Positive economic signs from the UK economy allow a near-miraculous recovery for sterling after a sharp fall. Investors are more relaxed about the Greek budget problems. Sterling fell sharply last Monday, losing nearly two cents before lunch. The remainder of the week was devoted to the slow and tedious process of recovery. Although it seemed an impossible ambition last Monday afternoon sterling opened in London this morning at €1.11, unchanged on the week. At the beginning of the week the non-domiciled tax status of Baron Ashcroft dominated the media. Allegedly, the noble lord had bought his way into a peerage by making large donations to the Conservative party. For some reason this old tradition had become suddenly improper. It would be an exaggeration to blame sterling’s sharp fall on Lord Ashcroft alone but the story will certainly have unnerved investors who were already nervous about the Tories failing to win a majority at the forthcoming general election. From there it was uphill all the way but at least sterling managed to make it up the hill with the assistance of some positive news. On Tuesday the government held a successful auction of 30-year gilts which attracted bids for nearly twice that much. The last five auctions of 30-year stock have achieved an average of 1.63 times cover so, whatever misgivings they may have about sterling’s short-term future, there is a degree of confidence among investors the current problems will be short-lived. Having ignored Monday’s manufacturing purchasing managers’ index (their minds were on other things) investors took a great deal of interest in Wednesday’s services sector PMI. At 58.4 the services PMI was more than three points better than predicted, scoring a three-year high. It blew America’s 53.0 and Euroland’s 51.8 into the weeds. Coming hard on the heels of a ten-point jump in consumer confidence it was another reminder to the market that not everything to do with Britain’s economy is in a state of collapse. There was more reassurance from the Bank of England when the Monetary Policy Committee voted to keep interest rates unchanged for a 13th month and to leave quantitative easing on hold. A rash of data provided no coherent picture of the euro zone economy. The manufacturing and services PMIs were both a little softer on the month but not far adrift from what the analysts had forecast. Consumer and producer price inflation were roughly in line with the market’s expectations but had no immediate implications for euro interest rates. A -0.3% monthly fall for retail sales was better than the expected -0.5% decline but still not exactly positive. The revision to fourth quarter GDP showed the Euroland economy growing by +0.1%. The European Central Bank tightened monetary policy on Thursday with an end to the cheap three-month loans it had been offering to commercial banks. They will still be able to borrow one-week money at 1% but the three-month rate will depend in future on market rates. The ECB had nothing to offer the Athens government and said it would oppose any attempt to approach the IMF for assistance. Nevertheless, Greece did manage to find buyers for a €5 billion bond issue. By the end of the weekend it had become clear that, although Germany would not put its hand in its pocket for a Greek bailout, the EU had an emergency plan if push came to shove. At least for the moment investors are comfortable, if not deliriously happy, about the situation but their next question will be whether France and Germany will be able to carry the euro zone economy ahead on their own if the economies of Greece, Spain, Portugal, Ireland and Italy are to be weighed down by austerity measures of one sort or another. Whilst sterling’s recovery last week might be seen as a sign that there is life in the old dog yet, it is still hard to see the British currency as anything other than a dog. Opinion polls continue to indicate a hung parliament and investors fear that even after the general election Britain’s government will be paralysed by indecision, unable or unwilling to tackle the budget gap. Buyers of the euro should hedge 50% of what they will need. If the money is required in the near future they should consider covering the whole amount. Get the best foreign exchange rates with no bank fees or commission charges using your Moneycorp Privilege Card

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Lucky Escape for Sterling

Spanish Banks are slowly relaxing their lending criteria with one or two offering more attractive deals and higher LTV’s. However, banks are still being cautious when it comes to assessing a client’s affordability. Most banks use a debt / income ratio of either 35% or 40%, although we work with one bank that uses 50%. This really helps those clients who struggle to get mortgages elsewhere due to having a higher ratio of regular outgoings on mortgages, loans, credit cards etc. to net disposable income (the “debt / income ratio”). The eurozone base rate has remained at 1% for some time now, meaning that borrowing in Spain is still cheap. With the recovery in Germany faltering and ongoing problems in the so-called PIIGS group of countries (Portugal, Italy, Ireland, Greece and Spain), it is very unlikely that there will be a sudden hike in rates. With regards to the exchange rate, this is more or less the same as last month. Dual-currency mortgages are available, which allows clients to pay the mortgage in pounds sterling and avoid any currency fluctuations. If you are buying a property for your main residence, we can offer 80% of the bank valuation. This means that if the valuation is higher than the purchase price, it is possible to borrow up to 100% of the purchase price, which is something that has been impossible during the recession. The interest rate is as low as Euribor (annual) + 0,66% (the lowest we have come across to date), with 0,5% bank opening commission and 0% redemption penalty for partial redemption. Another attractive option is that you can have up to 2 years’ interest-only. This bank also offers remortgage products. Terms are available up to age 75 with a maximum 45-year duration. The only disadvantages with this product appear to be the compulsory insurances and that the client’s income needs to be paid into an account with the bank. More information from Mortgage Direct

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Spanish Mortgage News

German magazine Bild (equivalent to The Sun in the UK) has ruffled Greek diplomatic feathers this week. In an open letter to the Greek PM during his trip to Germany, Bild pointed out some of the differences between the two countries: “Here, people work until they are 67 and there is no 14th-month salary for civil servants. Farmers don’t swindle EU subsidies with millions of non-existent olive trees.” Bild makes its point with characteristic Sun subtlety, but news of protests in Spain , Portugal and Greece against raising the retirement age to 67 reminded me how some citizens of those countries have yet to accept responsibility for their own futures. Spanish civil servants enjoy employment for life - it’s virtually impossible to get fired. They also enjoy a 13th month extra salary - (not performance-related) . Meanwhile, tax evasion is a national pastime and the tax-office (staffed by civil-servants, remember) only go after the easy targets - individuals and businesses who are already paying tax. Spain needs pension reform, employment reform and tax reform - but I doubt whether Zapatero has the stomach or backbone for very much of that. (Steps down from soapbox) Mark Stucklin reports on how the Spanish property market grew at the end of 2009 . It’s not a massive uptick, but it’s better than a further decline. Looking at the number of estate agents advertising on Kyero.com, we reached ‘bottom’ during September last year. Since then the number of advertisers has steadily increased - and we’re now back to the same number as this time last year. Regarding traffic to Kyero.com, we’re now over 50% up - a doubling of traffic in January and February this year compared to the same period last year. If what’s happening with Kyero is an early indicator of what’s happening in the Spanish property market (and I think it is), we can expect Q4 2009 to have marked the bottom of the Spanish property market - in terms of volume of transactions at least. The rest of this week’s news centred around the fragility of the Spanish economy and I’ve included the most enlightening articles this week. The best, I think is from the NY Times - a well reasoned and comprehensive explanation of the challenges facing Mr Zapatero. Martin Dell, Kyero.com

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We’re Past the Bottom of the Spanish Property Market

There was a small uptick in Spanish housing sales during the fourth quarter of last year, according to data released today by the Ministry of Housing. Small, maybe, but enough for the Government to get excited about. “The transactions in the fourth quarter represent a rise of 4.1% with respect to the same period last year, this being the first year-on-year rise since the fourth quarter of 2006,” goes the first sentence, in bold, of the Ministry’s press release. In fact, if you just look at the ordinary housing market, the uptick was even better. Excluding social housing there were 116,664 house sales in Q4, a rise of 5.5%. Regrettably, that’s where the good news ends. Take the year as a whole, there 413,112 transactions last year, a fall of 19% compared to the previous year, and a whopping 46% down on 2007. Even the Q4 was down 33% compared to 2 years ago. Some regions did better than others. Looking at a selection of regions popular with holiday home buyers, the inland province of Teruel suffered the most in 2009, down 36%, followed by Las Palmas in The Canaries, down 32%. At the other end of the scale, Spain’s two big cities did the best, down just 1.7% in Madrid and 3.9% in Barcelona. The small national uptick in Q4 that got the Ministry excited was almost entirely driven by big increases in Catalonia and Madrid (Barcelona +35%, Madrid +41%). Why the big surge in home sales in those two cities in the last quarter of 2009? I don’t know. But I wouldn’t be surprised if it had more to do with banks shifting Spanish property around their balance sheets than families buying homes to live in. Story from Mark Stucklin

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Spanish Property Market Grew Q4 2009

Upward revision to fourth quarter economic data does sterling no favours. Germany and France consider a bailout for Greece but there are no details yet. A two-day honeymoon took sterling from €1.1350 to almost €1.1450 before it set off south. Thursday and Friday were a one-way street that took it down to €1.11 in time for London’s opening this morning. Robert Stheeman, the chap responsible for issuing UK government bonds, managed an upbeat tone when he addressed a conference in London. He said that ‘politicians of all colours are taking the [public sector debt] situation very seriously indeed. Investors derive a lot of comfort that there is agreement across the spectrum that the deficit needs to be brought under control.’ Mr Stheeman also suggested that a hung parliament might be ‘less disruptive’ than assumed. Unfortunately the market did not share his optimism and sterling spend most of the week on the slide. The rot started, as it so often does these days, with cautious words from Bank of England Governor Mervyn King to parliament’s Treasury Committee. He did not go out of his way to talk sterling lower but, by refusing to rule out the possibility of further quantitative easing, made it sound as though the Bank’s printing press is ticking over and ready for more action. The governor’s comments coincided with news that mortgage approvals had dropped sharply in January with the end of the stamp duty holiday. Sterling spent the rest of the week rolling from one punch after another as investors lightened their holdings. A sharp fall in business investment at the end of last year saw investment down by 24.1% for the full year. Consumer confidence improved by three points but at -14 it still had a minus sign in front of it. Nationwide reported a -1.0% monthly fall in house prices after nine months of improvement. Britain’s overall economic performance in the fourth quarter of 2009 was revised to show growth of +0.3% instead of the +0.1% previously reported but third quarter shrinkage was also revised, from -0.2% to -0.3%. Government spending in the fourth quarter was much higher than expected. Investors did not just ignore one part of the euro zone economic story, they ignored the lot. Industrial new orders grew in December by +0.8%, less than a third of the pace seen in November but the cumulative effect of several months of improvement took the annual increase to +9.5%. Confidence figures from Brussels had little to say; consumer and economic confidence were very slightly softer while industrial confidence edged higher. Euroland inflation was roughly in line with expectations. Prices fell by -0.8% in January but were still +1.0% higher than a year ago. Greece was again the main story for the euro. Even though no solid plans emerged last week, stories at the weekend suggested the emergence of a workable solution that would see the better-heeled euro zone members buying Greek government bonds. EU Economic Affairs Commissioner Olli Rehn is in Athens today, apparently to negotiate a deal whereby Greece would get the support it needs in return for taking painful decisions to reduce its budget deficit. Although Germany’s Chancellor Merkel still publicly maintains that Greece’s salvation lies in Athens, not Berlin, she and other European leaders are not looking for a Pyrrhic victory that would scupper the single currency. The six weeks that sterling spent between €1.13 and €1.16 have been consigned to history With opinion polls closing the gap between Labour and Conservative to almost nothing investors fear that even after the general election Britain’s government will be paralysed by indecision, unable or unwilling to tackle the budget gap. Buyers of the euro should hedge at least 50% of what they will need. If the money will be required in the near future they should consider covering the whole amount. Get the best foreign exchange rates with no bank fees or commission charges using your Moneycorp Privilege Card

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Another week of Punishment for Sterling

There were two chinks of light permeating the same old economic gloom in this week’s Spanish property news. First, even though Spain is still officially in recession, consumption in Spanish households increased for the first time in two years. This is still a far cry from a booming economy - but at least it’s a move in the right direction. Second, Despite the news that mortgage lending is down 34% , news of competitive 100% mortgages could be just what the market needs to catalyse Spanish property buying again. One other piece of news which I’ll stick my neck out and interpret as ‘good’ is that the Spanish protests organised against raising the retirement age by two years have been poorly supported . I have no particular feelings either way about the wisdom of this pension reform - but I do feel strongly that striking is the very worst thing for Spain’s fragile economy. Yes, the politicians messed up. Yes, they should be held accountable. Yes, they should find workable solutions to revitalise Spain’s economy and reverse the spiralling unemployment rate. But striking won’t make those things happen - it will only delay them. For their part, Spain’s politicians are playing ‘fast and loose’ with the media. When speaking to international journalists and investors, they emphasise the austerity of the country’s economic plans - in an attempt to sooth investor nerves and cement Spain’s line of affordable international credit. Meanwhile in Spain, these same politicians are emphasising how it’s ‘business as normal’ and that there will be no significant cuts in public spending and no erosion of benefits. The upshot of this - since we live in an age of Google translate and the Internet - is that neither foreign investors, nor the Spanish people have any faith in anything the government says. They’re clearly ‘bending the truth’ at least 50% of the time, if not 100%. Over on the Kyero blog, we’ve discovered a way of getting Google to send you property alerts - even when the web site you’re using doesn’t offer that functionality. We apologise for annoying you with our signup forms, and we ask whether translating property descriptions really makes sense? If you have an opinion about these topics, please leave a comment and join in the conversation. Martin Dell, Kyero.com

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Spain: Two or Three Reasons to be Cheerful

The Bank of Spain is expected to increase the provisions it demands of Spanish lenders to cover property bought from struggling real estate developers. The central bank’s move would further dent bank profits already hit by economic recession, according to financial sources and bank analysts. In November, the central bank raised its provisioning requirement from 10 per cent of the property’s value to 20 per cent for real estate held more than a year, and is now expected to raise it to 30 per cent. However, it has yet to notify lenders formally. “No decision has been taken yet,” the Bank of Spain said on Monday. The probable change reflects a growing awareness among regulators and investors that Spanish banks and cajas, the unlisted savings and loan institutions, have massaged their bad loan ratios by refinancing property developers in exchange for Spanish property and equity in the companies, instead of allowing them to collapse. Iberian Equities, the broker, estimated on Monday that listed Spanish banks had property assets of more than €12.6bn ($17.1bn) at the end of last year, while the cajas held €33bn. Santander and BBVA, the two biggest banks, have taken impairments of about 30 per cent. But the proposed increase in provisioning requirements would amount to €1bn, or a fifth, of 2010 profits for smaller banks, and €5.3bn-€5.9bn, or a fifth, of profits for the cajas, Iberian Equities said. A flurry of recent debt-for-assets and debt-for-equity swaps – involving developers including Colonial, Reyal Urbis and Metrovacesa – has deepened the scepticism of analysts and investors about the true bad loan positions of Spanish lenders. Total exposure to developers is €324bn. “While banks’ doubtful domestic loans have risen quickly over the last two years, the recognition of impaired assets has been far slower than the severity of the recession might otherwise suggest,” wrote Jamie Dannhauser of Lombard Street Research. There are particular suspicions about the way the collective bad loan ratio of the cajas has reached a plateau and started to decline, down to 5.05 per cent of assets in December. That is only slightly higher than the 5.02 per cent figure for the banks, whose accounts are generally more transparent. If the numbers were correct, that would be the “best news on the Spanish economy I’ve heard for a long time”, said Luis Garicano, professor of economics and strategy at the London School of Economics, in a blog on Spain. “Personally, I don’t believe it. The alternative is that the bad loan numbers of the cajas don’t make a lot of sense.” Prof Garicano said it would not be possible to re-establish the credibility of the financial system if the regulator permitted “these accounting games”. The Bank of Spain’s expected tightening of its provisioning requirements could go some way towards defusing such criticism. Story from FT.com

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Spanish Banks Face Higher Provisions

Jump in UK inflation is a ‘temporary deviation’. Greek prime minister likens his economy to the Titanic. Having set off from €1.15 the pound fluctuated between €1.14 and €1.1550 until the middle of the week. On Thursday it took a dive, which was extended on Friday. It opened in London this morning off its lows - but only just - at €1.1350. The week got off to a slow start with bank holidays in Switzerland, Canada and the United States. The lunar new year put China and much of the Far East on a go-slow for several days. Things started to become interesting for sterling on Tuesday with January’s consumer price index data. As most analysts had predicted - and the Bank of England had warned - CPI inflation jumped from 2.9% to 3.5%, appreciably above the Bank’s 1 target range. In the Governor’s compulsory open letter to the chancellor he called it a ‘temporary deviation’ and repeated his belief that ‘weakness in spending… will bear down on inflationary pressures over time.’ If that was the good news, the bad news on Thursday was that the Treasury had had to borrow £4.2 billion in January. The Treasury never has to borrow money in January; that’s when a big chunk of the annual tax revenue comes in. The Times summed up the situation as ‘On borrowed time: shock deficit threatens UK recovery.’ January’s retail sales figures, released on Friday morning, were no help to sterling either. The -1.8% monthly decline was a surprise to forecasters, as was the downward revision which showed sales falling in December as well. An interesting debate in the press showed how opinion is divided about what course of action the government should take to bring its budget deficit back into line. The Sunday Times printed a letter from 20 respected economists highlighting the dangers of Downing Street doing nothing. Friday’s Financial Times carried a response from 60 other, equally well-respected, economists saying that nothing is a very good thing to do until the economy gets back on its feet. Although disagreement among economists is nothing new, the exchange of views highlighted Downing Street’s dilemma. Finding itself in a state of anxiety fatigue after weeks of angst about the difficulties of the debt situation in Athens, the market came to the conclusion that Greece was not about to be lost with all hands. It did so despite new revelations that the previous government had arranged swap trades with about 15 investment banks to hide (it is alleged) the size of its deficit. Investors also managed to ignore some unfortunate sound-bites from Greek prime minister Papandreou. On one occasion he said that ‘we are trying to change the course of the Titanic; it cannot be done in a day’; an unfortunate simile. At the weekend he said he was not looking for a bailout because ‘our borrowing needs are covered until mid-March’, not exactly far away on the calendar. He elaborated by explaining that ‘we need the help so that we can borrow at the same rate as other countries, not at high rates which in fact undermine our possibility for making the changes and cutting down our deficit.’ In other words Greece is not asking for actual cash but it is looking for guarantees that will allow it to borrow in the market. Basically, Greece wants the use of France and Germany’s credit cards. After three months spent between €1.09 and €1.13 the pound is clinging to a slightly higher range, between €1.13 and €1.16, despite last week’s unhelpful news. Although its profile is now a little lower, the Greek albatross remains a burden, balancing investors’ slightly different worries about Britain’s political and financial situation. Buyers of the euro should take advantage of any spikes to hedge 50% of their exposure. Get the best foreign exchange rates with no bank fees or commission charges using your Moneycorp Privilege Card

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January Spending Gap Hurts Strerling

Spain tries to hide under the smokescreen of an International conspiracy, TINSA is revealed as not-quite-so independent after all, and two pieces of good news for Spanish finances. In a bizarre twist this week, Spain hit out at English-language news agencies conspiring to bring down the Euro and the Spanish economy. As the writer of The Zapping of Zapatero in the Economist answered: “To this piffle the best retort is: grow up”. Mr Zapatero, however, continues to insist that Spanish economic recovery is near - something that economists outside the country have a hard time agreeing with because the Spanish government haven’t fleshed out their recovery plans. However, two pieces of good news for the Spanish economy broke this week - shoring up international confidence in the country. First, Spain enjoyed a strong bond issue - raising €5 Billion. A bond is basically an IOU from the Spanish government and, the fact that it sold out quickly is a very practical demonstration of how confident the world’s financial markets are of Spain’s ability to repay that debt. Second, the International Monetary Fund stated that Spain is not Greece . A spokesman said: “Spain has robust economic statistics and institutions with a solid history and credibility”. It seems that despite the constant news and rumour-mongering, investors are more than willing to continue investing in Spain - all conspiracy theories aside. Moving on from the world of Spanish politics and finances, please check out Nick Snelling’s new article: What the Spanish Coastal Law Really Means . If you are thinking of buying a Spanish property anywhere near the sea, it’s important to be ware of this fuzzy piece of legislation. Last week, I sang the praises of property valuations company, TINSA. Chartered surveyor, Campbell Ferguson was kind enough to email me this quote from Fuster Associates, a legal firm in Murcia: The biggest valuation companies, such as Tinsa and Tasamadrid, are connected with savings banks and the banking industry; “hence, every time they value a home at less than its former value, their own assets depreciate”. To put it another way, “to admit that homes have come down in price is tantamount to admitting that the assets which back up loans have fallen.” Hmm, so maybe my assertion that one of TINSA’s advantages is that they’re independent is suspect - that’s certainly true in the opinion of this Spanish commentator who said: “You trust the valuations of a company funded by more than 30 savings banks? Bad analysis.” I admit that the independence of TINSA may be questionable - but I do stand by the fact that their index trend is the only data series which tallies closely with what we have observed in practice. Moving on .. We started a new Kyero blog last week to let you know what we’re up to behind the scenes here. Some of the posts are quite technical, some aimed at estate agents, others at the general public. Some talk about functionality we’re developing, and others about problems we’re trying to fix. I hope you find the posts interesting and decide to comment and have your say if you feel strongly enough about a particular subject. Martin Dell, Kyero.com

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No Spanish Conspiracy Theory Required

Spain was the last major European economy still in recession in the fourth quarter, final data showed on Wednesday. But the markets gave some cheer to the Socialist government, as signs arose that fears surrounding sovereign debt in the euro zone may be easing for now. The National Statistics Institute reported that the Spanish economy shrank by 0.1 percent in the fourth quarter from the previous quarter, in line with a flash estimate made last week and better than the 0.3 percent decline in the quarter before. It was the seventh straight quarter of contraction for Spain, meaning the country has been in recession almost two years. Joblessness has neared 19 percent in the country following the disappearance of the easy credit that fueled a Spanish property boom during the previous decade. Prime Minister Jose Luis Rodriguez Zapatero called for the opposition to back its austerity measures to rein in spending and help reassure the markets. But he also celebrated the solid results from a government bond issue Wednesday as showing the market panic over Spain’s accounts had been unjustified. “Spain’s solvency as a country is unquestionable,” he said. Spain drew a stampede of demand for the issue — €12 billion of orders for a €5 billion syndicated 15-year bond, according to IFR, a Thomson Reuters service. The pricing was at the low end of the initial guidance. Neighboring, debt-ridden Portugal, seen by markets as the next domino to fall if Greece were to have payments problems, saw its borrowing costs fall. It sold €1 billion of 12-month treasury bills at a lower average yield of 1.173 percent in another well-bid auction. Analysts had said a successful Spanish sale could open the door for Greece to offer a planned 10-year bond. European Union leaders pledged support last week for Athens’ plans to shrink its huge budget deficit but stopped short of financial aid. “Good news in the euro zone periphery is also good news for Greece,” said Leonidas Fragiadakis, group treasurer at National Bank of Greece, the country’s biggest bank. In Spain, Mr. Zapatero has been lambasted in the media for his response to the Greek debt crisis. He tried to regain the political high ground Wednesday by calling for the opposition to support legislation meant to restore the Spanish economy to fiscal and competitive health. “The government is asking for and offering consensus, with good will, involving all the groups in this house,” Mr. Zapatero said in a speech to parliament a week after King Juan Carlos said political parties, business and unions should come together to dig Spain out of its hole. But Mr. Zapatero’s call for the legislation to be approved by consensus in the first half of the year met with a cool reception from the leader of the conservative opposition, Mariano Rajoy, who suggested the prime minister resign. Economy Minister Elena Salgado will lead talks with other parties over key measures, including a €50 billion savings package designed to cut Spain’s budget deficit from 11.4 percent of GDP in 2009 to the mandated E.U. limit of 3 percent by 2013. “We’re committed to these projects,” Mr. Zapatero said, but added: “But we are open to talk about other issues or to discuss different emphases with regards to these projects.” Mr. Rajoy said Zapatero’s proposal lacked credibility. “It’s not Spain that inspires lack of confidence, it’s you and your government’s way of handling the economy,” Rajoy said, asking for the government to reverse tax increases, including a rise in value-added sales tax. There were some encouraging signs in Wednesday’s economic reports: Data showed fourth quarter household consumption rose by 0.3 percent in quarter-on-quarter terms, the first rise since 2007. Mr. Zapatero said he expected the economy to resume growth in the first half of the year, but economists were not convinced a serious turn around was likely any time soon. “It’s going to come in handy for the politicians to say ‘We’re coming out of recession,’ but it’s not going to make any material difference,” said Jose Garcia Zarate at 4Cast. “2010 is going to be a very rough year, not as rough as 2009, but pretty rough anyway.” While the spread on Spanish Treasury bonds has spiked during the Greek worries, many economists say that the country’s relatively low level of public debt to GDP means it faces little immediate financing problems. Story from NY Times

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Spain Cheered by Strong Bond Issue