Spain has been in the throes of a housing bubble that is arguably worse than ours, since housing (narrowly defined) accounts for 5% of US GDP versus 18% of Spain’s.
And like the US, Spain’s mortgage banks have entered a financial crisis and are making heavy use of the ECB’s discount window. But oddly, this has gone almost completely without notice in the media, despite the issuance of a Moody’s report on this development. Reader Scott pointed me to a Telegraph story; I searched on Google News (which picks up stories from Bloomberg, Reuters, the Wall Street Journal, New York Times, and Financial Times) and found no other references.
And note that the silence can’t be explained by the size of the activity. The amount at issue is comparable to that of the Northern Rock bailout, making it proportionally more significant relative to the smaller Spanish economy.
From the Telegraph:
Spanish banks are issuing mortgage securities and asset-backed bonds on a massive scale to park at the European Central Bank, using them as collateral to raise money at favourable rates from the official credit window in Frankfurt.
The rating agency Moody’s said lenders had issued a record €53bn (£39bn) in the fourth quarter, yet almost none of the securities have actually been placed on the open market. Most have been sent directly to the ECB for use in “repo” operations.
“The market has shut down,” said Sandie Arlene Fernandez, the author of the report.
“Few, if any, of the transactions in the RBMS market (mortgage securities) have been placed since September. Some of the banks are hoping that the market will open up again but most are just preparing these deals to use as repos, which they can do since the ECB accepts AAA-rated securities,” she said.
The total volume of securities issued since the credit crunch began to bite in July has reached €63bn.
Reliance on the ECB window appears to have kept the mortgage sector afloat despite the sharp slowdown in the Spanish property market and the de facto closure of the capital markets for this type of business, allowing Spain to avoid the sort of mishap suffered by Northern Rock in Britain and Countrywide in the US.
The data appear to confirm suspicions that the EU authorities have carried out a covert rescue of the Spanish mortgage banking system.
It may equal the taxpayer rescue of Northern Rock in Britain, and possibly exceed it in proportion to the overall size of Spain’s economy.
The key difference is that the ECB rescue operation in Spain has been disguised. A veiled method is necessary since the eurozone lacks a clear-cut lender of last resort. The IMF has warned that this gap in the architecture of of the single currency could prove serious in a crisis.
Traders say the Spanish authorities are quietly turning a blind eye to use of the ECB window, and in some cases may be encouraging banks to go to Frankfurt – a claim denied by the Bank of Spain.
Moody’s said the total issuance of securities by Spanish banks last year reached €143bn, up 55pc on the 2006. Over €62bn were mortgage securities. The agency said the default rate was likely to rise, with mounting concerns among participants over a possible “housing crash”. Some of the mortgage securities have already begun to draw on their reserve funds.
David Owen, Europe of Dresdner Kleinwort, said Spain could face serious difficulties this year as the excesses of a decade-long boom finally catch up with the country.
“The size of the Spanish corporate sectors financial deficit is truly is really scary. It rose to 14.5pc of GDP in the third quarter of 2007 from 10pc in the first quarter. This must be a record for a relatively large economy. Clearly this is not sustainable. Cost imbalances have a nasty habit of unwinding, quickly and very painfully,” he said.
Mr Owen said Spain was acutely vulnerable since it cannot cut interest rates or let the currency slide to cushion the downturn. “Several years of no growth could now beckon. It will be very difficult for the economy to pick itself up again inside EMU,” he said.
Spanish corporate debt is now 112pc of GDP. The current account deficit is 10pc of GDP. These are both flashing red warning signs.
Among those issuing mortgage securities in the last two months are BBVA (€4.9bn), Caja Madrid (€2.4bn), Caja Catalunya (€1.6bn), CAM (€1.4bn), and Caja Castilla la Mancha (€800m).
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How is this different to the Federal Home Loan Bank system massively increasing its lending to entities like Countrywide?
Oh wait, the Spanish banks are doing (collateralised) repurchase agreements with the ECB, while Countrywide and friends are borrowing (unsecured?) from the FHLBs, and the FHLBs are issuing tax-preferred pseudo-government guaranteed securities onto the market instead.
I have first-hand experience of Spain’s housing bubble, so I would be the last to question the big picture. However, I don’t think that “housing (narrowly defined)” accounts for 18% of Spanish GDP. That figures to my knowledge refers to construction as a whole. See for example figure 9 in this paper: http://shop.ceps.eu/BookDetail.php?item_id=1545
IIRC, that 18% splits about 1/3 housing, 1/3 CRE and 1/3 public works.
Just checked official stats. See Table 3 (Tabla_3), line 23 (Construcción) in this file:
http://www.ine.es/daco/daco42/cne00/pib9506.xls
This claims that construction accounted for 10.8% of GDP in 2006, although that still seems to be an advance figure/estimate and is well below the figures I have seen in the literature.
Still, it does lend some confirmation to my view that “housing (narrowly defined)” cannot account for almost 1/5 of Spanish GDP.
The Telegraph? Puh-lease. This will be the third end-of-Spain scenario I’ve seen from them in the last year (all e-mailed to me, not being a reader of said) – none picked up anywhere else. The secret message in the article is to be found in: ‘It may equal the taxpayer rescue of Northern Rock in Britain…’, the ‘equal’ meaning morally equivalent, do I have to out. Hot buttons? Spanish property of which many of its readers are owners, bank failure and unfairness on the part of the ECB.
A less-known, but more serious problem stemming from the decline in building is to be experienced by Spanish municipalities, however. Systematically underfunded by taxation, they have spent well beyond sustainable levels on the basis of building permit income, and the like.
I meant to add, but hit the publish instead of the preview button, that the decline in new house sales will also have an effect on central government accounts, a reduced rate VAT (7% last I looked) being paid on the first purchase, but not on subsequent resales.
The Telegraph? Puh-lease.
Are the facts of the article correct? Are Spanish banks going to the ECB with MBS paper and getting funds at essentially par? Is this propping up the Spanish housing market and the banks that issue mortgages?
Next time try addressing the substance of the report rather than just impugning the source.
Spanish corporate debt is now 112pc of GDP. The current account deficit is 10pc of GDP. These are both flashing red warning signs.
Spain is also still a big net recipient of EU funding (which is why countries want to get in — it is a real cash bonanza for them); this money has contributed significantly to the expansion of Spain’s economy.
eh –
I revoke that comment on the source, but not the one on the true message of the article as it meanders around hitting buttons. The fact is, though, that said news outlet very regularly comes up with stories that, given their extreme nature, one would think might appear at least somewhere else.
As for the basic fact of the matter, it is apparently the case, although I have no way of knowing how much is involved or exactly how it is being utilized. The Telegraph, unfortunately sheds little light.
But I have questions also.
Exactly how is (or was, as the case may be) this activity being disguised?
Why is it being disguised?
Does lending against AAA constitute a bailout? If so they’d better find another word for Northern Rock.
Are the amounts borrowed net of amounts returned? One recalls that the ECB made available alot of funds on an overnight basis late last year. My guess would be that those quantities have not been factored out by the writer.
Will there be ‘several years of no growth’? It is already slowing down – but such a definite number over an indefinite period of time? I dunno.
Were the entire amounts of the mortgage securities mentioned in the last paragraph used as collateral at the ECB?
The reporting is substandard enough to call into question the conclusions, not to mention the motives.
Once again, my apologies for the cheesy intro.
Hi Yves,
I don’t know if you caught Gillian Tett’s column on Friday in the FT? She was writing about Spanish banks- http://www.ft.com/cms/s/0/e080a31c-d067-11dc-9309-0000779fd2ac.html
Agreed though, it’s a much neglected area of coverage.
Sam Jones/FT Alphaville
Ok, just a couple of points for the record on this subject.
Firstly, surprisingly, Spanish banks need to raise funds to continue their operations. They once used the ABS markets, but these are closed. Their larger cousins are finding it difficult to raise funds at attractive rates, and they likely don’t want the potential impact of raising leverage in a potential downturn. Solution: issue the ABS securities, and use them as repo collateral at the ECB. They can then be clawed back and sold in to the market if / when conditions become conducive.
Secondly, in what sense are these transactions hidden? The securities are rated and (typically) listed, and certainly reported by all of the IB ABS research teams. So, hidden in the same sense that a LT2 private placement would be? Or hidden because unless you paid attention you might not notice them. Or, just perhaps, hidden because the journo’s were asleep at the wheel. Again.
Thirdly, the Spanish housing market / ridiculous contribution of construction to GDP and potential for decline is such old news. People have been talking about this since at least 2006 – e.g. we declined two high LTV deals from Caja Madrid on housing market fears in Nov/Dec 06, based on a formulated market view which was not uncommon amongst investors. For anyone with doubt, check our Metrovecasa’s share price movement since 06. If the press is only just on to this story, I’m really not surprised. Congratulations again to the Telegraph (and FT) for teaching the ABS market to suck eggs. He says, bitterly.