Sunday, November 30, 2008
Romania votes under a new electoral system
Voters in Romania went to the polls on Sunday to choose members of both houses of the South-eastern European nation's bicameral Parliament, the Senate and the Chamber of Deputies. However, voters cast ballots for candidates in single-member constituencies - 137 in the Senate and 315 in the Chamber of Deputies - under a new electoral system introduced earlier this year, which replaced the party-list proportional representation system in place since 1990, following the downfall of Communist dictator Nicolae Ceausescu the preceding year.
Romanian expatriates also took part in the election, with six constituencies (two in the Senate, four in the Chamber) set aside for them.
Romania's Central Electoral Bureau's 2008 parliamentary elections website has preliminary results in Romanian only; results are also available at the bottom of this posting, under Update.
Although the election took place in single-member constituencies, it should be noted that the new system - introduced to make Romanian parliamentarians more accountable to voters - is not strictly first-past-the-post: candidates need an absolute majority of the vote in order to win a constituency seat, and the overall distribution of seats in each chamber will continue to be carried out by proportional representation among parties winning at least five percent of the nationwide vote, or first place in a minimum number of constituency seats (three in the Senate, six in the Chamber).
Romania's proportional representation system calls for seats in each house of Parliament to be initially allocated by the Hare quota in forty-three multi-member constituencies - Romania's forty-one counties, plus the municipality of Bucharest and the special constituency for Romanians abroad - with unfilled seats and remainder votes pooled on a nationwide basis, where they are apportioned by the largest average method (the D'Hondt rule), and subsequently assigned to the multi-member constituencies, following a complex procedure designed to insure that these seats are allocated without changing the nationwide distribution of mandates among parties or multi-member constituencies.
Then, in each of the multi-member constituencies any single-member constituency seats won by a party will be deducted from its corresponding proportional seat total, while the remaining seats will be distributed among unelected candidates in a way such that every member of the Senate and the Chamber represents a single-member constituency, and that every constituency is represented in Parliament. Finally, the constitution guarantees one Chamber of Deputies seat to lists representing national minorities that fail to obtain the number of votes for representation in Parliament.
In many ways, Romania's new electoral system closely resembles the system used for elections to the Italian Senate between 1948 and 1992, in which candidates also ran in single-member districts; an even larger majority of 65% was needed in order to secure a constituency seat, while unfilled seats were proportionally allocated (at the regional level). However, in practice the Italian Senate electoral system operated in a proportional manner because very few candidates secured the required majority at the constituency level. This may turn out to be the case as well in Romania, where no single party has commanded an overall majority since 1992.
Unlike other Eastern European countries, Romania had a decidedly tumultuous transition to democracy in late 1989, when a National Salvation Front led by less-than-reformed Communists stepped in to fill the power vacuum created by the violent overthrow and subsequent execution of Nicolae Ceausescu and his wife Elena. In a not quite transparent (some would say fraudulent) election held the following year, the Front won a large majority, and party leader Ion Iliescu - a prominent Communist leader who had fallen out of favor with Ceausescu - became president. That said, Romania acquired a democratic constitution in 1991, and subsequent elections have been generally regarded as free and fair. In 1996 the ruling party, which by then had changed its name to the Party of Social Democracy (PSD; subsequently the Social Democratic Party) lost to the right-of-center Democratic Convention. However, the Convention's government proved to be fractious and inept, and by 2000 Iliescu and the Social Democrats were back in power, while support for the far-right Greater Romania Party (PRM) soared to unprecedented levels: in that year's presidential election, PRM leader Corneliu Vadim Tudor - a court poet during the Ceausescu era who subsequently gained notoriety for his demagogic utterances against ethnic minorities and gays - polled strongly, although he was soundly defeated by Iliescu in a runoff vote.
In the 2004 general election, PSD remained the largest party in both the Senate and the Chamber of Deputies, but narrowly lost the presidency to Bucharest mayor Traian Basescu of the centrist Truth and Justice Alliance, which brought together the Democratic Party (PD) and the National Liberal Party (PNL). Basescu, who campaigned on a platform against corruption - an endemic problem in Romania, even after the country's entry into the European Union in 2007 - subsequently appointed Calin Popescu-Tariceanu of PNL as prime minister (Romania has a semi-presidential form of government, in which most powers are vested in the prime minister, although the head of state retains reserve powers in defense and foreign policy); Popescu-Tariceanu then formed a coalition government composed of the Alliance parties, the Humanist Party - later known as the Conservative Party (PC) - and the Democratic Union of Hungarians in Romania (UDMR), which represents the country's sizable Hungarian minority.
However, by 2005 Basescu and Popescu-Tariceanu were at odds over a variety of issues, and the differences eventually erupted into open conflict. In 2007 the prime minister dismissed eight cabinet ministers supported by PD and Basescu. Moreover, with the support of PSD Parliament voted to suspend Basescu from office, on the grounds that he had allegedly violated the Constitution; however, the decision was overturned by voters in a referendum held later that year on the president's impeachment. Since then, Basescu has continued to clash with Popescu-Tariceanu (who remained as head of a minority PNL-UDMR government), most recently over a law increasing the salaries of schoolteachers.
Romania's economy has enjoyed unprecedented growth in recent times, but the country remains the EU's second poorest member (neighboring Bulgaria is the poorest). Meanwhile, a large number of Romanians have emigrated to other countries (chiefly among them Italy and Spain), and the country's population has declined by more than a million and a half persons since 1990.
Pre-election polls had the Democratic Liberal Party (PD-L) - a merger of PD with the Liberal Democratic Party (PLD; a 2006 PNL offshoot) - as the likely election winner, with the PSD+PC alliance in second place and PNL in a distant third place. As it was, the PSD+PC alliance narrowly outpolled PD-L in both the Senate and Chamber elections, but PD-L nonetheless won the largest number of seats in both houses of Parliament, according to final results published by the Central Electoral Bureau on its 2008 parliamentary elections website.
The results of the Chamber of Deputies election were as follows:
Democratic Liberal Party (PD-L) - 2,228,860 votes (32.4%), 115 seats
Social Democratic Party+Conservative Party (PSD+PC) - 2,279,449 votes (33.1%), 114 seats
National Liberal Party (PNL) - 1,279,063 votes (18.6%), 65 seats
Democratic Union of Hungarians in Romania (UDMR) - 425,008 votes (6.2%), 22 seats
Greater Romania Party (PRM) - 217,595 votes (3.2%), no seats
New Generation Party-Christian Democratic (PNGCD) - 156,901 votes (2.3%), no seats
Others - 299,918 votes (4.4%), 18 seats
Meanwhile, the Senate election had the following results:
Democratic Liberal Party (PD-L) - 2,312,358 votes (33.6%), 51 seats
Social Democratic Party+Conservative Party (PSD+PC) - 2,352,968 votes (34.2%), 49 seats
National Liberal Party (PNL) - 1,291,029 votes (18.7%), 28 seats
Democratic Union of Hungarians in Romania (UDMR) - 440,449 votes (6.4%), 9 seats
Greater Romania Party (PRM) - 245,930 votes (3.6%), no seats
New Generation Party-Christian Democratic (PNGCD) - 174,519 votes (2.5%), no seats
Others - 70,802 votes (1.0%), no seats
Both PD-L and PSD+PC won 114 seats each under the proportional allocation of Chamber seats; however, in Arad county PD-L was entitled to four seats but won five single-member constituency seats by absolute majority, which brought its total to 115 seats - one more than PSD+PC. However, the PD-L upper house seat plurality resulted entirely from the nationwide distribution of unfilled Senate seats.
Only 85 of the Chamber's 315 single-member constituencies were filled by absolute majority, of which 40 were won by PSD+PC, 27 by PD-L, 14 by UDMR and four by PNL. Likewise, only 31 out of 137 Senate seats were decided by absolute majority: of these, twelve went to PSD+PC, eleven to PD-L, one to PNL and seven to UDMR. Moreover, one side effect of the new electoral system is that some constituencies will be represented in Parliament by candidates who arrived in second place (or lower), due in large measure to the fact that proportional representation produced a different distribution of seats than first-past-the-post: according to the Central Electoral Bureau, PD-L topped the poll in 138 Chamber of Deputies constituencies, PSD+PC in 117, PNL in 37 and UDMR in 23, while in the Senate PD-L came first in 58 constituencies, PSD+PC in 55, PNL in fifteen and UDMR in nine. Not surprisingly, there has been much consternation in the Romanian press about the workings of a system that makes winners out of apparent losers. However, it should be noted that this was also a common occurrence in Italian Senate elections from 1948 to 1992.
Finally, parties representing national minorities other than the Hungarians secured a total of 18 seats in the Chamber of Deputies, but the far-right PRM was left without parliamentary representation for the first time since 1992.
Voter turnout in the election stood at just 39.2%, sharply down from 58.5% in 2004. However, it should be noted that unlike previous legislative elections in Romania, the 2008 parliamentary elections were not held at the same time as the presidential election, due to the fact that a 2004 constitutional amendment expanded the presidential term to five years (whereas parliamentary elections will continue to be held every four years). As such, while the drop in turnout may be indicative of popular discontent with Romania's political establishment, it is quite likely that many voters weren't interested in taking part in the event simply because the presidency wasn't at stake.
Monday, November 24, 2008
Are Baltic Devaluations Now In The Works?
Now this is a very interesting question, isn't it? The only honest answer I can give is that I don't know, and indeed I haven't the faintest idea. The government of Latvia (the Baltic state which is currently most rife with "rumours" about imminent devaluations) works in its own wondrous ways, and neither we (nor Latvia's citizens) have any idea at all how they plan to lift their country out of the deepest depression they have experienced in many a long year.
What I do know is that, economically speaking,the present situation is simply unsustainable, and something is going to have to be done. Indeed the country's government is in talks with both the IMF and the EU Commission about this very topic as I write. My own opinion is that domestic consumption is now dead (as a growth driver) for as far ahead as the eye can see (and maybe even further), that the country's citizens now need to start to save rather than borrow more, and that the only way Latvia can turn itself around is by exporting more than it imports. But for a country which ran a 23% current account deficit in 2007 this is going to be very difficult objective to achieve, since after two years of very strong inflation Latvia's relative prices with the rest of the world are completely uncompetitive.
Historical experience has taught us that it is not an easy thing to tell people "we are going to cut your wages by between 5 and 10% this year, next year, and then possibly the year after". Apart from the fact that voters don't like to hear this kind of talk, you can also enter into a deflation dynamic which then comes to be very hard to break out of. Hence, according to conventional economic wisdom, devaluation tends to be the preferred option. And it is my opinion that, despite all the attendant difficulties, devaluation is the best option among the unappetising list of unpleasant options presently available to Latvia (and the other Baltic states, and Bulgaria). Unfortunately, having reached this point there are simply no "pleasant" options available.
The curious thing is that for voicing this opinion I could go to prison in Latvia.
According to the Baltic Course online newspaper Ventspils University College lecturer Dmitrijs Smirnovs was detained for two days recently on suspicion of spreading rumors about the devaluation of the Latvian currency. He was detained in connection with an opinion that he had expressed during a debate about the development of the Latvian economy and the future of the Latvian banking and credit system. His arrest followed the publication of his opinion in Ventspils' local newspaper Ventas Balss. According to the newspaper report he said the following:
"The U.S. problems are trifling, compared to what awaits us. They have now reached the bottom and will start to recover. Problems in the European Union have only just begun and we may be hit by a crisis that is ten or maybe twenty times worse than that in the United States. The Swedish banks will no longer be able to offer inexpensive loans through their subsidiary banks in Latvia. They will tell us to pay back the debts! How will we pay them – with the real estate? We have no assets to pay back the debts! [..] The pyramid has been built and now we have to wait until it collapses. [..] The only thing I can suggest now: first of all, do not keep your money in banks, second: do not save money in lats, as it is very dangerous at the moment."
Dmitrijs Smirnovs appears to have been detained by members of the Latvian Security Police, who seem to have been charged with the special mission of protecting the integrity of the Lat at this very delicate point in Latvian history. And while some of the advice Smirnovs offered to his audience may have been ill-advised (given the delicate nature of the problems involved), they are opinions, and in a free and democratic society he should be at complete liberty to express them.
In fact Smirnovs is not the only such case to have arisen in recent days, and Baltic Course report that two more people are "under investigation" by the State Security Police. According to Latvian newspaper the Telegraf Latvian police previously detained a journalist under suspicion of spreading rumors about the Baltic nation's financial system during the global market crisis (also see this report and debate in comments about the same issue in Baltic Business News, while the same source reports that in the Finish newspaper Kauppalehti - which is evidently not controlled by the Latvian Security Police - they are simply discussing whether the Lat will be devalued before Xmas or in two to three months time).
The police held a journalist working for a Latvian newspaper yesterday evening in an investigation that started on Oct. 6 due to ``rumors about the Baltic country's financial system,'' police spokeswoman Kristine Apse-Krumina said, according to the Russian- language newspaper. She gave no details on what rumors the journalist is accused of spreading. Another investigation has been started following a run on currency exchange booths in the capital Riga last weekend that was caused by rumors about a devaluation of the lats, she added.
One of the other cases under investigation by the State Security police appears to be a member of the Latvian pop group "Putnu balle" based on statements made during a pop concert in Jelgava on November 9. Kristine Apse-Krumina, aide to the Security Police chief, stated that the cases was opened following a complaint from a bank, which alleged that lead singer Valters Fridenbergs had urged the people to withdraw their money from Parex banka and Latvijas Krajbanka during the warm up to the concert. According to band manager Anete Kalnina what actually happened was:
"As it often happens at concerts, the band members communicated with the public, telling jokes about themselves as well as many other things. The band had performed two songs when the guitarist Karlis Bumeistars had to tune his guitar, which is when Valters Fridenbergs started talking to the public," Kalnina said. Commenting the current situation in Latvia, Fridenbergs said that the audience had better hear the concert to the end, and only then rush to ATMs. "The people at the culture center got the joke, and laughed. It was not an encouragement" to withdraw money from banks, said Kalnina.
Evidently State Security Police charged with the investigation of seditious devaluation rumours have no such sense of humour, although maybe having to attend a few more pop concerts wouldn't be a bad therapy for them.
I myself received what could be termed a "mild threat" on my Latvian blog, following my publication of an opinion by Bank of America analyst, David Hauner, about the need to devalue:
``They will keep the pegs at the current exchange rates well into 2009, but reset the rates to devalue against the euro later, when markets have calmed,'' Hauner said.
This attracted the following warning from unidentified commenter LV, who would seem to me to quite possibly be a member of the above mentioned "Keystone Cops" group.
Apparently you are disseminating false information about the Latvian financial system. Please note that this may constitute a crime under Latvian law. In order to prevent the spreading of false rumours regarding the Latvian financial system the Latvian Security Police has also opened a telephone hot line so that false rumour spreaders can be reported and tracked down.
He then cited some rigmarole in Latvian which he invited me to use a Google translator to understand. I replied as follows:
Well I don't know what the Latvian law says, and quite frankly I don't especially care. You stopped having a dictatorial system when the old Soviet Union broke up, and there is a UNIVERSAL right to express an OPINION under any concept of democracy I know.
Actually the extract you cite comes from an analyst from Bank of America, and it is an opinion and not a fact. As far as I know he has no priviledged information, but if you have any doubts better you contact him direct.
My OPINION is also that the peg is impossible to hold in the longer term (ie it needs to be corrected before euro entry, for the reasons I explain), and logically since there is then a further delay in entering the euro after the devaluation it is better to do it sooner rather than later.
This is my opinion as a mecro economist and specialist in the Latvian economy, if expressing this opinion is illegal in Latvia, then really I don't know what Latvia is doing in the EU, let alone thinking about euro membership. For tyhis kind of thing you'd be better off with Putin and Medvedev. Open economies don't work that way, or didn't you notice, 22 world leaders just met to affirm that the best way out of the present financial crisis is to have the maximum TRANSPARENCY possible.
As I say above, this is all a very delicate issue, and university lecturer Dmitrijs Smirnovs was undoubtedly ill-advised to use the specific wording he did, not because he committed any known offence, but simply becuase he could have provoked a run on the banks, and this would only make the matter worse. On the other hand - and assuming they do have to devalue - it is a very unfortunate state of affairs that all those who actually know and understand what is happening have already changed their money over, while "ordinary Latvians" (like those in Smirnovs' audience) who have no idea what is happening, but (ill-advisedly perhaps) like to trust their leaders will simply lose a significant part of their savings.
Better never to have come to this point, but then, saying that doesn't help very much, does it?
Back in August 2007 I was asked the following question by a reader of my Latvian blog:
I want to thank you for your continuing efforts to explain what is happening in the Baltics in general and Latvia in particular. I live in Latvia and will be heading to the bank tomorrow to move our family's savings out of Lats and into Euros while the peg is still intact. (Or is there a better idea?).
To which I diplomatically replied as follows:
I wish I could be the bearer of better tidings. I think history has been so unkind to all the peoples of Eastern Europe, they really do seem to be entitled to be dealt a kinder set of cards than the ones they actually have. Really, I think you will appreciate that, even if I could hardly claim to be widely read on this blog, I do want to be responsible, and thus am unlikely to say anything which I feel could be in any way damaging to the Latvian outlook.
However, if you ask me this question:
"Or is there a better idea?"
Then I have to say that I personally can't think of one. For the rest, at this point, you will have to read between the lines I'm afraid.
I will try, when I find the time, to treat the currency peg issue in a somewhat theoretical fashion, but I fear it is reality itself which will put it back on our collective agendas in a much more practical one. I simply don't see how you can have the level of cost inflation (and the wage increases have still to feed through to producer prices and the end customers over many months) and still hope to sell exports. And if you are going to cut domestic demand, which is what they are doing, then selling exports is the only effective way to live.
Basically, as the observant reader will note, my core discourse has not changed very much over the last 18 months or so, nor will it - Latvian State Police or no Latvian State Police.
Will They Be Investigating The EU Commission?
One of the very sad and ironic aspects of the present case is that the Latvian government is currently, as I indicate at the start of this post, in discussions with both the EU Commission and the IMF about the future of the Latvian economy, and I think it is hardly a closely kept secret that both these institutions favour a floating currency, and thus logically a "flexibilising" of the Lat peg as a way forward out of the present crisis,
The European Union was really as explicit as it could be at the end of last week when it make clear that it is more than ready to provide financial assistance to Latvia, but that any aid will be conditioned on a programme to underpin balance-of-payments stability. And what could bring more stability to the Latvian balance of payments (ie induce more exports and suck in less imports), well evidently a change in the relative values of the Lat and the Euro - really at this point there are no other alternatives.
The EU, in their statement said they were "in close consultations" with Latvian authorities, and with the International Monetary Fund in order to develop a joint response to what were described as the "growing tensions'' in Latvia's financial markets.
``The EU stands ready to participate in a coordinated financing package with the IMF conditional upon a strong commitment by the Latvian authorities to implement a rigorous and credible adjustment program in order to underpin balance-of- payments sustainability in Latvia".
The statement did not specify when the aid would be granted or the amount involved. As regards the Latvian extenal position, the chart below of the current account deficit says it all. There is a whopping imbalance, and even though the deficit will be less this year, this is largely due to a collapse in imports as domestic demand has collapsed, and the need to export competitively issue still remains to get to grips with.
Sunday, November 23, 2008
Repsol, Lukoil and Sacyr Vallhermosa Also Try Their Hand At Happy Families
“Happy families are all alike; every unhappy family is unhappy in its own way”
Well this is an interesting little fable of modern family life, even if all the families involved may not be ones which many of my readers would normally wish to belong to.
As is now reasonably well know Russian private oil company Lukoil is currently making a bid for the shares in Spanish energy company Repsol which are owned by the deeply indebted Spanish property company Sacyr Vallhermosa.
Shares in what is Spain's fifth biggest builder, and which currently occupies the somewhat ignominious position of being Spain's worst-performing stock this year, jumped the most in two years last Thursday (20 November) on reports they were about to sell their 20 percent stake in Repsol YPF to the Russian oil company OAO Lukoil. Sacyr, which said last week it was in talks over the possible sale of the stake, rose as much as 14 percent after EFE newswire identified Lukoil as a possible bidder. Lukoil is also reportedly willing to buy a further 9% of Respol stock owned by Criteria Caixacorp, the investment company established by Catalan savings bank La Caixa.
In fact Sacyr spent 6.5 billion euros building up their the Repsol holding, between October and December 2006, paying an average of 26.71 euros a share for the stake. It is estimated that the proposed sale of the shares may fetch 20 percent to 30 percent more than their current market value of 4.9 billion euros. To give an idea of what this means, we might bear in mind that Repsol shares closed in Madrid on Thursday at 13.61 euros, and rose 2.3% on Friday, while the Spanish newspaper El Economista reported that Lukoil was offering Criteria and the other shareholders 28 euros a share for the combined stake which constitues just under 30 percent of Repsol. An offer at this price would value the combined stake at about 10.2 billion euros, and would mean that Sacyr would walk away covering their initial investment almost completely, which in these hard times must seem almost incredible. I mean, you might like to ask yourself just why it is that Lukoil is able and willing to pay so much. Certainly Russian investors were asking just this very question since Lukoil shares dropped on the news - falling 4.6 percent to 778.74 rubles on the Micex stock exchange in Moscow on Friday (for my explanation of the apparent analogy more on this topic below).
But before going further there is perhaps one other little detail which is worth including at this point, and that is that since the combined stake of Sacyr and Criteria falls just short of the 30% mark which would give Lukoil effective control of the energy company (and make it obligatory to make a takeover offer to the other shareholders I think) it should not surprise us to find that the midewives of the deal are busy trying to identify those extra few shares which would push Lukoil over the 30% stake mark, and various names are being bandied around - like Mutua Madrileña (who have a two percent stake) or even La Caixa itself, since they effectively control another 6.1% of Repsol through their subsidiary company Repinves.
It's The Income Balance That Matters, Silly!
Now before we go into all the gory little details as to why exactly it is that Sacyr Vallehermosa find themselves so pressed to sell, perhaps a little of the background macroeconomics would not go amiss here.
Basically, as I explain in more detail in this post, the principal problem facing Spain's economy at the present time is financing the large external deficit, which has been running at around 8-9,000 million euros a month (8 to 9 billion in anglo saxon language, or around 10% of GDP) for most of this year. This deficit was previously financed by an inflow of mortgage funding when external investors were willing to supply this, but since these investors became increasingly nervous following the US sub prime turmoil in August 2007, Spanish banks have had problems funding the deficit (and funding mortgages) as we have been seeing via the dramatic slowdown in the Spanish economy that this reluctance to lend has produced.
The principal way to resolve this external deficit is to have a major macroeconomic correction such that exports start once more to be larger than imports, but this process is a huge and painful one, and it is not surprising that the patient, lead by the country's government, and the prime minister, is extremely reluctant to enter the operating theatre. So we struggle on, month by month, but the monthly deficit still has to be paid. And this is where the sale of Repsol to Lukoil comes in. The issue is not that Lukoil being a non-Spanish company is a disadvantage (which is why the sort of criticism of the proposed deal which is coming from the PP is also completely out of touch with reality), but rather that it is absolutely essential to find an external buyer to raise more liquidity for the Spanish banking system, and if no other bidder is in a position to pay Sacyr what they need to make the sale viable for them, then Lukoil it is, "por las buenas o por las malas", as they say in Spanish. When you are up against the wall, and the only question is "do I shoot you today or tomorrow", the answers you give are not always coherent and well-thought-out ones.
However, just how dangerous trying to handle the Spanish problem in this way actually is, can be seen from the fact that one of the country's flagship companies is effectively being sold off for less than two monthly installments on the current account deficit (the August deficit was 6 billion euros). The problem really is that Sacyr has to sell (see more details below) but there is no ship left among what used to be called the "new Spanish armada" who still has the creditworthiness needed to be able to buy. Gas Natural (who were one of the last stalwarts) had their Long-term Issuer Default rating of 'A' and Short-term IDR of 'F1' placed on Rating Watch Negative by Fitch last July after they announced they would need a new 19 billion euro syndicated loan to finance their acquisition of a sizeable chunk of energy company Fenosa from another debt laden Spanish construction giant ACS.
Essentially going about things in this way eventually becomes totally unsustainable. Let me explain a little more. It is important to understand that the external accounts of a country are divided into two parts - a current account and a financial account - rather like the finances of a houshold can be divided into long term and a short term components like the acquisition of a property and the monthly mortgage installments which finance it. Well basically the structure of national financing isn't that different. Spain Incorporated can raise funds on the capital account by selling the shares of Repsol to an external purchaser, but we should never forget that these shares will then pay dividends, and these dividends will subsequently show up on the current account under the monthly income balance heading.
Now normally, in a developed economy, the income balance should hover around the neutral zone, as external investments attract income, while FDI etc from abroad carry associated outflows. Indeed I would say that the normal difference between a developed and a developing economy is in the underlying dynamics of the income section of the current account.
It is precisely when we come to examine this aspect of the Spanish case that we see the extent of the hole that has just been blown in the flagship's main bulkhead, since the income balance (which was never perfect) has been turning steadily negative (which was only to be expected with all those loans coming in) since the early years of this century, and now runs at a monthly outflow of 3 billion euros, or thereabouts. That is to say, the first 3 billion of any goods and services surplus which Spain eventually does manage to generate will be earmarked to pay interest and dividends on loans and shares previously sold to finance the property and merger boom. So roll your sleeves up lads and lasses, since there is a lot of sweating to be done to work off all this accumulated excess fat. Or maybe you would prefer to try liposuction?
And of course, the more we go down the road of selling off the country's underlying assets (and, of course there is plenty more to come here, see below on Acciona, Endesa and Enel, or think of the recent agreement to sell Iberia to British Airways due to Caja Madrid's urgent need for liquidity - Caja Madrid is Iberia's largest single shareholder) to pay for petrol for all the SUVs we have been buying with the loans we sold, the worse the long term position becomes.
Sacyr In Danger Of Having To Make Firesales
Rumours have been growing in investor circles of late that Sacyr Vallehermoso could be in such a tight financialcorner that it may forced into fire sales as time passes, if it fails to find buyers for assets it has put on offer to try to cover the massive debts it has hanging over it. Sacyr's share price has lost 69 percent of its value since the beginning of the year - as compared to a 39-percent slump in Spain's main IBEX stock index.
Like many Spanish builders, Sacyr borrowed heavily during the final years of the boom in an attempt to diversify out of residential property as the nine-year-long domestic housing boom clearly started to wind down. But as in so many other cases, those who buy near the end of a wave buy dear, and risk, if things don't go right, having to sell cheap, very cheap, unless of course a gleaming white knight in shining armour like Lukoil gallantly comes to your rescue (or is it so gallant, see below). Sacyr had net debt of 18.3 billion euros at end-June, or eight times market value. The ratio of net debt to net equity was 5.3, outweighing peers like Ferrovial at 3.9 and ACS at 1.2.
Sacyr thus announced on September 12 that it was putting assets up for sale, including its toll road unit Itinere and the 20 percent stake it has in Repsol YPF, all part of a major effort to pay down some of the debts. However, outside Lukoil no firm expressions of interest have materialized, and analysts are suggesting that this is because the prices being asked are far too high, as evidently it is hard to get good prices for assets in a bear market accompanied by a credit crunch. But this raises of course, the not simply incidental issue of why exactly it is that Lukoil is willing to pay so much over the going market rate, but we will get to that part later.
Sacyr did have around 347 million euros of debt maturing in the second half of 2008, but they have so far managed to refinance this, although there are somewhere in the region of another 2 billion euros worth set to expire in 2009, and worries about the difficulties which are likely to be associated with this process during the deep recession which Spain is now entering are putting a lot of pressure on the company.
Sacyr has been attempting to cover next year's debt haemorrage using a mixture of renegotiation, housing sales, dividend payments and the possible sale strategic assets, like its road toll unit Itinere. Citi infrastructure fund had been reported to be showing some interest in a possible purchase of Itinere, but there has been no concrete evidence of progress.
Press reports and analysts say the asking price for Itinere is in the region of 3.9 billion euros plus debt, and this sum is 400 million euros greater than the value of Itinere's failed initial public offering last April. Analysts tend to be rather dismissive of this kind of approach in the present climate.
"They were unable to do an IPO at 3.5 billion euros and four months later they
want to sell it for 3.9 billion? It's a joke," said an analyst at a major bank
who asked not to be named.
Apart from the asking price there are also clauses in existing Itinere loans that require a renegotiation of terms if it changes ownership, which also are reported to present a stumbling block to any Citi-type deal.
But the main problem which Sacyr faces right now is the current performance of Repsol itself, since the 5.1 billion euro bank loan which partially funded their purchase of the Repsol stake was guaranteed with Repsol shares, and on a margin trade basis. So when Repsol's share price falls, Sacyr must stump up more guarantees, putting further strains on the group's liquidity. And, of course, Repsol shares have been having a very hard time of it recently, evening fell by as much as 20 percent in a single day on October 22 over concerns about the energy company's exposure to Argentina, which is itself getting into ever deeper water with the international investment community: a further Argentine default would be the last thing that Repsol (and naturally Sacyr) need right now. Subsequently Repsol stock has regained some of the lost ground (and is now trading at around 15 euros) but this is still a far cry from the 26.7 euros a share Sacyr paid in 2006.
Sacyr has so far pledged 40 percent of its rental property business Testa as additional collateral for debt taken out to buy the Repsol stake, and Goldman Sachs in a recent note suggest that as long as Repsol's share price remains above 12.9 euros per share, Testa will cover the collateral under current terms, but in Sacyr's present state that is a very wobbly if. And if Testa shares become no longer sufficient, then Sacyr will have to reconvene with banks to discuss alternative collateral, and this they need like a hole in the head, hence all the haste and attention being lauded on the Lukoil suitor.
Analysts are agreed the longer it takes to sell assets to shore up its balance sheet, the more worrying Sacyr's borrowing levels will become and the greater the risk of fire sales.
Spain's leading water company Aigues de Barcelona (Agbar) has also expressed an interest in the water division of Valoriza part of Sacyr's environemntal division. Valoriza is valued at around 1 billion euros. Agbar and Sacyr do not seem to be in actual talks at the present time, since the sum involved is insufficient to materially change the main problem, and Sacyr is more focused on Itinere and its Repsol stake. The Spanish newspaper Expansion reported that the sale process of Valoriza is being handled by Italy's Mediobanca and that as well as Agbar interest has been shown by Veolia which is a former partner of another Spanish builder - FCC - and operates in the environmental services business in Spain.
Any eventual sale of these units would not be the first such move by Sacyr to keep moving ahead by selling assets, since back in April Sacyr sold its stake in French builder Eiffage, following a bungled takeover bid, and in the process cutting its borrowing by 6 percent.
Sacyr representatives also recently met with lenders on its Repsol loan - who are lead by Banco Santander - to discuss the collateral clauses in their agreement. In principle under the original terms of the loan up until December 21 Sacyr have to put up collateral equal to at least 105 percent of the total loan, after that date this figue increases to 115 percent. In addition the interest rate on the loan rises to 1.10 percentage points more than euribor benchmark rates from the present 1 percentage point after the same date, and this is another reason why Sacyr would like to see their Repsol stake turned into history before xmas.
The company has already pledged the maximum amount, 1.275 billion euros, of shares from its property unit Testa Inmuebles en Renta SA allowed under the terms of the loan. Sacyr began using Testa stock in January after Repsol, whose shares were initially assigned as collateral, declined below the 20 euro a share watermark, according to a regulatory filing Sacyr made on January 23 2008. Repsol fell to 12.92 euros on Oct. 28, the lowest in more than five years, and are down 40 percent over the past year. Sacyr has fallen 71 percent this year, the largest fall of any of the 35 most-traded stocks included in Spain's IBEX Index.
So What About Lukoil, Why Should They Be So Interested In Repsol?
On the face of it the justification for Lukoil's interest in Repsol is not as self-evident as it at first appears, but then little in modern Russia ever is.
Lukoil has itself been struggling from a liquidity crunch back home in recent months, as the price of oil has dropped and lack of investment by the Russian oil majors means that field depletion is leading to ever lower levels of domestic output. Indeed the price of Urals crude, which is Russia's principal export blend, was down 68 percent from the July peak last week, hitting the "bargain basement" level of $44.80 a barrel.
Lukoil, which already owns refineries in Bulgaria and Romania, agreed in June to pay 1.35 billion euros to buy into an Italian refinery with partner ERG SpA. Lukoil, which has $1.9 billion in debt and loans scheduled to mature this year (although obligations will drop to $609 million in 2009 and $525 million in 2010) had only $1.66 billion in available cash at the end of June. So what is going on here?
Well, as I have said, Russia is facing its own credit crunch and construction slump, and as a result Vladimir Putin did recently introduce his own $180 billion dollar bank-bailout and loan guarantee scheme. Could it be that Lukoil want, in some shape and form or another, to take advantage of this potential funding to acquire the Repsol stake? Well, there are reasons for imagining that there might be a very strong incentive we haven't yet touched on for them to do just this. The principal reason among such reasons (or the bitter and compelling inner logic of the issue) was basically put under the spotlight by the recent announcement (and large gaffe) made by central bank Chairman Sergey Ignatief when he said that Russia's currency (aka the ruble) had a "certain tendency toward weakening'' . Since the ruble normally trades in a tighly controlled trading band this widely interpreted as meaning that the ruble is about to be devalued, and while estimates of the extent of the devaluation vary, something in the 15% to 20% range would be a good guess, I think.
Viewed in this light, a loan of some 6 or 7 billion euros (denominated in rubles) under the Putin bank bailout and credit guarantee scheme wouldn't look to be too bad a proposition, especially if it was subsequently to be repaid in rubles following a substantial devaluation. (I mean I don't think I will get here into any rather Machiavellian type of speculation about how a hypothetical demand for 7 billion euros from the central bank foreign exchange reserves - which are of course under considerable pressure right now - would effectively constitute a very large "devaluation put", and offer us all the hallmarks of being a self-fulling declaration of intent). And don't start imagining that such an idea is very far fetched, since IMF Managing Director Michel Camdessus effectively had to resign at the end of the 1990s following continuing scandals about IMF support loans being diverted into currency speculation. And that such activity is not entirely dead in today's Russia was confirmed by last week's threat by First Deputy Prime Minister Igor Shuvalov that Russian banks who convert government aid into foreign currency rather than lending to troubled companies would risk losing access to state funding .
Obviously, in addition to any incidental gains they may make in the forex markets, Lukoil would also gain access to Repsol's extensive refining capacity - 1.23 million barrels a day according to their website - which includes five refineries in Spain, three in Argentina and one in Peru. Repsol also has holdings in another refinery in Argentina and two more in Brazil. And indeed the deal has a certain logic from the Repsol point of view, since the tie-in with Lukoil would give access to Russian supplies while the company currently relies on South America for about 95 percent of its present oil reserves. But then, as is normally the case, nothing in life ever comes free, and in this case the strings attached are important ones, very important ones.
Spain's Builders Up To Their Eyes In Debts
Obviously Sacyr is far from being alone in its current "tight fix". Acciona SA, is another Spanish builder struggling under the weight of a growing mountain of debt. Acciona came to international prominence when it bought joint control of power company Endesa SA last year together with Italy's Enel SpA. Well, the Madrid-based builder said July 30 that first-half net income fell 15 percent to 314 million euros as the takeover had increased debt costs, with Acciona net debt rising to 17 billion euros in Q2, up from 10 billion euros a year earlier. Acciona has recently stated it is in talks with creditors in an attempt to refinance the debt it contracted to make the purchase of the Endesa stake, but strongly denied that it has already committed to selling the stake in 2010. This denial followed a report on Spanish financial website El Confidencial that Acciona has assured its creditors that it will exercise an option it has to sell the 25 percent stake in Endesa to Italian partner Enel in 2010.
Despite the denial the decision to sell would be a logical one, and appears as if it may well form part of an agreement Acciona have reached with a group of banks lead by Banco Santander not to link Endesa's share price to the collateral required for the 7.1 billion euro in loans it received for the stake buy, as previously agreed. The 2 loans were due to have expired on 31 December 2012, but Acciona was obviously anxious to get the conditions changed.
"Acciona has not committed to exercising the March 27, 2010 put option but that
does not mean that the company will not exercise it on that date or at a later
date," the Spanish builder said in a statement to the stock market regulator.
Under the previous contract Acciona needed to give additional guarantees in the case that Endesa stock fell below 25 euro per share and this had been the case since October 6. Such guarantees -or margin calls - disappeared under the new contract. In exchange the new contract increased interest rates on the entire sum of the debt - doubling the premium when compared with the previous rate of 60 basis points over Euribor. Thus we find ourselves in exactly the same position vis-a-vis margin calls as Sacyr has with Repsol. The 21 syndicated banks behind the principal Acciona loan include Santander, ING, La Caixa, RBS, Caja Madrid, Calyon and Natixis, and the loan effectively financed the original 25 percent stake that Acciona took in Endesa following a 42.5 billion euro bidding contest in alliance with Italy's Enel which currently owns some 70 percent of Endesa. At the time Enel and Acciona came out in front of competing bids from Germany's E.ON EONG.DE and Catalonia-based Gas Natural.
Back in July the Italian newspaper Corriere della Sera reported that Enel was in talks to buy out Acciona for 10 billion euros, adding the point that any such deal would needs the approval of Spanish prime minister Jose Luis Zapatero - so Zpt is going to be busy, since he has already flown to St Petersburg. Corriere also suggested that Endesa's development was currently being paralysed by an ongoing dispute between the two principal shareholders. The paper stated that there was an urgent need to find a solution to overcome the repeated obstacles raised over Endesa board decisions by Jose Manuel Entrecanales, who is chairman of both Acciona and Endesa. Enel has plans to expand Endesa outside of Spain, while Acciona is simply looking to sell its stake to pay down some of its 18 billion euros of debt, according to the paper.
Valuation of Acciona's stake in Endesa depends on valuation of Endesa's wind power generating plants, which Acciona would like to acquire. Any finally agreed exit price for Acciona would also need to take account of the put option it holds to sell the Endesa stake by October 2010 to Enel at a price of 10 billion to 12 billion euros.
Meantime another Spanish building dynosaur - Ferrovial - labours on with its heroic attempt to try to sell its Stanstead airport holding in the UK - but at least in this case the asset being disposed of does not form part of Spanish national patrimony. The Spanish builder that spent $20 billion buying the British Airports Authority is taking longer than anticipated to sell London's Gatwick airport because of the global financial crisis, according to its Chief Financial Officer Nicolas Villen.
``It's difficult to say where we are in this crisis,'' Villen said in an
interview in New York late on Nov. 14. ``In this financial crisis it will always
be more difficult for potential bidders of this asset to obtain financing. So I
think it's going to be a lengthier process than usual.''
BAA currently provides poor service and has failed to plan for extra capacity, according to a recent report from the U.K. Competition Commission, adding a recommendation that the company be stripped of the capital's Gatwick and Stansted airports and either Glasgow or Edinburgh in Scotland. Both Heathrow and Gatwick had a drop in traffic of about 0.5 percent in the first nine months of the year, described by Villen as a "moderate decline" when compared with earlier economic crises, when traffic fell by 3 percent or more.
Ferrovial had a third- quarter loss of 17 million euros, which compared with a year earlier profit of 49.6 million euros. The company's total debt fell 5.4 percent from a year earlier to 28.6 billion euros in September.
Fomento de Construcciones y Contratas (or FCC) - Spain's third largest builder - on the other hand had net debt of 8.51 billion euros at the end of the first quarter, 54 percent more than a year earlier, and up from 7.97 billion at the end of 2007.
And It's The Same Picture Among Property Developers
Spanish property group Tremon last week became the first major property developer to follow in the footsteps of Martinsa Fadesa, and file for administration after failing to meet debt payments, causing a fall in the shares of those banks which have total exposure of around 1 billion euros to the company. Tremon is thus the second large Spanish property group to seek
administration this year following the July decision of Martinsa Fadesa. Among Tremon's biggest creditors are Banco Popular, which has an exposure of around 200 million euros exposure, unlisted savings bank Bancaja with 100 million and Banco Pastor which has 95 million.
"Our debt is up to 1 billion euros, and more than 90 percent is held by a
pool of 16 banks. Administration was filed last thing on Friday," said
lawyer Angel Romero, who is acting as Tremon's spokesman.
Other Spanish property companies with large debts are Metrovacesa (6.991 billion euros), Colonial (10.086 billion euros) Realia (2.26 billion euros) and Reyal Urbis (4.672 billion euros)
Spanish property firm Metrovacesa recently stated they expect to meet the terms of a 3.2 billion euro syndicated loan by the end of the year. At the end of September, Metrovacesa's core earnings were 2.13 times its financial costs, below the minimum limit of 2.25 times the company is obliged by creditors to meet by the end of 2008. Among other conditions attached to Metrovacesa's 3.2 billion euro loan is that the company maintain its 6.9 billion euros of debt at no more than 55 percent of asset value. The company said its debt stood at 54.4 percent of assets on Sept. 30 when it published its third-quarter results. If Metrovacesa does not comply with the conditions of the syndicated loan, the banking syndicate can order its immediate repayment and order the company to talk to its creditors.
Spanish stock market regulator CNMV last week requested Metrovacesa to provide it with details on where it stands with repaying the syndicated loan, as well as with refinancing 810 million pounds worth of borrowing with HSBC, the money was used to buy the bank's London offices. Metrovacesa stated in reply that the company was still in talks with several financial entities over refinancing the HSBC debt, which falls due at the end of November, but had yet to reach a deal.
Real estate company Reyal Urbis also recently reached a deal with creditors to refinance debt of 3.006 billion euros. In a statement to the Madrid stock exchange regulator, Real Urbis stated it had obtained two new credit lines which gave it "the necessary liquidity for its operative management". The new deal refinances two syndicated loans signed in 2005 and 2006 in addition to other loans and debt issues. Under the new financing terms, the company has been able to postpone the next payment on its debt until October 2011 and signed up to twice-yearly payments after that date until 2015. Thus it seems there is a tendency to postpone into the future - to 2011 at least - and then perhaps at that point a critical moment will be reached in all this, assuming that is that it doesn't come before, which if we look at the very dramatic state of the contraction in the Spanish economy is a possibility which certainly can't be excluded.
In 2015 - should we get that far - the company will then have to pay off the remaining 40 percent of the debt. One of Spain's largest developers, formed through the merger of Urbis and Reyal in 2007, Reyal Urbis said it had net debt of 5.5 billion euros when it reported its first-half results.
Another Spanish real estate company, Colonial, recently reported a nine-month net loss of 2.475 billion euros after taking charges for plunging asset values. The loss compared to a profit of 356.9 million euros for the same period last year. Group sales for the nine months to end-September dived 23.7 percent to 472.8 million euros, but still the "walking dead" real estate firm managed to put through a debt restructuring in September. Funding banks had previously taken partial control of Colonial earlier this year when some of its shareholders failed to meet obligations. Residential land sales fell by over a half in the fisrt nine months of 2008 and Colonial's net debt stood at 8.975 billion euros as of the end of September.
And As Spain's Government Sells Bonds......
Spain's government still effectively seems to be in denial about where all of this more or less inevitably leads, and is still trying to keep alive the ailing builders and property developers on an emergency life support ("reanimator") system by selling government debt to guarantee the ever more risky private variant. Thus last Thursday (20 November) the (previously-postposed) first special "reverse auction" was held and the Spanish government bought 2.115 billion euros of bank assets out of a maximum possible of 5 billion euros. Spain's Economy Ministry said a total of 4.562 billion euros of assets had been offered. Spain's Fund for Acquiring Financial Assets (FAAF) held the reverse repo auction for investment grade, 2 year asset-backed-debt issued after Aug 1 2007. It plans to purchase up to a further 5 billion in 3-year mortgage-backed debt in December.
The government has said it plans to buy up to 50 billion euros in bank assets in 2008 and 2009 to provide a market for longer-term bank debt which institutions cannot sell to investors or the European Central Bank. The head of the State Credit Institute (ICO) Aurelio Martinez argued after the auction that some banks may have felt inhibited from participating due to fear of being stigmatised. FAAF received 70 bids worth 4.56 billion euros from 28 banks. Of those, 51 bids from 23 different banks were accepted, the rest were rejected after failing to meet criteria ranging from their size and interest rate to the participation of the bank in lending markets. Questions are being raised by analysts about the effectiveness of the fund given the limits on how much banks can sell, the stigma attached to sales, and the comparative ease of borrowing more anonymously from the European Central Bank.
The other side of this particular coin is however the little question of just how all this bank funding is going to be paid for. To some extent this became clearer this week since the day before the auctions the Spanish government previously paid its first visit to debt markets for funds in connection with the programme, and the first programme-specific auction was duly held on Wednesday 19th November. Remarkably the sale generated quite strong demand and even revealed comparatively stable spreads. Indeed demand was such that the Spanish treasury was able to issue 200,000 euros more in debt than initially anticipated in the special 4.4 billion euro sale to cover bank asset acquisitions.
That outcome is especially surprising as it compared with a disappointing demand in a sale of new 10-year German bunds held the same day, and which met fewer bids than the sum issued. Amazingly even the spreads remained stable. Investor appetite may be cautious in view of the high levels of uncertainty surrounding sovereign issues and debt levels over the next few years, and may be showing a preference over debt with a somewhat shorter maturity horizon. Anecdotal evidence (as encountered by the author of the present post) also suggests that many Spanish people may be seeing treasuries as a "safe haven" against a banking system where lack of reliable information makes them nervous about using deposit accounts.
Spain has said it plans to issue issue up to the full 50 billion euros earmarked for this kind of bank support in public debt (thus raising around 5% of GDP in new debt) over the next two years. Spain's deepening economic problems has caused the spread between 10-year Spanish bonds and the benchmark German bund to widen to 60 basis points in October from 8 bps a year earlier.
The much smaller yield differential on shorter term debt was reflected in a yield of 2.7 percent on the Spanish two-year debt sold on Wednesday which compared favourably with a rate of 2.71 percent in the secondary market the previous day. This paper traded in a band of 2.503/687 on Thursday in the secondary market and its spread against comparative German debt remained steady at 25 basis points.
Spain is to hold further auctions December and January to sell bonds and bills. Of course it is not clear who exactly is buying this paper. If it is the Spanish themselves then it will be of little avail (as per the above external financing argument), but Industry Minister Miguel Sebastian did tell Reuters on October 20 that Spain was appealing to Arab sovereign wealth funds to buy the bonds. With what success we have no idea.
........The Government Deficit Rises Sharply
As a result of all this selling Spain's budget numbers are deteriorating fast and could hit the EU 3 percent fiscal deficit limit as early as by the end of this year, according to a statement from central bank governor Miguel Angel Fernandez Ordoñez before the Spanish Senate last week. The limit itself is only a technicality at this point in time, but it is astonishing to learn that in the space of less than one year Spain will have gone from a budget surplus equal to 2 percent of GDP to a deficit of 3 percent. This is a shift of 5 percentage points in a year, and of course, if this continues into 2009 and 2010, then the debt to GDP levels will start to shoot up rapidly.
Fernandez Ordoñez may well not tell you (as I say here) the whole truth, but he normally does tell you the truth and nothing but the truth, andn he is thus fast becoming one of the main sources of reliable information in what is now a worm-infested Spanish communications system (just as another piece of anecdotal evidence here, I was to have travelled to the Basque Country tomorrow to appear on a regional TV programme about the merger between local cajas Kutxa and BBK, but the programme was cancelled - for the second time now - for the simple reason that the production team could find absolutely no one apart from me who was willing to talk in front of the cameras about this kind of topic. Thus hundred of Tertulias, thousands of empty words, and little in the way of cool clear light on the subject. The wheels of metaphysics turn round and round, but I see no motion in the drive shaft...). Anyway, Fernandez Ordoñez has been quick to pick up on the fact that the government's present forecast of 1 percent growth next year — unveiled just weeks ago in the 2009 budget — is already well out of date and the budget provisions need to be revised accordingly, and on the basis of much more realistic economic forecasts. If they don't start to do this, then the spreads will inevitably only start to rise further and faster as investors get more and more paniky about the actual underlying debt dynamics in the absence of any kind of realistic information.
"We must make a downward revision of prospects for economic growth in the next
few quarters," Fernandez Ordoñez said.
I think everyone now accepts what Prime Minister Jose Luis Rodriguez Zapatero explicitly said last Thursday: namely that Spain will inevitably exceed the European Union budget deficit limit as it tries to spend its way out of recession. EU budget rules specifically allow for countries to breach the deficit limit of 3 percent during exceptional circumstances, and Zapatero rightly said such conditions existed in Spain, where the economic contraction is about to become much sharper than elsewhere in Europe.
Of course, Zapatero is right here, Spain does need to use its fiscal leverage - Spain's debt to GDP ratio was around 20 percentage points below the EU average at the start of 2008 - to address the probelms. But just one more time Bank of Spain Governor Miguel Angel Fernandez Ordonez is also right in urging Zapatero to show some sort of fiscal prudence and hold back some public funds in case (I would say for when) conditions get even worse. Ordonez is explicitly expressing his fears that a focus on short-term, emergency measures, without a total restructuring plan, may rule out deeper structural labour and service market overhaulswhich will be needed in the future to raise competitiveness and promote long-term growth.
"Whether it (the deficit) goes to 3.5 or 4 or 4.2, we will have to wait to seehow the economy develops," Zapatero said during a press conference. "The Spanish government is not going to resign itself to recession, we're going to try to grow and provide jobs,' he said. "We're going to use the public deficit to keep social promises"
I will be even more explict. As I have argued here, and in numerous other posts, the present Spanish depression is being caused by deep-seated structural problems, and not by transitory cyclical ones. Thus, using fiscal policy as if this was simply a classical problem of the business cycle is a big mistake, on my view, and is needlessly using up vital ammunition which will be badly needed to take us through the battlefields which lie ahead.
We are now facing an economic slump of unprecendented proportions in Spain, and more than likely an ongoing problem of outright price deflation. To fight this combination using the traditional fiscal and monetary policy tools simply will not work - they are likely trying to drain an ocean with a teaspoon. We need new tools, fresh thinking, and a complete change of course. And the sooner we get them the better.
Well, this has been a very lengthy post. If anyone else has actually arrived this far, I can simply thank you for your patience and your perseverence. You are undoubtedly the kind of enduring person the new Spain is going to badly need. I hope you have learnt as much in reading this as I have learnt in the doing the background research which was necessary for writing it.
Saturday, November 22, 2008
Exports Drop Sharply As Japan Officially Enters Recession
The Japanese cabinet officially recognised this week that Japan's economy has entered its first recession since 2001, following a second quarterly contraction in Q3 2008. Claus Vistesen has already analysed (in this post) the key issues which lie behind the present recession data, and has also, in this post today, attempted to place Japan's renewed deflation alert in a somewhat broader context. Thus I will limit myself here to looking at the basic GDP data, and the export developments which accompany it.
The Recession Becomes Official
Japan's gross domestic product shrank by an annualised 0.4 per cent in the three months to the end of September, following a revised decline of an annualised 3.7 per cent in the second quarter, according to data released by the cabinet office on Monday. It is quite possible that we will now see a third consecutive quarter of contraction in the October - December period, especially if October's export performance (see below) is anything to go by.
Quarter-on-quarter, Japan's economy shrank 0.1 percent, lead by a 1.7 percent drop in capital spending. In fact, as can be seen in the chart below, Japanese investment has now been dropping back steadily since the third quarter of 2007.
Net exports also weighed on growth - subtracting 0.2 percentage point from growth after imports outweighed an increase in shipments abroad. Exports were up 0.7 percent, while imports climbed 1.9 percent as oil surged to a record in July. Consumer spending, on the other hand, increased by 0.3 percent, a much better showing than the one achieved in the second quarter, when consumption declined a quarterly 0.6%. Year on year, household consumption dropped back from 1.7% growth in the first quarter to 0.4% in the second quarter and 0.3% in the third one.
The rapid decline in the Japanese economy’s fortunes has pushed the government of prime minister Taro Aso into introducing a Y5,000bn ($51bn, €40bn) stimulus package, despite the mounting debt of the Japanese government, while the Bank of Japan has been forced to desist for the time being from its monetary "normalisation" programme, and has but the monetary vehicle in reverse gear by once more cutting interest rates -on this occassion for the first time in seven years. The cut - which was by 20 basis points - took BoJ interest rates to 0.30 per cent, meaning that during the longest economic expansion in recent Japanese history the bank was only able to raise rates by 0.5% during the upswing, and we now eagerly await to see what it will be capable of during the downcycle.
In any event neither the fiscal stimulus nor the monetary easing are likely to be of great impact since Japan's economy is export driven and it is the downturn in demand in the US , Europe, China, Russia and elsewhere, and the consequent battering of Japanese exports, which has lead to the recent strong decline in investment and consumption.
Meanwhile the unwinding of the carry trade has pushed the yen up, and the currency has gained some 9.4 per cent vis a vis the dollar since the end of September (see six month chart below), only adding to the difficulties faced by Japanese exporters as their goods become more expensive for overseas buyers.
The Tokyo stock market has also fallen 44 per cent fall this year, depressing consumer sentiment, while bankruptcies in October hit a 2008 peak of 1,429, according to credit reference agency Tokyo Shoko Research.
And we should not imagine that the current recession is likely to be short lived one, since we are going to have to learn to live with the current problems for most of 2009 at least, an outlook which has also been endorsed by Japan's economy minister Kaoru Yosano, who warned last week that the next fiscal year (starting in April 2009) was likely to continue to register negative growth for the economy. "I can hardly be confident that it would be positive," he told a news conference.
Export Pressure Grinding Japan's Economy Down
And the present contraction only looks set to deteriorate in the fourth quarter with Japan posting a Y63.9bn trade deficit in October, reinforcing concerns that falling exports will push the country even deeper into recession. In fact Japan's exports declined at the fastest pace in almost seven years in October as sales of cars and electronics slumped. Exports fell by 7.7 percent from a year earlier, which was the biggest drop since December 2001, according to the Finance Ministry.
The monthly report showed just how the global financial crisis is hurting demand from emerging markets, which up to now have helped prop-up Japan's export growth as shipments to the U.S. and Europe have waned. Not surprisingly - since Europe is in recession - shipments there plunged an annual 17.2 percent, the largest drop since December 2001, while demand from the U.S. dropped 19 percent. But even exports to Asia were down (byan annual 4 percent) while shipments to China fell for the first time in three years.
We should, however, bear in mind, that these figures are to some extent influenced by the yen value of the export shipments, since euro and dollar denominated prices will have registered lower readings when converted back into yen, due to the sharp and sudden rise in the yen in mid October, which could hardly have been anticipated at the time of planning shipments. So yen fluctuations may make the October numbers look worse than they actually are in volume terms.
Imports, on the other hand, were up 7.4 percent on the year, and this produced the trade deficit of 63.9 billion yen ($666 million), the third shortfall so far this year.
Deflation A Large Problem That Once More Looms
Both the U.S. Federal Reserve and Bank of Japan officials now openly admit to being on active alert for the early signs of deflation, and both are actively grappling with the thorny problem of just how to continue to keep it at bay as interest rates steadily approach zero (well, truth be said, in the Japanese case they never moved too far away from it). There are growing signs that the Federal Reserve may have already resorted resorted to some form of quantitative easing - a procedure that relies more on massive liquidity injections into the banking system than it does on the more conventional key policy-rate-driven monetary tools.
But while Bank of Japan Governor Masaaki Shirakawa accepted that just such injections had helped stabilise (but not cure) Japan's decade long deflation problems, he declined to comment on whether or not it would currently be the best response to the economic downturn in Japan.
As Claus indicates in his accompanying post, central bankers who only few months ago were struggling to contain an inflation flare-up stoked by soaring commodity prices are now desperately trying to prevent the global market rout from degenerating into a cycle of falling prices and economic output. Consumer demand is falling sharply across most of the industrialized world and U.S. while consumer prices fell at a record pace in October.
The Fed and other central banks are already flooding the banking system with cash in an attempt to prod banks into lending to each other, but the funds supplied are still lent at a some sort of notional cost (however low). In Japan, during the period of quantitative easing from 2001 to 2006, banks received cash free (although during deflation since prices drop, the value of money paradoxically rises) in the hope that it would spur credit growth and consumption. But the Bank of Japan is being much more cautious at the moment about what the best policy to tackle deflation actually is, and for the moment are relying on interest rates being held at 0.3 percent.
Bank governor Shirakawa said on Friday that in his mind further rate cuts might do more harm than good by further disrupting markets. He was also pretty non-committal about a return to quantitative easing.
"The BOJ decided to implement quantitative easing in the past because it was appropriate to do so in light of economic developments at the time," he said. "As for what would be the best policy in the future, we will decide by examining economic and financial developments."When asked about the risk of falling prices, Shirakawa said: "Now that raw material costs are falling, a key factor to watch is whether that would cause a knock-on effect and push down overall prices." "We will closely watch the balance of domestic supply and demand and how people's price expectations develop".
However, with Japan's economy already in a recession and oil and commodity prices in sharp retreat, it looks very probable that core core consumer prices will start falling again either in December or early next year, at which point the Bank of Japan will have some serious thinking to do. In the meantime, as always, we watch and wait.
Some Random Thoughts On The Deflation Problem
Today it is precisely one month since yours truly first reported that he was starting to feel swamped. Well he still is, but even though your author is still struggling to meet the quantitative demands of neo-classical graduate economics (especially, the statistical vintage) he still thinks that now might be as good a time as ever to jump back into the saddle and practice some economic punditry. After all, this is something he, much unlike graduate econ math, is quite familiar with.Needless to say, it is difficult to know where to start but since I am only now returning from an extended pause it might a good idea to pick up one of the themes I laid out just before the anvil of quantitative science hit me. Consequently, one thing that I have been persistently noting in my ongoing analysis of the global economy has been the risk of deflation in key economies due to the dramatic decline in domestic demand and credit momentum.
Specifically, I have been warning that when it comes to the old economies of the world (measured by median age) the risk of a deflationary backdrop is particularly large. The argument here is really quite straight forward in terms of economic dynamics and basically hinges on the idea that relatively old economies do not have sufficiently dynamic internal demand conditions to prevent their economies from falling into deflation. Obviously, the risk of deflation can hardly be confined to these economies at this point and what we are facing now is a potential scenario of global deflation both in terms of core and headline prices as well as of course asset prices. At least I would say without sounding too doomist that this is now a real threat.
Deflation Coming to a CPI Near You?
A couple of months back I sketched my thoughts on the topic as I asked the simple question of whether deflation would be the next macro story. As the carnage in global finance continues and as the effect on the real economy is increasingly making itself felt I am sure most analysts and observers feel a bit shell shocked. I know that I do. Consider consequently the recent news that consumer prices in the US fell a whopping 1% on a monthly basis which more than suggests how the threat of deflation is mounting.
Of course, the monthly decline in consumer prices masks a healthy y-o-y growth rate of some 3.7% (2.2 in core prices) which does not exactly spell deflation in any sense of the word. However, the negative momentum must be considered here and in particular the fact that the global economy has gone from a situation of liquidity disruptions confined to the wholesale banking market, over to a severe credit crunch in terms of firms operational finance and on to what must now be considered a complete freeze of lending to all agents. On the back of the recent barage of execrable news from the US, JPMorgan rolls out the inevitable prediction that the Fed and Bernanke may even introduce some form of ZIRP to counter the recession.
And speaking of ZIRP we learned yesterday from Japan how exports sank the fastest pace in seven years which also prompted analysts from Barclays to suggest that Japan would return to deflation and that the BOJ would have to re-introduce ZIRP accordingly.
I don't know whether the good lads at Barclays had to dig deep to come up with this call; needless to say that deflation in Japan is now a foregone conclusion as we venture towards 2009 and the previous sharp dose of cost push inflation tapers off. At the BOJ, rates were kept at the odd 0.3% yesterday and while there may be an strong inclination not to cut rates to 0% for simple reasons of credibility I do think that they will have to bite the bullet as we move forward into this slump. In a general global context, I think it is important to recognise the massive negative shock we are seeing on demand conditions in those nations who have hitherto been living high on credit and since the credit channels are now firmly broken, so will those macroeconomic credit providers (read: exporters) also suffer .The epitomy of this must clearly be Japan but also Germany comes immediately to mind.
And now that I am talking about Europe, the deflation ghost is also here hovering like a dark shadow over the economic edifice. Of course, and as a hell of a lot more than the proverbial Rome is burning I am not sure what the ECB will do here? It is true that it seems that European policy are content with flexing their fiscal muscles while Trichet et al. remains in the ivory tower where the M3 presumably is still growing above target and where only a definitive drop in consumer prices below 2% would seem to allow the ECB, in a postmortem perspective, to really act along the lines of its other CB peers. At this point I will give the ECB the benefit of the doubt in the sense that we have indeed observed a real change of strategy, but given other CBs' response the ECB seems still, to be the odd man out.
That may change quickly though. The Spanish representation at the ECB roundtable certainly seems to be predicting a dire potential outcome which, given the state of things on the Iberian peninsula, it is difficult to second guess.
European Central Bank council member Miguel Angel Fernandez Ordonez forecast an ``enormous'' drop in euro-region inflation. Bank of Spain forecasts for the 15-nation euro area ``show an enormous moderation in price gains, but they do show price gains,'' Ordonez, who is also governor of the Spanish central bank, told reporters in Madrid today. The forecasts ``don't show deflation,'' he said.
As in the US we are far from an actual state of deflation, but given my argument as I laid it out (see link above) the negative momentum we are observing suggests that what comes next on the macroeconomic front may be quite "unexpected" as those ever incoming stream of Bloomberg headlines are so fond of noting. If we look at the evolution of data the interpretation is quite clear. As can be seen from the graphs below, the decrease in inflation is currently being produced solely as a function of declining headline inflation (this is the same picture as the one emanating from the US and Japan).
More generally, it is hard not to think back to the days when Trichet was playing tough on inflation, when CEE central banks revalued as there was no tomorrow, and where moral hazard (or traitor?) was pinned on all those who had the temerity (I positively love that word!) to argue that something had to be done. Clearly, we are past that now and to steal again the analogy conjured by my colleague Edward Hugh; what is the point in having your throat slit alongside your enemy's just to see who can run the fastest before bleeding out? Clearly, not the most productive of endeavors I would say.
Meanwhile and returning to the graphs one last time it seems as if, once again, one of Macro Man's metaphors will be useful; more specifically I am talking about the one in which Trichet does the humpty dance (now, there is a party I would attend!). Do you see a hump sir? I do.
Obviously it is never so simple. First of all there is the good old sticky price phenomenon which is also present in the graphs where headline (cost-push) inflation is coming down rapidly but where core inflation naturally will need more time before adjusting to the economic fundamentals. In this way, and if we pull out the oldie but goldie dichotomy between the Anglo-Saxon and Continental European economies conventional wisdom would have it that prices (and wages) adjust more more slowly in the latter. In some ways this would merit the divergence between the Fed and the ECB in tackling this mess. However, I am not sure such MD/SAS analyses apply in this case. More specifically, what I am looking for in particular is what will happen in the transition as many economies now will need to depend more on external demand to achieve growth. Remember here that all those rescue packages need to be paid for and domestic demand in itself will hardly do it. For the US et al. a reduction of external imbalances will be of material importance.
Thus, I am also sure that we have the whole rebalancing/global imbalances discourse knocking around somewhere in the background. Yet, I am just not sure that the ECB can "help" the US by keeping interest rates up and by derivative "offering" the Eurozone as a shoulder on which the global economy can lean for demand. Add to this of course that the market has already discounted the incoming recession through the absolute slaughter of the EUR/USD.
In this sense the ECB may get double pinched since if they lower rates further (and one has to assume that they will) it COULD take the Euro to a level where the objectives of policy would be in conflict in the sense that rates would have to be kept higher than otherwise to avoid the Euro to fall in the .9-.8 region. In some ways, this is would square well with the likely growth path of the "future" Eurozone as an economy driven less by domestic demand than has hitherto been the case. And yes, you heard me right, there will be much less domestic demand to go around in the Eurozone and indeed the entire EU 27 once the corrections in Spain and Eastern Europe becomes clear for everybody.
And thus we end up at one of my favorite hobby horses (I have several). In a world where governments are presiding over ageing populations and faced with a major overhang of debt in the context of fighting this behemoth of a financial crisis, the incentive to try to burn up the debt through inflation (and for all things in the world, to avoid deflation) and thus by derivative export your way out of trouble is massive. I would hold this to be true even without the particularity of the current situation in the sense that as the world ages so does the number of economies dependent on external demand grow. In fact, it is precisely this "incentive" to be export driven I think it is so crucial to pin down in both a practical and theoretical sense, but that will have to wait for another day.
Thursday, November 20, 2008
As The Federal Reserve Readies-Up Quantitative Easing, The Bank of Spain Sees Little Prospect Of Deflation
While we are likely to see a "substantial'' drop in euro-region inflation, Bank of Spain forecasts for the 15-nation euro area do not show price drops. That is they "show an enormous moderation in price gains, but they do show price gains,'' according to the latest statements by Miquel Angel Fernandez Ordoñez, ECB Council member and Governor of the Bank of Spain. Bank of Spain eurozone forecasts "don't show deflation" he told reporters in Madrid yesterday (Wednesday).
The reason for this swift and adroit response to the question of the day in Spain was that EU Economy and Finance Commissioner Joaquin Almunia (not exactly your garden-variety world authority on macroeconomic topics) had earier said that the Europe's economies were "facing the prospect of deflation" amidst the worst financial crisis since the 1930s. In fact Fernandez Ordoñez is right, as is his want - right on a technicality. The Eurozone as a whole is almost certainly not heading straight into deflation (yet), but this begs the question which he could have been answering: what about poor little Spain?
As I reported last week, Spain's consumer price index has now been dropping since June (see chart below), and it is very possible (I would say probable) that the index will move in negative territory throughout 2009 (and possibly by between 1 and 3 percent). True a significant part of the drop at this point is due to the drop in energy costs, but even the core-core index (excluding energy and fresh vegetables) was only up around 0.4% in October (HICP) over June, or an annual 1.2% rate, and it is my very very strong opinion that we will start to see "downwards pass through" as the recession deepens, profits melt (rather than just being squeezed) and everyone struggles hard to try and find a bottom.
According to data from the National Statistics Institute earlier this week, Spanish household spending contracted 1 percent in the third quarter of 2008 over the previous quarter, while investment contracted by 1.9%. We can only realistically expect this process to continue during 2009 and unemployment to continue to rise, creating a considerable capacity overhang which will exert a downward pressure on wages and prices (remember around one third of new employment contracts in Spain are temporary, making salary reductions comparatively straightforward, at least for one part of the labour force).
The Federal Reserve - On The Other Hand - Readies Its Plans
Meantime in the United States the Federal Reserve has been busy stressing that it will do whatever it has to do to ensure the US does not fall into a deflation trap. This view was reinforced by statements from vice-chairman Dohn Kohn yesterday (Wednesday), as US stocks fell below 8,000 on the Dow Jones Index (their lowest level so far in this financial crisis) and consumer prices fell 1% in October when compared with November. That was the largest monthly drop in at least 61 years (since the current index only goes back to 1947). Even core consumer prices, which exclude food and energy, fell by 0.1 percent month on month, and this was the first monthly drop in core prices in more than a quarter of a century.
Don Kohn stressed he did not believe deflation was the most likely outcome for the US economy, but he did say he thought it was a “less remote” possibility than he previously thought.
“Some people have argued that we should save our ammunition, that interest rate cuts aren’t effective,’’ Mr Kohn said. “I think that were we to see this possibility, that we should be very aggressive with our monetary policy, as aggressive as we can be.”
The lions share of the fall in headline inflation, of course, came from energy prices dropping 8.6 per cent. Yesterday crude oil fell to a $53.30 a barrel, its lowest since January 2007.
Treasury inflation-protected securities now indicate that investors anticpate deflation in the US, though Fed officials stressed in interpreting the data that prices were being distorted by a lack of liquidity. The five-year break-even rate, which provides an expectation of future inflation, currently suggests that investors expect annualised inflation at a minus 0.70% rate over the next five years.
It is also worth noting that it is getting much more difficult to read Fed policy intentions, at least as far as movements in the key policy rate go. Massive injections of liquidity have now driven the interbank overnight lending rate to less than half the current 1% Fed FOMC rate. The presence of this gap seems to be now shifting investors' focus toward the amount of money in the banking system as a better gauge of Fed intentions than possible movements in the policy rate. Kohn in fact stressed that the US central bank is simultaneously reducing interest rates and expanding its balance sheet (in a process known as quantitative easing) and explicitly avoiding reliance on one strategy "in favor of another".
Analysts point to the surplus cash that banks keep on deposit at the Fed as an important gauge of the Fed's true monetary-policy stance. These so-called excess reserves have ballooned to $363.6 billion from $2 billion in August as the Fed has added one measure to another in its emergency lending program package. Excess reserves are now bigger than the overnight lending market between banks (aka the federal funds market), but it is in this market thatthe Fed sets its key rate target. As a result of the large volume of excess liquidity it is becoming more and more difficult for Bernanke to control the federal funds rate (he recently described it to the House Financial Services Committee. as an issue he was "working on") - and the effective federal funds rate was 0.38 percent Novber 18, and has averaged 0.29 percent since the Federal Open Market Committee cut the rate to 1 percent on October 29.
Former St. Louis Fed President William Poole has described this as a move to quantitative easing, a process which forces a large volume of reserves into the banking system with the expectation that banks will start to trade them for a higher-yielding asset. Such quantitative easing in fact formed the backbone of the Bank of Japan anti-deflation stance between 2001 and 2006 (as in the case of the Fed, it was this easing rather than the more headline catching ZIRP - zero interest rate policy - which was doing the bulk of the donkey-work), but it is worth noting that while this policy stabilised Japan's situation temporarily, the Japanese economy never actually came out of deflation (at least as far as the core core index goes) and now once more under the grip of recession it seems almost certain to fall back even further into negative price territory. The basic problem is that the banks themselves may well fail to freely lend the excess reserves to businesses and consumers, in the process prolonging the credit freeze. That is basically the underlying story of what actually happened in Japan.
Normally, when central banks launch explicit quantitative easing strategies they abandon the interest-rate target and start purchasing assets in order to boost the money supply. This is what Bernanke calls "expanding the Fed's balance sheet". Typically, such activities can have two effects on an economy.
In the first place banks can decide to earn more than the nominal rate they earn at the central bank and start to lend aggressively. We have seen no signs of this happening as of yet, and measures of bank reserves are growing faster than most money supply measures. Secondly, the central bank can target some assets that are thought to have a broad impact on the economy, such as Treasuries or mortgage-backed bonds. The US Federal Reserve has already taken a half-step in that direction by purchasing the commercial paper of U.S. corporations at predefined rates. The central bank's Commercial Paper Funding Facility held $256.1 billion as of November 12.
Basically returning to the issue at the start of this post concerning Miquel Angel Fernandez Ordoñez's statement on deflation, we should not take everything here at face value. Communicational techniques are different between one side of the Atlantic and the other, and we might note that even Don Kohn says that he doesn't consider deflation a "likely" outcome (he couldn't very well say so, could he, as saying it was likely would be like saying in advance that it wasn't very probable the Fed's preferred policy option would work, and this he isn't going to say, even if he has serious concerns about effectiveness).
By the same token all Fernandez Ordoñez has really told us is that the Bank of Spain forceast isn't currently showing price falls in 2009 (and I am sure it isn't) but only a pack of fools would draw the conclusion from that that they should have no "plan B" for deflation just in case, and while I may think many things about the current Governing Council at the ECB, a pack of fools I do not think they are. It is also worth remembering that with the present occupant of the Bank of Spain governorship it is very important that you read the fine print in what he says, since while he definitely tells the truth, and nothing but the truth, he doesn't always tell "the whole" truth, as when he said that Spanish banks had no exposure to off-balance-sheet SIV-type securitisation (which it didn't), which is not the same thing as saying Spanish banks have no exposure to potentially toxic instruments, since as we are now seeing they do, and I'm sure he was aware of that at the time. Prudently, he was simply keeping his fingers crossed, and saying what he had to say.
Like Chalk and Cheese, Definitely Not Two Of A Kind
So we should be aware that Señor Ordoñez is a very astute customer, which Joaquin Almunia evidently isn't, and the difference between the two is apparent in the way the former has to rapidly jump up out of his foxhole in an attempt to undo the damage potentially done by the latter's rather eyebrow raising "faux-pas".
And just to ram the matter home, I will leave you with an earlier effort on the part of our much beloved Economy and Finance Commissioner to win for himself the acollade of economic illiterate of the year.
The European Union's Economic and Monetary Affairs Commissioner Joaquin Almunia said on Monday (27 October) that while lower financing costs were needed interest rates should not fall to negative levels in real terms.
"At this moment, it would be good for the cost of financing to go down," Almunia told a live Internet chat with readers of Spanish newspaper El Pais (www.elpais.com), adding: "We shouldn't go back to a situation in which real interest rates are negative, as we know from experience that this leads to excess indebtedness, low perception of risk and new bubbles which always end by blowing up in our faces." Almunia said it was hard to say how long the present bout of financial turbulence would last but he thought the uncertainty plaguing markets should have cleared with a year.
Essentially two things are being confused here. Negative interest rates (such as those Spain had between 2002 and 2006, you know, the ones that lead to the current crisis) are highly undesireable during the upswing in a business cycle, since you are simply giving more stimulus to economies which are already stretched to capacity - and negative rates may thus produce "bubbles", as they obviously did in both Ireland and Spain - but they are of course highly desireable during a downturn, and especially during recessions, since they can stimulate slumping economies. And of course, we are all currently heading into one of the most important recessions since WWII, or hadn't our "machine-reader" commissioner noticed?
I mean, as I say, basically the man is a total economic illiterate, and indeed his policy pronouncements more often than not lead me to feel what the Spanish would call "verguenza ajena" for any club of economists who would entertain him as a member, or indeed group of Commissioners who get stuck with him fielding the economics portfolio. And what better proof of all of this could there be? Well, take a sneak peak at the above chart, and you will see that Spain once more had negative interest rates after the end of 2007 - ie at just the time when Almunia was speaking - as, of course, the textbook recommends it should. As I said, a complete pack of fools is something the ECB Governing Council aren't. But, and here we come full circle, as inflation is falling interest rates get near to turning positive again (once more giving Spain a dose of "restrictive" monetary policy) and the problem is going to be how we maintain negative rates as Spain enters deflation. We had all better join Fernandez Ordoñez in keeping our fingers crossed and hope that our ECB Council Members prove to be just as inventive as Messrs Benanke and Kohn at the Federal Reserve, and equally astute as those Honourable Gentlemen over at the Bank of Japan.