Investors should avoid Spain’s bonds as the euro region’s highest levels of joblessness stifle the country’s ability to cut its budget deficit, according to Invesco Ltd. and Bank of America Corp.’s Merrill Lynch unit. Spanish debt isn’t yielding enough to compensate investors for buying the bonds of a country with the euro region’s third- largest budget deficit, according to Axel Blase, a fund manager in Frankfurt at Invesco. Investors receive a 69 basis-point yield premium for holding Spanish 10-year bonds rather than German bunds, compared with 313 basis points for Greek debt. “It’s not a time to increase exposure to Spain,” said Blase, who helps oversee the company’s $423 billion in assets. “The country is in rather serious difficulties and the risk premium on Spanish bonds isn’t that attractive.” Concern that Europe’s most recession-battered nations aren’t doing enough to contain their deficits sent Greek bond yields to the highest in more than a decade, and helped push the euro 4.6 percent lower against the dollar this year. While attention focused initially on Greece, Spain may take years to recover from the recession, according to Johan Jooste, a strategist at Merrill Lynch Wealth Management in London. “It’s going to take a very long time — half a generation — for them to fix the structural issues they have,” Jooste said. “Rather than a spectacular short-term blow up, a more likely outcome is a death-by-a-thousand-cuts-type scenario.” The country’s economy, which is more than four times the size of Greece, has been contracting since the second quarter of 2008. The deficit reached 11.4 percent last year, almost four times the EU’s 3 percent limit, compared with 12.7 percent for Greece. Optimistic Forecast Standard & Poor’s said Feb. 26 the Spanish government’s growth forecasts may be too optimistic, predicting average gross domestic product expansion of 0.6 percent through 2013, compared with the 1.5 percent upon which lawmakers are basing budget measures. The public debt burden will rise above 80 percent of GDP by 2012, compared with 40 percent in 2008, S&P said. While Invesco and Merrill Lynch are shunning Spanish debt, Greece is enticing DWS Investment GmbH. Germany’s biggest mutual fund manager said it’s buying Greek bonds as the highest yields in the euro area and the prospect of support from European partners trump concern the country will struggle to reduce spending. Too Tempting “Although we still think challenges ahead for Greece are significant, the values offered by current spreads are too tempting,” Johannes Mueller, a portfolio manager at the company in Frankfurt, said last week. Greece’s 10-year yield reached 7.16 percent on Jan. 28. The yield on 10-year Spanish bonds climbed to a seven-month high of 4.2 percent the same day. Spain’s 10-year bond yield rose 3 basis points to 3.87 percent as of 4:37 p.m. in London today. It will climb to 4.61 percent by mid-2011, according to the median of three analyst estimates compiled by Bloomberg. Spain offered investors a 12 basis-point yield premium over existing debt in a 5 billion-euro ($6.8 billion) sale of new 15- year bonds on Feb. 17. Prime Minister Jose Luis Rodriguez Zapatero’s government plans to sell a net 76.8 billion euros of debt this year. The country, which was responsible for more than half of all new jobs in the euro region in the five years through 2006, posted a budget surplus between 2005 and 2007. Deep-Rooted “Spain came into this crisis with actually very, very good debt-to-GDP statistics,” said Jamie Stuttard, head of European and U.K. fixed income at Schroders Plc in London. “Nevertheless Spain has deep-rooted economic problems.” The unemployment rate is the highest in the euro area at 18.8 percent, and the country accounted for more than half the region’s 4.3 million job losses over the last two years, according to data from the European Union’s statistics office. The pace of decline in Spanish tax revenues is a “concern,” Fitch Ratings analysts Paul Rawkins and Chris Pryce said in a presentation in London two days ago. “Labour market inflexibilities could prolong economic adjustment,” they said. Spanish bonds have returned 1.5 percent this year, compared with 2.2 percent for German debt and a loss of 0.8 percent for Greek securities, according to Bloomberg/EFFAS indexes. Story from Business Week

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Investors Urged to Avoid Spanish Bonds

The idea that Spain could become a target of the world’s markets, an economic basket case weighing down the euro, is a preposterous notion, but not an unthinkable one. It’s preposterous in the sense that this is a great, energetic, creative and competent nation that in about 25 years shed a dismissive label as a cheap place for two weeks in the sun to become Europe’s fifth economy, Latin America’s biggest foreign investor, and an all-points, high/low cultural turbine producing terrific films, clothes people want to wear, exceptional food, and great soccer and basketball. In 2010, that’s a reasonable, widespread perception. Still, according to Fernando Fernandez, a former chief economist at Banco Santander and former official at the International Monetary Fund in Washington, “an attack by markets on Spain would be based on some rationality.” Now a professor at IE University here, he said, “An 11.4 percent deficit like ours is huge.” Last week, José Manuel Barroso, president of the European Commission, and Angel Gurría, secretary general of Organization of Economic Cooperation and Development, were in town on separate missions to insist, as decorously and elliptically as possible, that Greece (whose 12.7 percent deficit and substandard accounting methods have shaken the euro), and Spain (having the confidence of its lenders and much lower debt) were chalk and cheese. Still, Spain’s facts are scary: 18.8 percent unemployment; about half the age group under 25 out of work; €600 billion, or $820 billion, in mortgages outstanding after the end of a construction boom two years ago; and a real effective exchange rate that the E.U. Commission says is overvalued by 10 percent. Spanish structural realities run a along a similar track: Productivity and competitiveness are low. The job market’s rigidities mean that two-thirds of the labor force are permanent hires, blocking a potential fall in real wages after a rise in labor costs of 4 percent a year over the last nine. To boot, the central government controls only about 25 percent to 30 percent of discretionary spending, with the rest of state revenue devolving to regional and local governments with their own notions of savings and expenditures. What to do? The governor of the Bank of Spain, Miguel Ángel Fernández Ordóñez, says that failing “urgent” and “ambitious” reforms in the labor market, the Spanish economy will enter a “tough and complicated period.” Which is a gently phrased complement to the insistent market noises saying Spain stays an attractive speculative target even if the European Union rescues Greece. Mr. Ordóñez, who also sits on the governing committee of the European Central Bank, stressed the need for an immediate, convincing response. The startling thing in Madrid is its seeming absence. There’s a kind of lethargy instead. No crash program with specific goals to change the Spanish economy over the next weeks and months is coming from right-wing opposition. And the Socialist government of Prime Minister José Luis Rodríguez Zapatero appears to bumble ahead confusedly, casting proposed cutbacks into the air, then reeling them back. Mr. Zapatero himself informed an international audience of his plan to push back Spain’s retirement age to 67 from 65, which, days later, was put it into the conditional tense. The possibility of a public sector wage freeze, discussed in the press by an official last Wednesday, got buried on Thursday by Finance Minister Elena Salgado. The government’s effort seemed as feeble as an initiative announced by the Fundación Confianza, a group backed by big Spanish firms like Telefónica, Santander and BBVA, seeking to buck up national confidence with a Web site called estoloarreglamosentretodos.org. Roughly translated, that’s togetherwecanstraightenthingsout. I tried to get onto the site on Monday morning and was shunted to one having to do with sustainable transport. Spanish politics, frankly, does not currently seem up to the intensity of action that the country’s economic and financial circumstances would suggest — and appears barely conscious of the implications for the world’s view of Europe if Spain were to fall to its knees. The opposition Popular Party, which the polls indicate would run up to seven points ahead of the Socialists if national elections scheduled for 2012 were held now, gives the impression of not wanting to do anything — proposing a cutback in social security levels, for instance — that might spook a single prospective voter. Mr. Zapatero, in turn, it is said, just might relish some kind of eventual E.U. involvement, guidance or assistance in enacting the tough austerity measures his constituency, notably the trade unions, would otherwise resist. In the Spanish context, where the electorate holds the E.U. in ongoing reverence, accepting what could be euphemized as a European austerity checklist could be a politically manageable way out for the prime minister. But the game may be moving quickly outside of Spain’s grip. On Friday, the ratings agency Standard & Poor’s, far from endorsing the credibility of the government’s pledge to the E.U. to reduce its deficit to 3 percent of gross domestic product by 2013, said it thought it was likely to remain above 5 percent. It said it expected “much weaker economic performance” than the government expects, with unemployment remaining above 15 percent over the period. The agency also renewed its negative outlook on Spain’s sovereign ratings “in the absence of more aggressive and tangible actions by the authorities.” As if in response, Ms. Salgado, the finance minister, asserted that the country, which remains in recession, would grow in every quarter this year. And — Let the good times roll! — sounding like someone who thought they had assurances that Spain was Too Big to Fail, she insisted that members of the euro zone “will not stand idle if one of the member countries is in trouble.” That was late Friday. On Monday, Mr. Zapatero doubled up on Ms. Salgado’s statement of confidence, telling the Frankfurter Allgemeine Zeitung in an interview, “You can have absolute confidence in us. Our plan to reduce the deficit will be fulfilled.” Then, almost in the next sentence, he added a new turn to the government’s pattern of confusion, and cut the legs off the finance minister’s timetable for Spain’s emergence from recession by as much as half. “I am convinced,” Mr. Zapatero said, “that our economy will be growing again by the fourth quarter, at the latest.” Story from NY Times

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Spanish Economy on the Edge

More than half of Spain’s landlords are dodging taxes as the rental market expands, depriving the financially strapped government of more revenue each year. Owners are asking for payment in cash from tenants to avoid tax on 2.5 billion euros ($3.5 billion) of earnings annually, the Gestha union of tax inspectors estimates. An increase in rental properties nationwide hasn’t generated any more tax revenue. The Spanish government, seeking to pull the country out of its deepest recession in 60 years, needs all the money it can get right now. The slump was triggered by a crash in the Spanish property market and has left Spain with the highest budget deficit since at least 1980. Taxes go unpaid on income equal to about a quarter of gross domestic product, Gestha estimates. “The deep economic crisis in which the country is submerged is once again making the hidden economy flourish,” said Juan Jose Figares, chief analyst at Link Securities in Madrid. “The government will be compelled to clamp down on rent fraud.” A drop in house prices starting in the second quarter of 2008 has forced many people who bought homes as investments to seek tenants for their properties rather than selling at a loss. At the same time, more Spaniards are trying to lease homes after they were priced out of the market in the years before the crash, making it easier for landlords to strike deals that don’t involve the taxman. The number of properties for rent increased 18 percent to 2.2 million units in 2008, according to data from Spain’s Housing Ministry. Rental income declared by landlords rose by just 0.1 percent over the same period, a report on the Web site of Spain’s tax office shows. The rental market has a lot of room to grow. At 13 percent, the proportion of renters to homeowners in Spain is still low compared with other European countries, where 40 percent to 60 percent of housing is rented, according to Madrid-based property consultant Aguirre Newman. Around 65 percent of Spaniards aged 25 to 29 live with their parents, compared with about 22 percent in France and the U.K., economic research institute Fedea estimates. “During the housing boom, the state was earning so much from home sales that it wasn’t worth chasing the odd landlord,” said Fernando Encinar, co-founder of Idealista.com, Spain’s largest real estate Web site. “Now, with the economic crisis, the government really does need the money and will make efforts to prosecute tax dodgers.” Encinar, whose company lists 360,000 properties for rent and purchase, said Gestha’s estimate that 54 percent of landlords are ducking taxes “falls short of the true figure, which is set to grow further.” The penalty for avoiding tax on rent is a fine equivalent to 150 percent of the unpaid amount, according to the Spanish tax office. The tax also must be repaid. There is no punishment for the tenant. The penalty is almost never applied because tax dodgers are not being investigated, Gestha General Secretary Jose Maria Mollinedo said. “As both the landlord and the tenant make an agreement not to declare tax or their residency, there is absolutely no way to prove that tax fraud is taking place and therefore no non- declaring landlords are brought to book,” Mollinedo said. A tax break adopted in 2008 accounts for part of the difference between rising rentals and the lack of tax revenue growth. It gives landlords a 100 percent tax break if they rent to tenants who are under 35, according to a spokesman for Spain’s tax office who declined to be identified by name, citing government policy. He didn’t provide information on how many landlords claimed the tax break. The incentive makes little difference because most leaseholders are over 35 and landlords worry that the break will be repealed in a couple of years, after they’re all registered with the state, Mollinedo said. Spain can ill afford to lose revenue it should be collecting. The country, which had a record budget surplus equal to 2 percent of GDP in 2006, will probably have an overall public-sector deficit of 9.8 percent this year, according to Finance Ministry data submitted to the European Commission today. Sellers pay 18 percent capital gains tax in Spain on any profit made from home sales. There were 106,273 transactions in the third quarter of 2009, according to the most recently published data from the housing ministry. That was 14 percent lower than a year earlier and 58 percent less than the market’s peak in the second quarter of 2006. Values decreased as much as 11 percent last year, Idealista.com said. Rent fraud is just the tip of the iceberg, with Spaniards avoiding tax on income of 240 billion euros, equivalent to 23 percent of the economy, according to Gestha. If Spain could reduce that figure 13 percent, the country generate another 25 billion euros of tax revenue annually, it said. Tenants, happy to find a place at all, aren’t likely to turn into whistleblowers. While rents fell 8.4 percent in Madrid and 12 percent in Barcelona during the first half of 2009, increases over the previous five years continue to squeeze budgets. Rent levels climbed 28 percent in the capital and 56 percent in Barcelona in the five-year period. Ruben Gonzalez, a 33-year-old Madrid resident, said he received 120 calls in four hours after placing an advertisement in Idealista.com for a 2-bedroom apartment on behalf of his current landlord. Then he turned his cell phone off. Gonzalez showed the first 30 callers around the 60-square- meter (645-square-foot) city center apartment, which has a broken refrigerator and faulty boiler, rising damp and peeling paint. “‘Everyone was fighting over the place because it’s better than a lot of what is out there and the owner is legal and insists on a contract.” Gonzalez said. “One couple even offered to pay more than the asking price and another offered a cash bribe to put them at the top of the list.” Story from Business Week

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Spain’s Tax-Dodging Landlords

Spain’s Cabinet will discuss spending cuts of as much as 50 billion euros ($70 billion) by 2013 as it aims to slash the budget deficit by two-thirds to meet a European Union target. The government will discuss the so-called austerity plan that aims to cut current spending in the central and regional administrations, said an official at the prime minister’s office in Madrid today who declined to be named in line with policy. Spain, mired in recession with the highest jobless rate in the euro region, has come under scrutiny amid concerns that smaller European countries like Greece may struggle to finance their growing debt. Even as Spain’s public-debt burden is about half the size of Greece’s, the risk premium on Spanish bonds has surged to the highest in nine months. Spain’s public-sector deficit probably amounted to 11.2 percent of gross domestic product last year, according to forecasts from the European Commission, which has set a 2013 deadline to cut the shortfall to the 3 percent EU limit. The country’s debt burden is set to double from before the crisis to 74 percent in 2011. Spain’s economy has been contracting since the second quarter of 2008, pushing the unemployment rate to 19.4 percent as the collapse of a construction boom destroyed more than a million jobs. In response, the government created one of the biggest stimulus programs in Europe, putting builders back to work, and extended jobless pay for the long-term unemployed. To shore up state finances and convince investors about its deficit-cutting plans, the government raised taxes on income from savings in 2010 and will increase value-added tax in July. Bank of Spain Governor Miguel Angel Fernandez Ordonez said more needs to be done as reining in the deficit is the most “urgent” priority, along with overhauling labor rules. “It will be necessary to implement, in each component of spending, deep structural reforms,” he said in a speech in Vigo, Spain. Story from Bloomberg

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Spain Targets €50Bn Spending Cuts

Never before has Europe’s monetary union seemed so fragile as some in Europe fear that Greece or another weak country might default on its sovereign debt obligations, threatening monetary union. Day by day, fears are growing that Greece or another weak country may default on its sovereign debt obligations, forcing the richer countries in Europe to ride to the rescue or risk having one or more of its most vulnerable members leave the 16-nation euro zone. Many European economists discount such a fracture as a remote possibility. But that doesn’t mean Europe has safely emerged from crisis. Instead, it faces a longer-term challenge to restore the fiscal credibility of at least half the countries that use the euro. The true test for the world’s largest common currency zone, analysts say, will be whether it can withstand the economic, political and social strains once the European Central Bank begins to raise interest rates in response to economic improvements in Germany, France and other Northern European countries. At that point, the laggards on the union’s fringe — Portugal, Ireland, Italy, Greece and Spain (the so-called Piigs) — will face even tougher choices to cope with what looks like several more years of stagnant economies, high unemployment and gaping budget deficits. “If inflation picks up in France and Germany, the smaller economies will be left behind in stagnation and deflation,” said Jordi Galí, a Spanish economist recognized for his work on business cycles who heads the Center for Research in International Economics in Barcelona. “Such an asymmetric recovery is pretty likely, and if the E.C.B. raises rates, it could get very ugly.” Mr. Gali, like a number of other European experts, takes the view that the euro zone’s resilience has been underestimated. He says the recent convulsions are more the result of trigger-happy ratings agencies that have downgraded the sovereign debt of Greece and others in atonement for having failed to foresee the subprime mortgage crisis. Still, he says, there is no escaping this emerging growth divide, and he points out that the mandate of the European Central Bank is to ensure broad price stability in the union, not to look out for the interests of individual nations. France and Germany have already emerged from the recession. Business confidence in Germany, Europe’s largest economy, has hit a 17-month high. Yet on the periphery, the hangover from more than five years of a credit-infused boom shows little sign of diminishing. Ireland, the first economy to stumble, has taken the most severe fiscal action, cutting public wages sharply. A new Greek government, punished by the rough treatment of bond investors no longer willing to countenance soft promises of reform, is just now promising steep spending cuts. But it is not clear whether the political system in Greece will accept them. Meanwhile, Spain, to the frustration of many major lenders, seems to be putting off difficult fiscal questions in the hope that its economy will soon recover. Critics of the euro zone contend that weak governments in the peripheral economies, facing high unemployment and restive voters, will not have the stomach to hold down wages, pensions and public expenditures. “Are these people serious about reform, or are they just telling people what they want to hear?” asked Edward Hugh, a British-trained macroeconomist who lives in Barcelona and has been critical of Spain’s unwillingness to take difficult economic decisions. Paradoxically, the very dysfunction of a struggling two-tier Europe may represent the best chance for recovery if it leads to devaluation of the euro against the dollar, which many see as long overdue. Already, in the last month, the euro has lost more than 5 percent of its value against the dollar. Many economists predict that the currency will weaken more as the growth gap between the core and peripheral states creates further disharmony. Then, it will be the type of export-led recovery that has helped the United States and is likely to soon help Britain that could bring Europe’s economies closer to convergence. “If there are fears now that a breakup of the euro zone will lead to weakening of the euro, then that is good news,” said Paul De Grauwe, an economist based in Brussels who advises the president of the European Commission, José Manuel Barroso. “So we should congratulate Greece for getting us out of this anomaly of having a euro that is too overvalued.” Any such recovery will not be rapid, however. In Ireland, where prices are falling by 5 percent, reordering the economy from its deep reliance on construction and property will take years. And an already unpopular Irish government, along with others on Europe’s periphery, will have a difficult time explaining to recession-bruised voters why they must accept an central bank’s decision to raise interest rates — a move that may protect German and French savers from inflation but that does little for the many millions of citizens out of work. Yet the painful, historic steps taken by Ireland offer a ray of hope, says Philip Lane, a professor of international macroeconomics at Trinity College Dublin who oversees the widely read Irish Economy blog. He points to signs of wage compression in the hard-hit service, property and government sectors as proof that there is a recognition that recovery, distant as it may seem, must occur inside the euro zone, not outside. “It takes a crisis to learn a lesson,” Mr. Lane said. “Could it be that by getting countries to change their behavior you might get improved cooperation within the euro zone? “What does not kill you,” he added, “often makes you stronger.” Story from The New York Times

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Worst Not Over Yet For Europe

What with all the political manoeuvring this week, you would think there is a general election looming in Spain. In fact, the current Prime Minister called a general election as recently as March 2008 - while he was still in a position to win it. The fact that Mr Zapatero (Socialist) did indeed win a second term in office had more to do with the lack of support for his opponent, Mr Rajoy (Conservative), than any overwhelming confidence in the Socialists. With Spain still one of a few European countries still languishing in recession, I doubt Mr Zapatero will be calling an election any time soon. His current term of office will expire in March 2012 - long enough, hopefully, for the governments’ proposed economic policies to have had a positive effect. In Spanish Strategy for Sustainable Economic Growth we read about some of those plans. The ‘Sustainable’ in the title is a play on words - referring both to the creation of ‘green’ employment and a realisation that relying on a property boom to fuel the Spanish economy wasn’t such a good idea. Mr Rajoy, representing the Conservative opposition, slammed the proposals as hot air and has been on a warpath against the governments’ lack of strategy to pull the country out of recession. In polls, the Conservatives are now favoured to win the next election - much as is the case in the UK. During the week, the government also outlined their plan to make Internet access in Spain a basic human right. I suspect that this has more to do with Zapatero’s desire to create a more mobile, tech-savvy workforce than any real humanitarian agenda - but the announcement did make a few headlines. I also suspect that this is another way of the current PM dodging an issue he refuses to tackle: making Spanish workers more competitive in Europe. Current legislation heavily favours the employees rights - making it expensive for employers to hire and fire. I’m not suggesting a return to Victorian workhouses in Spain, however with unemployment nudging 20% in Spain, the current legislation is clearly doing nothing to encourage employers to hire. As I’ve been saying for a while, I suspect that in 2010 and 2011, much of Spain’s economic recovery will come about thanks to investment from their European neighbours. Here’s how I see it: The Spanish domestic economy will remain suppressed for the next couple of years This will drive prices down within Spain Meanwhile, most other European economies will be growing Money will flow into Spain from Europe and other ’stronger’ economies We are already starting to see this happening at the top end of the property market in Spain and the UK. Moneyed buyers have been patiently waiting for the right price before making their move. Now that activity is moving down in price toward more mainstream properties. As Mild Recovery of the Spanish Property Market and Spanish Property Recovery Already Underway suggest, real property sales values are at, or near, bottom in Spain. All we are waiting for now are buyers from stronger economies to pounce. As always, there’s never a right time to make a bad Spanish property purchase. Don’t let the forthcoming frenzy encourage you to take legal or procedural shortcuts. Always haggle hard, always use an independent lawyer and consider taking out a title deed insurance just in case. Finally, if you sold a property in Spain within the last 12 years, make sure you read Spanish CGT Tax Rebate Stretched Back to 1997 . If you paid more CGT than a Spaniard would have done during that time, you can now claim the difference back. That ‘difference’ could be a significant chunk of money - and you can even claim interest on it too. Previously, Spain agreed to consider house sales back to 2004 - but that has now been extended to include transactions going back another 7 years. Martin Dell, Kyero.com

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Sustainable Spanish Economy?

Spanish Economy Minister is satisfied the GDP is contracting at a slower pace and expects things to pick up in the next quarter. Spain’s economy contracted in the third quarter, although at a slower pace than in previous quarters, official data showed Thursday, contrasting with a return to growth elsewhere in Europe. Gross domestic product declined 0.3 percent from the previous quarter, its fifth straight quarterly contraction, and was down 4.0 percent from a year earlier, the National Statistics Institute said in preliminary figures. It follows a contraction of 1.1 percent in the second quarter, 1.6 percent in the first quarter, 1.1 percent in the three months to December and 0.6 percent in the third quarter of 2008. The statistics office said the slowdown in the pace of economic contraction was due to “a less negative contribution of domestic demand and a positive contribution of exterior demand” as government stimulus measures helped smooth the decline in activity and a return to growth in other nations aided exports. Economy Minister Elena Salgado said she was “satisfied” with the figures. “We expect that the results of the next quarters with our predictions and they will be better,” she told reporters as she entered parliament. The government expects the economy, Europe’s fifth largest, to shrink 3.6 percent this year and return to growth by the second half of 2010. The latest quarterly results leave Spain, along with Britain which unexpectedly slumped 0.4 percent in the third quarter, as the only large European economies still stuck in recession, usually defined as a drop in GDP for two or more consecutive quarters. The European Commission forecasts the entire 16 member eurozone likely expanded during the third quarter. Eurozone heavyweights France and Germany will publish third quarter GDP data on Friday. Both nations posted surprise economic growth in the second quarter of 2009, meaning their recessions were technically over. The Spanish economy has proved especially vulnerable to the global credit crunch because its growth relied heavily on credit-fuelled domestic demand and a Spanish property boom boosted by easy access to loans that has collapsed, leaving around one million new homes unsold. Prime Minister Jose Luis Rodriguez Zapatero’s Socialist government has responded to the economic slump by putting in place a stimulus plan worth more than two percent of GDP this year which it says is the largest in Europe. The plan includes a massive works programme, which has torn up vast swatches of Spanish cities as workers extend or repair roads and pavements. That however failed to prevent the jobless rate from soaring. Spain’s unemployment rate has doubled over the past two years to hit nearly 18 percent, the highest level in Europe, with construction workers leading the job losses. The country of just over 46 million people accounts for roughly half of the rise in the number of jobless in the euro zone over the last year, according to the European Union’s statistics office Eurostat. At the height of its 15-year boom, Spain was creating about half of all new jobs in the eurozone, which drew millions of immigrants, especially from Latin America and Eastern Europe. The sharp economic slowdown has caused Spain’s public deficit to balloon as tax receipts fall and government spending on stimulus measures and unemployment benefits soars. The government, which posted budget surpluses between 2004 and 2007, predicts the budget deficit will hit 9.5 percent of GDP this year. The European Commission on Thursday gave Spain an additional year — until 2013 — to bring its budget deficits back under the European Union limit of 3.0 percent of GDP. Story from Expatica

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Spanish Economy Minister: Contraction Slowing

Eurozone inflation has fallen deeper into negative territory, according to official data that suggests risks of deflation remain in spite of the region’s improved growth prospects. Consumer prices in the 16-country zone were 0.6 per cent lower in July than a year before, according to Eurostat, the European Union’s statistical office. In June, the annual inflation rate was minus 0.1 per cent, which was already the lowest since comparable records began in 1991. The latest, larger-than-expected fall in inflation reflected largely the impact of volatile energy prices over the past year. But it could stoke fears of a protracted deflationary period, in which prices fall generally. Earlier this week Marek Belka, director of the International Monetary Fund’s European department, said the risk of deflation remained minimal but “we should be vigilant and we should not completely exclude the possibility”. The European Central Bank has repeatedly warned that negative inflation rates were likely for some months but expects a return to a positive annual inflation rate later this year. Last month it argued that “such short-term movements are not relevant from a monetary policy perspective”. The ECB is widely expected to keep its main interest rate unchanged at a record low of 1 per cent at its governing council next week. The eurozone economy has shown clear signs of stabilising in recent weeks, although its recovery appears less advanced than in the US or UK. Separate Eurostat figures on Friday showed eurozone unemployment had risen to a 10-year high of 9.4 per cent of the workforce in June, up from 9.3 per cent in May. But the increase was less than feared. Analysts agreed that eurozone annual inflation rates had probably reached a trough in July, with a return to positive rates likely by November as the effects of large falls in oil prices drop out of year-on-year comparisons. But evidence is mounting that price falls are becoming more general. Julian Callow, European economist at Barclays Capital, argued the ECB should launch an offensive to prevent deflationary fears taking root. “Core” inflation, which excludes energy and food prices, has already turned negative in Ireland. A European Commission survey this week showed consumers’ expectations about prices in the next year were more skewed towards expecting falls than at any time since its surveys started in 1985. But Nick Kounis at Fortis Bank argued the risks of deflation related more to the medium term, given the high level of slack in European economies. In contrast, the current dip would soon be reversed. “It is difficult to get worried about this period of negative year-on-year changes,” he said. Story from Financial Times

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Eurozone Deflation Threat

After struggling to find a buyer for her renovated two- bedroom apartment in Madrid for two years, Arancha Ibarra found a tenant for 750 euros ($1,066) a month, becoming one of the 1.5 million second-home owners thrust onto the country’s rental market. The number of properties for rent in Spain climbed 55 percent in the past two years to 3.3 million, the highest since the Ministry of Housing started collecting the data in 2004. Rents in cities, including Madrid and Barcelona, are falling for the first time in seven years with declines of as much as 8 percent, according to Madrid-based property research firm Idealista.com. “Those who need to sell but can’t are being forced to lease,” said Fernando Encinar, co-founder and head of research at Idealista.com, Spain’s largest real estate Web site with 308,000 listings for rent and purchase. “We haven’t seen this number of properties for rent since the 1950s.” Spain built about 29 percent of new homes in the European Union from 2001 to 2007, even as it represented just 9 percent of the population. The resulting glut of 1.5 million unsold houses and apartments sparked the end of a decade-long real estate and construction boom that accounted for about 20 percent of the country’s gross domestic product in 2007. The ensuing housing slump has tipped the economy into the worst recession in 60 years with the unemployment rate climbing to 19 percent, the highest in the EU. Home sales fell by more than a third in the 12 months through May, the latest government data show. Rents in Madrid and Barcelona jumped 28 percent and 56 percent, respectively, in the five years to 2008, driven by a jump in house values. Home prices rose 120 percent from 1997 to 2007, pricing many Spaniards out of the market. This year rents declined 4.2 percent to 12.3 euros a square meter in Madrid and 8 percent to 12.6 euros in Barcelona, Idealista reported. After two years of trying to sell her 70 square meter (753 square foot) air-conditioned apartment in Madrid, Ibarra rented it after receiving just one offer of 162,273 euros, 33 percent below her asking price. “The rent barely covers the mortgage, but doesn’t pay the council tax and maintenance,” she said during an interview in Madrid. “It was the best price I could get and I can’t afford to sell at a loss or leave it empty.” Owners of vacant Spanish property also have to pay a yearly tax that’s equal to 1 percent to 2 percent of the property’s value. Spaniards aren’t the only ones saddled with empty homes. The nation’s banks lent about 318 billion euros to domestic real estate companies and also were forced to accept billions of euros of real estate assets in exchange for canceling debt with insolvent developers, according to Fernando Rodriguez de Acuna, president of R.R. de Acuna & Asociados, a Madrid-based industry research company founded in 1980. “Those assets are sterile, or constantly falling in value, so the banks have to get them off of their books or else they will damage their balance sheets in coming years,” Acuna said. Banco Santander SA, Spain’s biggest bank, together with its consumer unit Banco Espanol de Credito SA, has 4.1 billion euros of property assets after taking real estate from failing developers. Santander put 1,800 homes up for sale in January and sold 500 of them as of May, a company spokesman said. He declined to provide a breakdown of the bank’s residential and commercial real estate assets. Banco Bilbao Vizcaya Argentaria SA, the Spanish lender that bought 490 million euros of real estate in the first quarter, forecasts that will climb to 1 billion euros by the end of the year. Caja Madrid, the country’s second largest savings bank, has about 600 homes for rent and is offering as many as 1,500 for sale at discounts of as much as 40 percent. Acuna estimates the slump in the Spanish residential property market will last seven years, prolonging the recession until 2013. “Recovery is going to depend on when people can purchase homes again, which in turn depends on employment,” Acuna said during an interview at his office in Madrid. Acuna estimates the economy will contract by 4 percent in 2009 and 2010, by 2 percent in 2011, and 1 percent in 2012. Growth will be zero or minimal in 2013, he said. The Spanish government has forecast that the economy will shrink by 3.6 percent this year and 0.3 percent in 2010, and then grow 1.8 percent and 2.7 percent in 2011 and 2012. Joblessness in Spain may reach 20.5 percent by the end of 2010, according to estimates from the European Commission. “Redundancy is having a huge impact on home sales, hence many people are turning to renting,” said Ben May, an economist at Capital Economics Ltd. in London. “Even people who still have jobs are clearly going to be worried and those that are in a position to buy are waiting for prices to fall.” The International Monetary Fund expects Spanish property prices to drop 30 percent from their peak in 2006. They’ve already declined 7 percent, analysts at Citigroup Inc. estimate. Irene Garcia is among about 2 million Spaniards who have joined the ranks of the unemployed in the past year. The 33- year-old ex-production assistant gets 700 euros a month in unemployment benefits and pays 400 euros a month to rent a room in a shared apartment. The good news is her rent is about to drop 50 percent. Garcia, a native of Galicia who moved to Madrid three years ago, found a room in an apartment in the city center. It was empty for six months, prompting the owner to cut the rent to 200 euros per month. “I’m getting the same living space in the same area and saving 50 percent,” Garcia said. “I don’t know when the crisis will end or how long I will be unemployed, but this gives me a lifeline of six months.” Ibarra knows she’ll have to wait much longer than that for the market to recover and to be able to sell her home. “It’s crystal clear that in its current state the market is going to take at least five years before we see things pick up again,” she said. Story from Bloomberg

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Most Spanish Rental Property Since 1950’s

Deputy Prime Minister and Economy Minister Elena Salgado has been forced to admit that the economic situation in Spain is far worse than previously acknowledged. Until last month the Socialist Workers Party (PSOE) government remained publicly optimistic about the recession, with ministers talking about “green shoots” of recovery. Following their poor showing in the European elections, when they fell four percent behind the right wing opposition Popular Party (PP), the PSOE has started to speak more frankly. The government has admitted for the first time that the economy will continue to shrink next year, as well as this. The European Commission has said that it expects Spain to be the last European Union economy to emerge from recession, probably in 2011. A report from the Organisation for Economic Cooperation and Development (OECD) has painted a bleak picture predicting economic contraction of 4.2 percent this year, considerably worse than the 3 percent prediction of the Bank of Spain. The scale of the Spanish economic crisis is indicated by the continued downward revisions of forecasts by the International Monetary Fund (IMF). In January the IMF predicted a contraction of 1.7 percent; in April it was revised to 3 percent and this week, in line with the OECD’s assessment, the figure stands at 4 percent. The speed of the recession has been striking. In 2007 Spain was running a record public sector budget surplus of 2.2 percent of GDP, but this year it will have a deficit of nearly 10 percent. Within the Euro-zone, only Ireland’s public spending deficit has risen faster. The governor of the Bank of Spain has warned that government debt could exceed 60 percent of GDP next year, up from less than 40 percent at the end of last year. Further evidence of the economic crisis can be seen in recent figures on house sales, which fell a record 47.6 percent in April compared to the same month last year. House sales have been falling for 16 months, but this was the sharpest year-on-year decline to date. The National Confederation of Construction has estimated that around 600,000 homes around Spain remain unsold and predicted a decline in the construction sector of 12.8 percent this year. One economic analyst has suggested that the Spanish property market will “take at least five years to be resolved.” Spain’s second biggest bank, BBVA, last month predicted that home prices would fall around 10 percent this year and a further 12 percent in 2010. Overall, BBVA predict a 30 percent fall from peak prices. Much of the growth in the Spanish economy was based on a housing bubble that has now burst. Between 2001 and 2007 Spain accounted for around a third of new-build properties in the European Union. The property crash had a huge impact on the major banks and the regional savings banks, which rested on mortgages and loans to property developers. Bad loans have quadrupled in the last year and there has been a rapid rise in defaults. The housing bubble was fed by a chain of finance based on the sale of bonds. This was swept away by the credit crunch. At its peak the Spanish current account deficit was nominally the world’s second highest, behind only the United States. This was in spite of the fact that Spain has a population of only 45 million. This unsustainable deficit has been slashed by recession. In April imports fell by 35 percent, bringing the current account deficit down from €6.55 billion in March to €3.49 billion. This is two-thirds the €9.14 billion deficit in April 2008. Tourism, which accounts for 11 percent of Spanish GDP, has also been hard hit. Foreign visitors fell by 2 million in 2008. Salgado has warned that employment will recover more slowly than the economy generally. Unemployment currently stands at 18 percent, just under 4 million people, almost double the Euro-zone average. Most analysts predict that it will reach 20 percent next year. Spain has the highest level of unemployment of any OECD country. In the first quarter of 2009 Spain accounted for nearly 55 percent of total job losses across the Euro-zone, and around 35 percent of job losses in the European Union. Salgado still defends the notion of “green shoots.” Discussing the government’s current fiscal stimulus measures, which are worth more than 2 percent of GDP this year, she insisted that there had been “signs of an inflection point” in June. She went on to warn that Spain cannot continue to run large budget deficits for any length of time. Last month the government approved a bank restructuring fund, which could reach €90 billion to accelerate mergers and cut costs in savings banks. It has also agreed a €20 billion sustainable economy plan to fuel recovery, with Salgado calling on banks to put up half of the money. She called on banks not to shy away from lending to “solvent entities” at the risk of prolonging the recession. Salgado pledged last month to “retire” the current fiscal stimulus package when growth reaches “normal figures.” This was followed by a clear statement of intent: “Of course, we are very much committed to austerity and to the sustainability of our finances.” The government has already indicated what this will mean, with a first wave of tax hikes following Salgado’s statement. Shortly afterwards, Treasury Secretary Carlos Ocana announced that all taxes will be reviewed for the 2010 budget. The government has also announced cuts in spending. Salgado has pledged to reduce the 10 percent budget deficit to the European Union’s stated (and largely obsolete) limit of 3 percent over the next three years. Dominic Bryant of BNP Paribas approved the intention, saying it was impossible to run a 9-10 per cent deficit for three or four years without running into problems. He warned that the pressure to “do something about the finances … will hinder the recovery.” Similar warnings were sounded by José Luis Malo de Molina, director-general of the Bank of Spain. He expressed concern at the speed of the crisis: “the worsening of public finances could lead to a situation in which it might be necessary to raise taxes or cut costs when the economy has not emerged from the recession.” Launching the Bank of Spain’s annual report, governor Miguel Ángel Fernández Ordóñez said their task was to “stop public sector debt becoming an obstacle when the Spanish economy is in a better condition to grow.” In particular, he expressed a concern that the government has no further room for manoeuvre, as “Any chance of using fiscal policy to increase spending has now been exhausted.” Emergency spending brings with it the possibility of a further downgrading of national credit rating and corresponding rises in credit risk premiums. Ordóñez upset the PSOE government earlier this year when he insisted on the need for pension and labour market reforms. As Salgado’s comments have made clear, the disagreement is a tactical one. Salgado herself was appointed earlier in the year to replace former Finance Minister Pedro Solbes who was removed following his public complaints about government overspending. The PSOE is acutely sensitive to reactions from the working class to blunt statements about spending cuts. The government looks likely to approve a €16 billion unemployment benefit supplement for up to one million workers whose dole has run out. Prime Minister José Luis Rodriguez Zapatero is seeking to reach a new agreement on collective bargaining between employers and unions. Although he has ruled out reducing the costs of firing workers, as demanded by business groups, he is likely to offer other concessions to employers. As a minimum, employers are calling for cuts in the social security contributions they make for workers. Gerardo Díaz Ferrán, head of the Confederation of Spanish Business (CEOE), has insisted that the labour market must be reformed, with or without agreement. “If the government can’t reach an agreement through talks,” he said, “it must legislate anyway. … That is what it was elected to do.” Jean-Claude Trichet, President of the European Central Bank (ECB), has also called for greater labour reform including an end to indexing wages to inflation. Story from World Socialist

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Spain: Crisis Worse Than Thought