2010 to 34% in July where they have remained despite the rally.

Spanish banks have been borrowing money from the ECB and purchasing the bonds in a lucrative carry trade. While this has brought temporary relief, it has also strengthened the dynamic between distressed banks and a shaky government.

The Spanish economic situation is getting worse in every single way:

  • Unemployment continues to rise with 6mm people out of work.
  • Every month brings a new non performing loan record. For November the number rose from 10.71 to 11.38%.
  • Bank lending decreased 3% from October to November.
  • Economists predict a further 1.5% decrease in GDP for 2013.

Don’t believe the hype. I have been of the opinion that Spain could continue without requesting a bailout indefinitely, but I am beginning to change my mind. The ECB’s money printing was not enough to keep smaller Greece off the dole, and Spain’s economic situation is rapidly deteriorating along the same lines.

Recovery Meme Spreads to Greece, Yes, Greece

This pie chart has not been updated to reflect the additional capital needs of the Greek banks following the bond exchange.

This pie chart has not been updated to reflect the additional capital needs of the Greek banks following the bond exchange.

Greece not out of woods, must stick to reforms: finance minister | Reuters

Mainstream media outlets have been publishing stories  advancing a recovering Eurozone narrative. It is one thing to claim that Ireland’s performance is improving, because economic indicators have at least stopped cratering. Greece is a basket case, but you would not know this after reading Reuter’s puff piece interview with Greek Finance Minister Yannis Stournaras.

Reuters starts the article by touting that “some economic indicators are showing fledgling signs of recovery” and adds other supposedly good news to the pot to create the recovery stew. Is it a good stew? Let’s see how the ingredients hold up.

Money is returning to Greek banks. This is technically true but omits any discussion of the amplitude of this trend. Greek deposits fell from a peak of about €240bn in 2009 to €156bn in June. Since then they have risen €8.3bn, which means they are at May’s levels. The depository base is still dangerously low.

Bond yields have improved. This is technically true, too, but is presented without context. Greek yields have fallen dramatically because the troika implicitly guarantees Greek debt with bailouts and a printing press. Falling yields do not support a Greek recovery. Greece remains shut out of international bond markets and will not gain access for years.

There will be a primary budget surplus of 0.4%. What this means is that Greece covers it expenses before interest expenses are paid to current bondholders. After accounting for interest, Greece is still running a massive budget deficit, which means its debt pile is growing by the day. Let’s not forget that Greek budget forecasts have missed by the downside each and every year since the beginning of the crisis.

Privatization receipts will hit €2.6bn this year. Since the first bailout, we have been told by officials that Greece would begin raising lots of money by selling state assets. These funds have yet to materialize. Even if they do, Greece has €340bn in debt. Projected proceeds are less than 1% of the debt load. If Greece owed $1oo, privatization would account for about 75 cents. Once again, the amplitude is being ignored.

The banking sector may not need the €50bn in recapitalization money. This statement is made without basis. In fact, one can make a compelling argument that banks will need more recapitalization funds. Greek banks took a large capital hit in December due to the bond buyback. They were forced to recognize losses and lost an income stream. Additionally, bad loans have risen to a record 24%. These factors add billions of euros more to the tab.

To this chef, it appears that someone is using subpar ingredients in their recovery stew. It’s not going to taste too good. Moreover, there are more bad ingredients. Unemployment is still rising hitting a record 26.8% last month. GDP is falling projected to shrink by another 4.5% in 2013. Signs of a civil war have begun appearing with bombings, assassination attempts and shots fired on political headquarters.

The only thing keeping Greece afloat is that the troika has made a cost-benefit analysis and determined that stringing it along is much cheaper than letting it fail. The 3rd bailout of December was meant to support Greece until German elections past, but it is becoming more likely that another crisis will erupt before then.

Spain’s Funny Numbers and the Journalists Who Repeat Them

Madrid clings to truce with bond markets –

This article repeats a misconception about Spanish bond issuance and remaining financing needs for 2012 that I have seen all over the mainstream media. Please follow the math, so that I may show you that Spain’s financing needs are much greater than is currently being reported.

The author writes, “[Spain] has already achieved 95 per cent of its target bond issuance this year.”(My emphasis)

At the beginning of the year, Spain had forecasted a budget deficit of 4.4.% of GDP (€52bn) with maturing debt for 2012 of €98bn, which gives us €150bn in gross financing needs.

The Spanish treasury has sold €132bn in debt maturing beyond 2012, and Spain also drew down its cash reserves by about €10bn since January. Adding those numbers together we arrive at €142bn which does not have to be financed out of €150bn. Dividing these numbers gives us 94.7%. Spain has indeed completed nearly 95% of its target bond issuance for the year, if you allow the fudge for drawing down cash reserves.

However, the target has moved, because the Finance Ministry now projects the deficit to be 6.3%. If we believe it, then Spain needs to find an additional €18bn between now and year end.

You shouldn’t believe the Spanish Finance Ministry. It subscribes to the Juncker doctrine, which he succinctly states thus, “When it gets serious, you have to lie.”

The budget deficit was running at an annualized rate of 8.1% for the first half of the year and has been magically improving since then while the entire economy craters.  I wrote about the phenomenon here:

To see the true state of Spain’s finance, we will assume an 8.1% deficit, even though the true number is undoubtedly worse. This figure yields a €91bn budget deficit. At this number, Spain needs to finance an additional €39bn between now and year end.

Adding €39bn to move the target give us €189bn. €142bn in bond sales and cash draw-downs divided by €189bn in actual financing needs leaves Spain with only 75% of the new target completed. I remind you that over 83% of the year is in the books.

The Spanish Finance Ministry is technically not lying when it claims that it has sold almost 95% of its target for the year. It just never updated the target to reflect a larger than forecasted budget deficit like we just did. The mainstream media is not complicit in a coverup; it is merely negligent in not questioning the numbers.

The fact of the matter is that Spain needs to sell more bonds than it is letting on in 2012.

This is just one trick that has been deployed in an effort to keep Spain afloat. Yesterday, Der Welt and the Wall Street Journal reported that the ECB is ignoring its own collateral rules by accepting Spanish T-Bills without a haircut.

Spain is no longer rated investment grade by the major agencies, so its paper should be discounted 5%. If the ECB discounted the paper appropriately, Spanish banks would need to finance an additional €16.6bn, which they simply do not have.

This fudge by the ECB allows Spain to keep issuing T-Bills, because banks can borrow 100% of the purchase price from the ECB. If the ECB was to begin discounting the paper, the Spanish banks would not be able to finance additional T-Bill purchases, and they are virtually Spain’s only T-Bill customer. If this merry-go-round stopped, Spain would run out of cash in a matter of weeks.

Spain’s fiscal condition and financial system are in much worse shape than is being reported, and, therefore, it is in greater danger of defaulting than people realizes.

Rajoy is holding out as long as possible to obtain better bailout terms, but it is inevitable that he will relent. If I know that Spain has only completed 75% of its financing for the year, then Draghi damn well knows, too. He will not be the one to swerve in this dangerous game of chicken.




Spain’s Unemployment Rate Soars

Spain’s Unemployment Reaches Record as Bailout Looms – Bloomberg.

Spanish Bonds Post Worst Week Since August on Bailout Delays – Bloomberg.

The eurozone has deep structural problems that require more than just the topical balm of monetary policy.

There are two main reasons for Spain’s ridiculous 25.4% unemployment rate. Austerity has pushed the country into a depression, and this high rate is a direct result of this action.

The other reason for persistently high unemployment in Spain is the structure of the labor market. The unintended consequence of well-meaning labor protection laws is that it is very difficult for companies to sack workers for any reason, including incompetence or declining output slackening the need for them.

Since it is so difficult to fire workers, companies rationally respond by hiring as few of them as possible. In today’s economic client, output drops have become the norm, and companies are refusing to hire. This choice results in less consumer spending reinforcing the entire downward spiral.

While the ECB’s monetary policy and the alphabet soup of bailout regimes can maintain the status quo, in the long-term drastic changes are necessary for the crisis to abate. So far, the political will for these changes has been lacking.

In the meantime, the eurozone periphery remains trapped in a stable disequilibrium that is slowly strangling the economies of the affected states. One shock is all that is needed to topple the entire house of cards.