Spain continues her economic struggle with another negative year for growth in 2013.
The clear problem for Spain continues to be a lack of credit for the private sector, households and corporates alike. Year on year, since the onset of the 2008 global financial crisis loans to the private sector have fallen sharply. The Spanish central bank has been unable to perform liquidity injections in a similar way to other central banks e.g. the FED, BOE, etc, as Spain’s currency is the euro whose liquidity is controlled by the ECB. A credit crisis in a fiat currency system has a very slow resolution unless capital is restored to the commercial banking sector and lending restored to productive businesses and credit worthy consumers.
Part of the problem in addition to the weak, capital light Spanish banks is the Spanish public sector borrowing needs.
In spite of the rhetoric of de-leveraging in the Spanish economy Spanish bank total assets are approximately 20% higher than in early 2008 yet loans to the private sector are 20% lower than in the early 2008. The difference has been the massive expansion in public sector debt by approximately 650bn euros over the same period funded by balance sheet expansion of banking and non banking Spanish financial institutions.
In Austrian economic terms, this is the worst possible scenario for any economy. The productive private sector contracts year over year whilst the economically unproductive government sector continues to expand its debts. The private sector is being squeezed out by government borrowing needs.
Here ML taking a relatively optimistic line on Spain given the structural issues.
Here the IMF’s Nov13 Forth Progress report on Spain.
Of all the detail in the report i would like to alert you to the projections they make for the Spanish economy and particularly for the Spanish financial sector.
As one example, they project that in 2018 loans to the private sector will be no greater than in Dec 2013! Its very much the sort Greek model of progress. A real term perpetual multi year decline as government funding requirements roll onwards.
Of course residential housing is the main beneficiary of consumer credit availability. Without private sector and particularly consumer credit expansion the Spanish housing market will continue to fall as it has done relentlessly since the start of the crisis mid 2008.
Credit contracting in real terms to the private sector is likely to lead to a continuation of this trend and the wage price decline that continues unabated.
The picture would not be complete without a consideration of Spain’s demographics here:
Demographically speaking, as above, Spain faces serious demographic challenges which will mean rising social security costs to the state whilst those with assets to sell will increasingly become net sellers of these assets, including houses. Bank deposits are likely to decline as pensioners use accumulated savings to provide for their retirement. The mix of issues helps to create a super bearish Spanish domestic (rather than holiday focused) residential property market should these IMF projections attempt to be followed by Spanish authorities.
These are all long term macro secular issues. Without the means of currency debasement and bank re-capitalizations Spain faces a perpetuation of her painful economic depression. The EU, IMF and ECB offer no respite and advocate hard currency strategies to emerge from her depression. Short term equity issues (particularly exporters and international Spanish corporates with access to international debt markets) can rise. Some regional housing markets can bounce especially if appealing to foreign buyers with cash or access to credit in their own countries.
But the real wild card here for a turn around ending of her depression remains whether Spain remains inside the euro currency. Domestic social and political pressures will intensify for Spain as her economic depression continues. The wage deflation, credit contraction route to restore competitiveness has seldom been followed by a nation. The inflationary currency debasement route is normally preferred by policy makers. Its only denied to Spain due to participation in the euro currency so this is the key variable and will determine long term nominal asset price deflation or inflation accordingly.
All the best
Rich
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