Economic Interests

If you owe the bank £100, that's your problem. If you owe the bank £100 million, that's the banks problem.

Archive for the tag “Spain”

The next EU Bailout?


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The Euro Crisis has died down in 2013 after a turbulent 2012. This was not because of a lack of effort by Europe’s trouble makers; Italy ground to a halt when trying to decide a government, while Cyrpus were the latest government to need a bailout. Yet the cost of borrowing for many EU countries has been decreasing gradually regardless. This has mainly been down to the statement made last year by the head of the European Central Bank to “do whatever it takes” to save the euro, hinting at the bank finally becoming a lender of last resort to the rest of the eurozone.

But tricky times lie ahead for Europe. The Euro area declined on averaged by 1% in the first quarter of the year and unemployment has reached a record 12.1%. Protests and riots have been more common in recent years (with even Sweden now experiencing public unrest) leading to many extreme parties getting more public attention, campaigning largely on their respective countries leaving the EU.

So a big question remains; who will be the next country to request a bailout?

One likely candidate is Slovenia. With a budget deficit over 5% of their GDP, their finances are in disarray. The economy retracted by over 15% in 2008/09 and is not set to return to growth until at least 2015. The largely state owned banking sector, saddled with debt, has grown to 140% of GDP, with an estimated 20% of loans considered non-performing (extremely late repayments). The public debt is still rather low at around 60% of GDP compared to much of Europe, but the interest levels Slovenia have to pay for borrowing are rather high at near 6%, if that rises much higher in the coming months they may lose access to the international markets and require external help (i.e. a bailout). Much of Slovenia’s problems come down to the credit crunch, where easy credit fuelled a construction boom similar to that in Spain that promptly burst. Another problem was the size of the state, which kept a tight grip on the bigger markets, crowding out private competition and stopping innovation. With the government now employing austerity measures, the growth of these industries have stalled, with potential buyers now a lot harder to find in a recession hit EU.

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Slovenia’s prime minister has announced a brave rejection of any bailout talks, instead talking of important reforms to the banking sector (a creation of a bad bank for the worst debts) and budget balancing austerity measures including: cuts to school subsidies, a recent 5% cut in nominal public sector wages and a new higher marginal personal income tax. Their crisis resembles more Ireland’s than Cyprus and some strong leadership is giving the country a fighting chance of avoiding an international bailout.

So if not Slovenia, who then?

Two countries that resemble Cyprus (the latest bailout victim) more closely are Malta and Luxembourg. Both are small countries with massively outsized banking sectors. Malta’s banking sector is nearly 800% of its GDP making it impossible for the government to bailout out the sector by itself if needed, while the government already has high public debt of around 70% of GDP. But Malta has relatively low unemployment and a controllable budget. Its banking sector is rather different in nature to Cyprus’s as well; instead of two big local banks full of dodgy russian money and heavily exposed to the volatile Greek economy, Malta banks are actually subsidiaries of foreign banks, with high capital ratios and profits. Luxembourg also has a large banking sector, roughly 23 times its GDP. But once again the banks are large foreign owned, differentiating it from Cyprus. The economy is also very strong; experiencing low growth in 2012 when the surrounding countries were in deep recession, holding low public debt and unemployment and possessing one of the large current account surpluses in the region. If that weren’t enough, the small country has the highest GDP per capita ratio in Europe, meaning its people enjoy a very high standard of living. Both countries are over reliant upon their financial sectors and are very exposed to shocks in the market, but neither are realistically on the brink of a bailout.

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Rather more worryingly, a much bigger economy is at risk, one which has already had to accept a bailout for its banking sector. Spain withdrew around €40 billion from European Stability Mechanism to help recapitalize their banks (a EU organism set up to offer up to €100 billion in bailout funds to member states). Yet many believe this wasn’t enough and that problems remain in the troubled Spanish banking system. Spain has had to nationalise one of its largest banks Bankia, while most others have had to make large cuts to their balance sheets. If this wasn’t enough, the economy is in serious trouble. Spaniards are seeing a deep decline in their national output, likely to fall for an eighth consecutive quarter and unlikely to see growth until after 2015. Unemployment is at a record high of 27% of the population, nearly 60% for the young. The budget remains heavily unbalanced, with a deficit of 7% of GDP, leaving public debt high (though not as high as private debt). A construction crash has lost many young spaniard an entry into the work force and has caused a lot of bad debts in the banking sector. When times were bad for the EU, Spain and Italy have faced some of the highest borrowing costs. Many see Spain as the weakest member of the big club, and any serious bailout of the economy would cause massive fractures in the EU and could possibly cause a domino effect on the likes of Italy and so forth. Fortunately, the political scene is stable, with the government in power for the foreseeable future and elected on a mandate of budget balancing and reform. Such reforms and austerity are already under way, with labours cost having dropped in contrast to rises in Frances and Germanys and a 4% drop having been achieved in the budget deficit since 2009. Progress is being made, but it needs a stable environment and a strong recovery in europe wide demand for Spain to really recover and see of the need for a bailout. That is a big ask in a continent that has become synonymous with the word crisis. A bailout for Spain is largely not talked of, precisely because of the implications it could have for the future of the EU. Yet it probably remains more likely than a bailout for Luxembourg and Malta.

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The reality is that many member states could require a bailout if matters turned for the worst, with Portugal another possibility after the rejection of austerity measures by the national courts. The lack of a proper system in place and the reluctance by the ECB to really put its money wheres it mouth is, means rich and stable countries like Germany will continue to fund the mistakes of poorer economies. A more united Europe could solve this, with the spreading of some of the debt between the member states an attractive idea, ending the vicious circle of national debts being inflated by bailouts and increasing the need for further bailouts. Politically it remains a tough sell, especially for Germany, but it would also show a strong and united Europe, something most national leaders would secretly like to see.

Slovenia are the strongest possibility for a next bailout, with markets lacking confidence in the economy and increasing the costs of borrowing to perhaps unstable levels. But a spreading of at least some of the debt  through Euro Bonds could greatly decrease the need for this guessing game.

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No tenemos dinero… Beneath the glamour Spanish football is going broke | Just Football


No tenemos dinero… Beneath the glamour Spanish football is going broke | Just Football.

New article up on Just Football by me, on Spanish Football and the economic problems the country is experiencing. Click on the link to have a read 🙂

Does money buy success? « Back Page Football


Does money buy success? « Back Page Football.

 

Article I wrote on whether money has bought success in the 5 big European leagues this past season. Have a read, its very interesting 🙂

Europe’s winners and Losers


The Euro Crisis has created a doomsday atmosphere around the continent, with the threat of the “Grexit” hanging over many heads. So I have decided to create a list of those countries that I believe are doing well economically right now and those countries that are suffering the most from these destabilising times.

Winners:

Germany is currently one of the strongest countries in Europe. Germany experienced growth in the first quarter this year of 0.5%, helping to keep the eurozone out of recession, while low inflation (1.9%) and unemployment (6.7%) are the envy of the continent. They are known as Europe’s equivalent of China because of their high current account surplus, exporting more goods than they import (producing over a quarter of European output), though a slump in European demand has damaged their exporting machine somewhat.  In fact, the one major factor stopping Germany from growing more is the rest of the struggling economies in the EU, with the southern states like Greece requiring expensive bailouts to keep their economy running. But then Germany benefited hugely during the boom years, when these same countries were borrowing money off Germany to buy German goods. This northern and southern split can be seen in the bond prices for Germany and Spain, where the difference between the two is the biggest it has ever been. Germany’s 10 year bond yields have dropped to 1.34%, while Spanish 10 year bond prices have risen to 6.55%, a staggering difference that shows the confidence markets have in Germany’s ability to pay its debts. Germany does face some problems like Greece’s potential exit from the EU (with Germany one of the nation’s most exposed to a Greek default) and the possible domino effect that could result, while cries for “Eurobonds” and Germany to accept higher inflation won’t sit well with Angela Merkel but might be the best way forward. As the leaders of Europe they make it onto my list, but they will have to shoulder more responsibility if they are to ensure future growth.

Showing the Difference in the German and Spanish 10 year bond yields.

Poland is the next country on my winners list, as they are one of the fastest growing countries in Europe. They have benefitted hugely from being neighbours to Germany, where German demand helps boost Polish output.  While the hosting of Euro 2012 this month has focused government concentration on improving the infrastructure of the country, for too long a drag on Poland’s development into a modern economy. The country is currently the sixth largest economy in the EU, was the only country not to fall into recession during 2009 and it predicted to grow by 3% in 2012. Poland still has its own currency as well, meaning the current problems other EU states are facing now of trying to devalue their economy through internal cuts has been avoided by Poland, who externally de-valued when needed to remain competitive (allowing the currency to devalue etc). The country also has impressive internal demand which has helped buffer the external factors currently plaguing other EU nations and its banking sector is a lot more secure than its neighbours. But the country can’t completely ignore the outside world and while growth is strong, it is slowing down. More tightening of its interest rates could help reduce persistently high inflation, while more improvement of its infrastructure could attract more external investment, which has slowed down in recent times.

The hosting of Euro 2012 could help boost Poland’s infrastructure.

Sweden is the last addition to my list. This is because Sweden is a country that ticks most of the boxes for success right now; the third highest GDP per person in Europe, an unemployment rate of 7.7% (one of the lowest in Europe), a public debt to GDP ratio under 40% (extremely rare in Europe) and is one of the few countries expected to grow this year. This builds on a good year last year, where they were only one of three countries to have a budget surplus and had growth of 3.9%. They have achieved these accomplishments through being a successful manufacturing exporter, not having the euro currency (allowing them to externally de-value and avoid harsh spending cuts) and by being fiscally responsible which has left them in a much better position than their neighbours. They still have some hurdles to jump however, with their youth unemployment surprisingly higher than the UK’s (a nation it beats in most other departments) there is need for some reforms to help the transition from education to employment. While Sweden’s forecasted GDP growth this year is a lowly 0.3% that shows a slowdown in their economy from last year and the need for a timely boost.

This graph shows Sweden are one of only 6 countries to have a debt to GDP ratio of under 40%. This can be found at http://www.social-europe.eu/2012/05/francois-hollande-is-right-why-fiscal-stimulus-would-reduce-debt/

Losers:

Greece tops my loser list with its economy crashing before everyone’s eyes. Greece’s unemployment reached a new record last month at 21.7% meaning nearly 1.1 million Greeks were out of work, while youth unemployment has reached an incredible 54% meaning over half of young people are not employed. The Greeks debt is the biggest problem however, at €356 billion and set to peak this year at 172% of GDP – an uncontrollable size – and even in 5 years time it is still predicted to stand at 137% of GDP.  Their economy declined by 6.9% last year, is set to decline again this year by 4.7% and if so will mark the fifth successive year of decline. The country have had to agree to two bailouts from the rest of Europe and the IMF just to keep the economy running with the consequences being harsh austerity measures being placed on the Greek public. Recently this boiled over in the parliamentary elections, as the public voted for anti-austerity parties and the end result was that no governmental majority could be formed. If there is one plus right now for Greece it is that they are at least cutting away their budget deficit, with the deficit lower in the last two months than what was predicted in the initial budget. There is talk of Greece exiting the euro, which would have a extremely negative effect on both countries initially, but could actually be a better long term solution as it would allow Greece to de-value its country externally with a weak currency that could boost exports, while also losing the EU a flagging member, though if a domino effect on other weak economy’s was to happen then it could mark the end of the euro.

Portugal is next up on the list with a weak economy that would be vulnerable to any Greek default. Portugal also had to be bailed out last year to help its struggling economy and is in a similar situation to Greece, if not as severe. They have a public debt to GDP ratio that is set to peak at 115%, an unemployment rate of 15%, a youth unemployment rate of over 35% and a decline in their economy last year of 1.6%. They are predicted to decline further this year by 3% and are highly susceptible to any market shocks. Portugal’s problem is that they are uncompetitive in today’s market and are struggling to turn this issue around whilst still in the euro. They had a current account deficit last year of 6% and do not export enough goods to justify their standard of living. Portugal are working well at reducing their high budget deficit of recent years but still have a tough journey to regain their competitiveness, this is why they make it onto my losers list.

Portugal’s current account deficit over the last few years, showing how they have become noncompetitive and too reliant on imports. 

Spain completes the list with one of the most fragile economies around right now. They are different to the likes of Greece and Portugal in that they didn’t overspend before the recession and actually have relatively low public debt (less than Germany currently). Spain’s major problem was instead that their industry relied on a construction boom, which turned into a bubble and promptly burst when the financial crisis hit. This caused a big rise in unemployment, as construction firms were a key employer in Spain, with the unemployment rate at 23.8% and the youth unemployment rate over 50% (the highest rates in Europe).  The other industry Spain relied on was the banking sector which has declined across Europe and left many of Spain’s banks undercapitalised and unready for external market pressures. Spain are now trying to tackle a high budget deficit (8.9% of GDP last year) with big internal cuts (with external devaluation impossible) but are facing problems trying to get local governments to undertake such cuts while also trying to improve growth with the country forecasted to decline this year by 1.8%. Spain also remain extremely vulnerable to a Greece default, with their high bond prices (already mentioned earlier) showing a lack of confidence from the markets in Spain’s ability to pay their debts. If Greece were to fall it would be damaging but fixable for the EU, Spain on the other hand would cause irreversible damage and undoubtedly bring an end to the euro. Europe will need to help Spain remain steady after the recent destabilizing pressure around the country, Spain will have to reform their economy to help improve their poor employment record and competitiveness.

Showing the rise in Spanish unemployment since the financial crisis hit and burst the construction bubble. 

Why does the Spanish Stock Exchange Shrink? By Adrian Espallargas


Spain entered in recession last month for the second time in three years. This country has been economically struggling since the 2008 financial crisis. The harsh austerity policies passed by the conservative government have not tackled the two main economy troubles of the country: The high unemployment rate and the very damaged financial sector. Therefore analysts are not very optimistic about the future of the Spain´s economy. In fact, the IMF expects the Spanish economy to shrink by 1.7% during this year.

Consequently, the Madrid Stock Exchange has continuously fallen since July 2011. Have a look at this graph.

However, some European countries economies have grown in the last two years or have recovered somehow after the 2008 financial crisis. For example Germany.

But why does the German economy increase while the Spanish hits the bottom? Let’s have a look at the companies that make up the DAX 30 and the IBEX 35 indexes in Frankfurt and Madrid Stock Exchanges respectively.

   

This is Germany

Among the 30 most important companies in Germany there are:

  • 10 Chemical, Technological, Medical or Pharmaceutical firms.
  • 4 Automotive Companies.
  • 2 Banks.
  • 2 Insurance Companies.
  • 2 Personal and Home Care manufactures.
  • 1 Steel Company.
  • 1 Cement Producer.

This is Spain

Among the 35 major Spanish companies there are:

  • Banks.
  • Construction and infrastructure corporations.
  • Steel companies.
  • Pharmaceutical.
  • petrochemical.
  • Solar Power company.
  • Wind Power company.

Germany has a large number of firms that manufacture diverse products. Automotive, Chemical, Technological, Medical, and Pharmaceutical industries are big job creators. Those businesses need from very low-skilled level workers to very-highly educated employees. In other words, from assemblers and transporters to scientist. Besides, the large scientific community in Germany assures the country  has very innovative top level firms.

The two main activities by the 35 major companies in Spain are banking services and construction. Precisely, the two industries most affected by the 2008 economic bubble.

Construction suddenly stopped after the bubble. This industry propelled Spain’s economic growth in the 2000s making around 10% of the GDP and employing 9% of the labor force in 2009. Construction is also a huge job creator that pushes other industries such as steel manufacturers. But Spain has over built infrastructures, buildings, and houses. In fact, Spain built more houses than Germany, Italy, and France together during the bubble. There is nothing else to be constructed. Therefore, one of the largest industries has halted its economic activity triggering massive layoffs. Now, unemployment is at pre-housing bubble levels (1994-1996). The jobless rate had decreased but once the bubble exploded, we see that Spaniards are at the same situation as when it started.

Found at http://globaleconomydoesmatter.blogspot.co.uk/2010_07_01_archive.html

On the other hand, Spain has a crippled financial sector. Banks have accumulated numerous toxic assets from unpaid mortgages. Instead of depreciating the value of those properties to the current market prices, Spanish banks keep reporting in their balance sheets that the value of those assets is the price paid before the economic crisis in order to avoid reporting loses. But those prices are not fixed to the current. Consequently, nobody will invest in real estate keeping those toxic assets in stock having banks full of properties but short of liquidity.

Therefore, banks are not lending money. Despite the fact that the Spanish government bailed-out many of the cajas (savings banks), banks have used that money to pay the debts they had with other institutions instead of injecting money into the economy. Thus, there is no credit for individuals or companies. There is no fuel to start the engine.

Therefore, having the two main industries severely damaged has left the economy stagnant. Unlike Germany, there are no other industries that can carry the economy into a better scenario. The main problem of Spain is Spain itself. Until this country invests in different industries, unemployment will be an endemic disease in this nation.

This was written by the talented Adrian Espallargas, who has a great blog http://www.storyofacrisis.com/ and can be found on twitter @storyofacrisis


Spain’s current problem with Youth Unemployment


Debt crisis…Bank bailouts… Country bailouts… even some confusing statistics about Government bonds. This is all we hear about when the Euro crisis is on the news, but the most important statistic is usually the least talked about: Unemployment. In Spain, this is their most troubling problem, with unemployment currently around 20%. But even more troubling is their youth unemployment statistics (Under 25 years old) which currently reads just under a whopping 50%.

https://i2.wp.com/product.datastream.com/economics/gateway.aspx

That is nearly half of young people in Spain not working, which doesn’t inspire much faith in the Spanish government or education system (not much point in entering higher education if there isn’t a job at the end of the road). So what caused such astronomical unemployment figures?

One major cause was the housing bubble that existed in most western countries; this was exacerbated in Spain as they let their economy rely too heavily on tourism. Spain was pushed into building houses to host tourists to bring money into the country which in turn funded more holiday homes. A vicious cycle that relied heavily on tourists coming into their country, which promptly stopped once people realised it was a luxury they couldn’t afford. Some statistics to back this up, show that when the financial crisis hit, construction accounted for 13% of employment and 12% of GDP and that in the 10 years previous to this, both borrowing and prices for houses tripled. This had a big effect on youth unemployment, where previously construction was a reliable trade to enter into.

Another major cause is the strange labour laws that Spain had. Due to tight regulation it was hard to fire employees, which meant employers were less likely to hire them in the first place. Instead temporary workers are hired, where employees have to work with no strong security for their future. These temporary workers aren’t included in employment statistics, so it makes the numbers a bit inflated, but still shows a problem of a lack of long term stability in the labour market.  A few days ago new labour reforms were released and were met with fierce protests from the public and on the face of it you can see why: giving employers more power over firing workers doesn’t seem to be helping the market. But maybe this might lead to more organisations employing people, as they now have more assurances that they can be flexible in the future. One example is in Germany, where labour laws are more lax and organisation were convinced to keep their staff on by lowering hours, this sort of co-operation was needed in Spain.

http://www.bbc.co.uk/news/world-europe-17090994

Youth unemployment can lead to some very negative impacts. One such impact is emigration, as young people looking for jobs feel they have better opportunities in other countries. This seems to be happening in Spain, where young potential employees are moving to the UK, Germany, France or even the USA. These countries don’t have particularly better employment rates, but it shows the complete lack of faith in Spain’s market. Another impact is that young people can become disillusioned with their surroundings and resort to crime; recent riots in the UK started in areas where unemployment was badly low and young Britons no longer had faith in the government to help them.

Spain aren’t alone, along with Greece they lead Southern Europe in poor employment prospects: Portugal currently have unemployment at just under 15%, Greece are just behind Spain with 18% while Italy are faring the best with around 8%. Check out the youth unemployment statistics and the southern states look even worse: Greece show nearly 50% as well, while Italy and Portugal are near the 30% mark. Their counterparts in central and northern Europe dealt with unemployment much better (excluding Ireland), with Germany using exports to keep their people in employment and the UK lucking out as there stricter construction laws meant the housing bubble didn’t quite have the same effect on employment as in Spain. So is there a lesson to be learned? From Britain no, low production and growth mean that unemployment is again rising.  But from Germany yes, high exports have kept people in employment and good relations between the government and organisations meant that employees weren’t sacked when times were at their worst.

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