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Spain: The crisis of the week:

13 Dec

On Monday the country risk rose to 430 points and the interest rate on 10 year public bonds reached 5.61%
The Fitch Agency has warned that the prospects for the Spanish banking sector will be ‘negative’ in the coming year, due to public debt and the privatisation of nationalised entities
Eurostat reports that Spain, together with Romania, Bulgaria and Greece, has the largest percentage of people at risk of poverty, with 22% of total population
In spite of the refinancing of the banks, agency Moody warns that the number of bad loans in the Spanish banking system will continue to increase in 2013, and prices for dwellings continue to fall.

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Spain’s Bad Bank Seen as Too Big to Work: Mortgages

6 Dec

Spain’s bad bank will struggle to sell the 90 billion euros ($117 billion) of toxic property assets it takes from other lenders because of its size and inability to help buyers finance purchases.
“When managing tens of thousands of assets scattered across the whole of Spain, big is not beautiful, it’s sheer chaos,” said Mikel Echavarren, chairman of Irea, a Madrid-based financial adviser. A large, “clumsy” bad bank will be at a “tremendous” disadvantage and will generate losses that Spaniards will have to pay for.
Spain’s efforts to sell as much as 90 billion euros ($117 billion) of toxic property assets it uses to create a bad bank from lenders that take state aid will be constrained by the size and inability to provide credit to potential buyers, adding to the risk of taxpayer losses.
The country has until the end of next month to establish the institution, a condition for receiving 100 billion euros of external aid for the financial system it requested in June. Premier Mariano Rajoy’s government seeks to purge about 180 billion euros of bad assets that the Bank of Spain says are on the balance sheets of lenders. The government has said the bank will be profitable and won’t cost taxpayers.
The bad bank will not take deposits and so won’t be able to provide financing to potential buyers of its assets, Antonio Carrascosa, director general of the state run FROB bank-rescue fund, said in an Oct. 18 interview at a Barcelona conference.
The aim is to place soured real estate loans and other assets in the vehicle for as long as 15 years in the hope that, once cleansed of bad property bets, banks can resume lending and reactivate an economy mired in its second recession since 2009. The bad bank will have to compete with healthier lenders that have set up units to sell their own problem assets and can provide credit, known as vendor financing, to potential buyers.
Financing Agreements
“It won’t be a bank and the only way it may be able to achieve sales with attractive mortgages is by reaching financing agreements with other banks, which will be competing to deleverage their own real estate,” said Fernando Acuna Ruiz, managing partner of Taurus Iberica Asset Management in Madrid.
Acuna, whose company oversees 60,000 foreclosed properties on behalf of 25 banks, said that while the structuring will be in place by December, it will be “mammoth,” with tens of thousands of assets and loans to service and transfer onto its books. “Integrated management won’t be up and running for 12 to 24 months after,” he said.
Known by its Spanish acronym SAREB, it will have as much as 90 billion euros of assets based on their transfer price, initially comprising land, developer loans and residential units that went bad after Spain’s decade-long real estate boom turned to bust, an Economy Ministry official who spoke on condition of anonymity told reporters on Oct. 17.
Transfer Valuations
The Bank of Spain has yet to fix transfer valuations for the assets based on the stress tests of Spanish lenders carried out by management consultants Oliver Wyman and published on Sept. 28. The 90 billion-euro number is based on transfer prices, so the original value of the assets is likely to be higher.
In comparison, Ireland’s National Asset Management Agency, set up in 2009, spent 32 billion euros on mortgages with a face value of 74 billion euros to cleanse its banking system.
Lenders that take state aid will have to transfer to the bad bank foreclosed property of more than 100,000 euros, real estate and builder loans of more than 250,000 euros and controlling stakes in property firms, according to the Economy Ministry official. A decree to regulate the entity should be passed on Nov. 16. It may be amplified in the future to include loans to consumers, small- and medium-sized enterprises and retail mortgages.
‘Consume Capital’
“It will need a legion of lawyers, notaries and debt servicers to ensure properties and loans have no legal issues and change title documents,” Echavarren said by telephone. “By the time they find out what and where the assets are, they won’t have any idea of what they have and what to do with it for at least a year.”
The vehicle won’t have the resources to manage assets, which are like “livestock that consume capital,” he said. Holding the assets cost money in taxes, maintenance and security and will generate losses for Spaniards.
Spain is considering giving tax breaks to the bad bank, two people familiar with the matter said. They asked not to be named because the information isn’t public.
A lack of financing options will also hamper the bank, Echavarren said. “A bad bank can try to compete by slashing prices but as a buyer if you can’t get a loan, and the bad bank won’t be able to provide them, you can’t buy full stop.”
The FROB, which will be a shareholder in the bad bank, is searching for investors to take at least 51 percent of the vehicle, an onerous task, according to analysts including Krista Davies at Fitch Ratings.
Skeptical Investors
“Equity investors in the private sector are likely to be skeptical of the benefits to be drawn from investing in a wind- down vehicle,” Davies wrote in an Oct. 22 report. “As SAREB purchases will take place during a period of uncertainty around economic development in Spain, there is likely to be only a small number of potential private investors in SAREB.”
Jaime Guardiola, chief executive officer of Banco Sabadell SA, told reporters today in Madrid that more details about the bad bank are needed before it can decide on a possible role for the vehicle. Banco Santander SA (SAN) Chief Executive Officer Alfredo Saenz said he has concerns over the transfer price of assets, though they are based on incomplete information.
Concerns about Spain’s creditworthiness have grown since the government, which is struggling to trim a 2011 deficit that was more than three times the EU limit, requested as much as 100 billion euros in European Union aid in June to shore up its lenders and its economy contracted for a fifth quarter.
Ratings Reviews
On Oct. 17 Spain avoided joining euro-region peers Cyprus, Portugal, Ireland and Greece as being rated below investment grade by Moody’s Investors Service as it concluded a review for a possible further downgrade of Spain initiated in June. Standard & Poor’s lowered Spain’s ratings to BBB- on Oct.10.
According to Carrascosa, the bad bank “cannot make losses in the short, mid or long term.” As well as reaching accords with banks participating in the vehicle, the bad bank will need to reach agreements with other “healthy” financial institutions to arrange vendor financing, he said.
It also hasn’t ruled out selling homes individually.
“We can’t set up offices all over Spain because it’s too big so we’ll try to sell packages of assets to institutional investors and not individual apartments,” he said. “If we have to set up agreements with real estate agents, we could do it. Flexibility and profitability are the two key words.”
Santander’s Success
The bad bank’s limitations stand in contrast to Santander, Spain’s largest lender. The company advertises homes on its Altamira real estate website for as little as 40,000 euros in Madrid and apartments complete with swimming pool and garage on the coast of Moncofar in Valencia for 65,100 euros. The lender offers 40 year mortgages with loan to values of as much as 100 percent.
The strategy is paying off. Proceeds from sales of homes on its balance sheet reached 1.3 billion euros in the second quarter — almost as much as the total for the whole of 2011, according to Saenz who said on July 26 that sales are taking place at discounts of as much as 45 percent. Santander has reduced its exposure to Spanish real estate to 26.5 billion euros from 42.5 billion euros in 2008, the bank said today in a results presentation.
Banco Bilbao Vizcaya Argentaria SA (BBVA), Spain’s second-largest lender, last year created BBVA Real Estate to handle its 30 billion euros of property assets.
‘Market Prices’
“Our policy is to sell at market prices with 100 percent financing,” Ignacio San Martin, head of research at BBVA Real Estate, said on Oct. 19. The bank is selling more houses than last year, though said that for large institutional investors, the bank prefers buyers to provide their own financing. “That way we don’t hold the loan on our books or have to provision them.”
Sabadell, a Catalan lender, sold 708 million euros of properties via its Solvia real estate unit in the first nine months of the year, up from 433 million a year earlier. The company is aiming for sales of 1.19 billion euros this year, according to an earnings presentation by the lender today.
The strategy works well for healthy banks, according to Fernando Rodriguez de Acuna Martinez, a partner at Acuna & Asociados, a real estate consulting firm in Madrid. If nationalized banks that transfer assets to the bad bank were forced to provide vendor financing for sales, it would perpetuate the subprime lending that initially got them into trouble.
“As a nationalized bank, you’d be looking at an asset that came to you via way of default, so do you really want to be forced to finance its sale again to get it out of the bad bank?” he said during a telephone interview.
Acuna said the best discounts are on the worst assets, where demand comes only from people with a low credit rating.
“So they are subprime or less than subprime borrowers and if you give them credit, you are assuming bad risk again. It’s a vicious circle as you are financing the very assets and debtors that got you in trouble in the first place.”

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Spain has taken painful steps to clean up its banks, but more may yet be needed

6 Dec

European Union regulators approved Spain’s plans to restructure its troubled banks, allowing them to get bail-out funds. One of the lenders, Banco de Valencia, is being sold off for a token €1 ($1.30).
THE delightful (though small) plates of tapas that often accompany an evening drink in Spain can, if eaten with gusto, end up replacing the meal they were meant to precede. After four years of appetiser-sized bank restructurings, bail-outs and reforms, Spain’s banking system may finally be getting its fill of public money.
On November 28th the European Commission approved restructuring plans that will allow it to inject €37 billion ($48 billion) in euro-zone funding into four Spanish banks. The money will allow for a clean-up of bank balance sheets begrimed by dud loans granted to property developers during the inflation of Spain’s colossal property bubble. Many of these loans are now worth just cents on the euro. Yet an earlier refusal by supervisors and banks to recognise the scale of the problem contributed to an erosion of confidence in both banks and in government finances.
Under the new plan, four banks including Bankia, itself the failed product of an earlier half-hearted restructuring of bust regional savings banks, will get cash from two of Europe’s bail-out funds. In return they have promised to cut their balance-sheets, stop lending to risky property developers and focus instead on lending to small and medium-sized businesses.

The sharpest cuts will be at Bankia, which has already been nationalised and which will receive public funds worth almost €18 billion (including €4.5 billion injected into the bank by the state in September). It will cut its branch network by almost 40% and its staff by 28%. Investors in the bank’s debt will also take a hit, with as much as €4.8 billion in additional capital coming from the mandatory swapping of hybrid instruments and subordinated debt for new shares worth less. Across all four banks, holders of hybrid instruments may take a hit of about €10 billion.
Forcing investors in some of the banks’ debt to take losses was a condition imposed by contributors to the bail-out funds to minimise the burden on taxpayers. Yet it will probably prove unpopular in Madrid, since much of this debt is held by tens of thousands of small investors, many of whom bought it after being assured by banks that it was as safe as deposits.
Bankia optimistically hopes to return to profitability next year and to be generating healthy returns by 2015. One bank, Banco de Valencia, was deemed beyond salvation. It will be recapitalised with €4.5 billion and then sold to CaixaBank, Spain’s third-largest bank.
A second key element of the bail-out will be the creation of a new “bad bank” in December. It will take dud loans from those being restructured. The government hopes this will help them regain the confidence of markets. It may also kickstart lending, and help revive an economy that contracted by about 5% in the year to August. Little detail was provided as to exactly how much debt the bad bank, known as Sareb, will take, but officials in Brussels said some €45 billion in Spanish banking assets would be transferred to it.
Officials in Brussels hoped that the markets would welcome the restructuring, saying it would “restore the viability of banks”. Yet even this new recapitalisation and restructuring plan may underestimate the voracious appetite of the Spanish banking system.
A report by staff at the International Monetary Fund (IMF) released on November 28th sounded warnings of further loan losses as Spain’s economy contracts. Losses on corporate loans have already increased sharply, yet those on mortgages remain remarkably subdued (see chart). Some deterioration in these seems likely if, as the IMF expects, house prices contract and unemployment also rises.
The IMF reckons that house prices, which have slumped 30% from their peak, may fall further given the stock of unsold homes and weak growth in household incomes. Unemployment, already at about 25%, may rise to almost 27%, the OECD warned in a separate report this week. The main course of bank restructuring may have been served, but a sour postre (dessert) may still be on the menu.

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Spanish ‘Road Shows’ results

6 Dec

Politicians and real estate promoters, have for more than a year, been travelling the world with ‘Road Shows’ trying to sell some of the more than 700,000 unsold dwellings which are dragging the Spanish economy downhill. Some of these expensive expeditions have been spearheaded by the Ministry of Foreign Affairs, others by regional governments, Diputaciones Provinciales, all assisted by the associations of promoters and real estate agents which caused the glut in the first place.
A latest ‘Road Show’ was organised by the Diputacion of the Malaga Province and the Patronato de Turismo de la Costa del Sol, with visits to UK, Russia, Sweden, Bulgaria and Germany. The cost, up to now, 40,000 euros of public money.
There are 40,000 unsold dwellings on Costa del Sol. 1,000 of them were offered for sale in the 5 countries visited. The result: not one dwelling sold.
The other ‘Road Shows’ have not fared much better, only serving to give the less than serious politicians and promoters the possibility to travel and stay in top hotels, eating and drinking in fancy restaurants, all at the expense of the taxpayer.
The grave failure of the ‘Shows’ is a serious warning to the ‘bad bank’ Sareb, which will be saddled with 90 billion euro’s worth of the property mountain.
It may be better to move in the bulldozers now !

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Just how “Italian” are Italian Olive Oils?

1 Dec

Olive Oils labeled “Italian” are in fact 66% Spanish, says a report recently released by the Turin newspaper, La Stampa.

Italy accounts for 65% of all olive oil exports from Spain. Their food industry, one of the world’s most powerful and with large multinationals that dominate the crop-processing absorbs most of the Spanish olive oil producers’ harvests. These transactions are conducted via tanker lorries collecting bulk olive oil from depots and cooperatives around the country, including Valencia where I live, which is one of the major producing areas of Spain after Andalucia. Spain’s neighbour then packages the product, maybe even blends it with other oils and then re-exports it through the leading distribution companies in the EU, of course with the stamp “Made in Italy”. Moreover, two-thirds of the oil it sells in its home market is also Spanish, as has recently reported the largest association of producers in the country, Coldiretti, whose leaders warn that in 2011 oil imports exceeded exports by a long way. So the chances are even the Italians, so proud of their Olive Oil probably haven’t even tried an Italian Olive Oil for quite some time!

Valencia is one of the leading regions for exporting Olive Oil and mainly to Italy. From Maestrat to Vall d’Albaida, among other regions, they continue sending tankers to the Italian industry throughout the season. According to data provided by ICEX, in recent years the value of exports fell compared to the 8, 2 million euros achieved in 2007. Drought and other factors have reduced the harvests considerably and this year it will be even less compared to previous campaigns owing to the lack of rain during the summer. Nonetheless, exports remain a key feature of their business strategy.

The EU is starting to take action in the matter. The Italian producers’ organisation Coldiretti claims that “under the guise of the brand “Made in Italy” national olive oils are mixed with imported Spanish olive oil to acquire the image of the country and pass off as products from historical Italian brands” mentions the report by La Stampa . Olive Oil labelled Italian is in fact two-thirds Spanish says the study carried out by the Italy’s largest association of farmers. Most of the 600,000 tons of oil in 2011 that Italy imported came from Spanish olive groves, but also from Greece, Portugal, France and Turkey. With the case of Spanish Olive Oil, some Italian olive oil producers bought olive oil at a price of 50 cents a kilo, which was then resold on to the domestic market at a cost price of between € 2.50 and €3.

“The speculators are manipulating the business and doing a lot of damage,” laments the environmental technician and expert on the oil sector, Ferran Gregori. The rogue Italian industry is committing a crime, the European Union not so long ago enforced a law on the clarity of olive oil origin for labelling standards, and those who are carrying out this fraud generate about 5,000 million euros in profit annually, warns the representatives of Coldiretti .

According to the technician for the Llauradors Union, “Italy absorbs a lot of Spanish olive oil exports because it runs some of the largest food businesses in the world. The same happens with the almonds in Spain, we import them and then sell them on” Gregori pointed out. In his opinion, the fact that some Italian producers are denouncing this, the volume of imports clearly justifies their complaints. “If there is fraud in the labelling the matter should be taken up with the authorities so not to manipulate consumers,” adds the director of the Union.

In view of the situation, Italy is working on a bill to protect it’s oil against increased imports of foreign oil and counterfeiting. This legal proposal, according to Agrodigital, has been presented by the producers’ organisation Coldiretti, Symbola Foundation (Foundation for the quality of Italian products) and Unaprol (association of growers).

The main changes contained in the bill are to require larger letters on the labels, measures to prevent and eliminate deceptive brands and the secrets around the names of the companies that import foreign oil.
Also they will include a classification control to supervise the qualitative characteristics of the oils. This aims to build a system of rules that protect consumers and ensure fair competition between businesses, preserving the authenticity of the product, the certainty of its territorial origin and the transparency of information provided to consumers.

So when many thought that Italian olive oil was the best in the world, little did they know that it is in fact most probably Spanish.

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If you want to see where Spain is headed, take a long look at Jerez

30 Nov

Decades of financial mismanagement have brought the city to the brink of bankruptcy
The new mayor is determined to impose order, but at what cost?
Guillermo Abril
Jerez, in the southern region of Andalusia, can be viewed as an illustration of all that has gone wrong with Spain over the last two decades: rapid growth based on seemingly limitless borrowing, which has produced a glut of houses and office space that nobody wants. Three years ago the bubble burst, and the local authority has been left with no money. That means it is unable even to pay its utility bills or the cleaning staff in its schools.
To put it simply, Jerez has been living beyond its means. Anybody working in the public sector – or for a company that depends on the public sector – is either on strike, has been on strike, or is likely to be very soon. From one month to the next they have no idea whether they will be paid, or even if they will be left with a job. People were being laid off even before the government introduced new laws to make it easier to fire employees, and the unions have been unable to do anything about it.
Some commentators say that if you want to see where Spain is headed, take a long look at Jerez: ever-declining public services that mean people just have to get on with making the best of what there is.
Around 8pm on a rainy Wednesday at the end of October we meet Moisés Gálvez, the father of one of 7,000 children in the city who haven’t been to school that week, and the head of the parents’ association of the Manuel de Falla junior school. He tells us that around half of the city’s 47 infant and junior schools have been closed this week because of a strike by cleaning staff who haven’t been paid. Negotiations are underway, and it is possible, he says, that the strike may be lifted this evening. But then again, it may not. That’s the way things are in Jerez right now: nobody knows anything.
By fighting for your rights, you’re more than likely to be trampling on somebody else’s
The cleaners are owed around 1,500 euros each in back pay, and have been staging partial walkouts over the last two weeks in protest. This is the fourth time that they have taken industrial action in just under a year. In the new Spain, by fighting for your rights, you’re very likely to be trampling on somebody else’s. That’s austerity for you. When there is no more money in the state’s coffers, people have no choice but to deal with the ensuing cuts as best they can. This means looking out for one’s own interests, even at the expense of those around you. “These women are exercising their right, fine. But at the same time they are affecting our children’s education. And what happens if City Hall gives in to them?” asks Gálvez, a worried and angry parent, like so many others throughout Spain.
Gálvez has been a municipal police officer in Jerez for the last 12 years. Back in 2009, when the crisis really began to bite, he and his colleagues marched to City Hall dressed as Roman legionaries to draw attention to the worsening situation. When the authorities stopped paying them, they set up a camp in the main square. Since then, they have lost a range of subsidies and benefits, as well as having to take a pay cut, like the rest of their colleagues in the public sector. He looks tired: he’s just worked a night shift, and hasn’t slept this morning, having spent the free time looking after his son, who is off school.
“Police officers are not allowed to strike, so that means that City Hall can hold back our pay. At one point they owed us three months’ wages. By the middle of the year we were no longer being paid. Now they owe us two-thirds of our wages for September. Over the summer we were unable to go out on patrol because there was no fuel for our cars and bikes. We could only go out if we got an emergency call. We didn’t even have paper for the photocopier. We’re using the old voting slips from the last elections.” Like everybody else in Jerez he has no answers, and no solutions to the situation: “We just want to be paid, that’s all,” he says.
But Jerez City Hall has no money. In fact this city of 212,000 people owes one billion euros. The loan it requested from the government under a scheme to allow local authorities to pay their suppliers was the second largest, after Madrid’s. Unemployment in Jerez is around 34 percent, with 34,000 people out of work. Meanwhile, City Hall’s budget is getting smaller and smaller.
At one point they owed us three months’ wages,” says a policeman
Since María José García-Pelayo of the Popular Party (PP) took over in May 2011 with an absolute majority, the council has reduced its budget by 20 percent, and its costs – the amount it spends on products and services – have fallen by 40 percent. One of the first things the mayor did was to lay off 260 City Hall employees. She says that in the year 2000 there were 1,650 employees on the City Hall payroll, a figure that had ballooned to 2,150 by 2007, many of them on “generous salaries with significant benefits and perks.” A 55-year-old man who wouldn’t give his name described the layoffs as “arbitrary, despotic, and neo-fascist.”
City Hall brought in consultants Deloitte to go through its books. Its report, which led to the layoffs, reads: “The current situation at City Hall is a reflection of a situation inherited from previous periods. In this sense, during the period between 1995 and 2007, characterized by important economic growth, Jerez City Hall had access to abundant revenue and easy credit, which provided relief to the local treasury, but which covered up the real financial situation at the institution. In the end, the current economic crisis, with its strong impact on revenues and subsequent increase in demand for social services, has highlighted the desperate situation of Jerez City Hall’s finances.”
There is now something of a war economy in Jerez these days. City Hall is fighting on any number of fronts, most of them related to public services.
On the way to the Manuel de Falla junior school, where the next day cleaning staff went in to work after City Hall agreed to pay them part of their salary – albeit without supplying the means to purchase cleaning products, for which there is no money – one passes the local fire station. In front of it is a collection of tents. They’ve been there since September, when firefighters decided to stage a go-slow. They are only covering emergencies. They are not training, studying or even checking their machinery of vehicles. They were paid their August salary in late October. There is no sign of September’s. The provincial firefighters’ union has threatened to expel them if City Hall doesn’t cough up their union dues and back pay. A few days later, City Hall promised to pay them by the end of November.
Jerez City Hall has no money – the city of 212,000 people owes a total of one billion euros
Walking through newly paved streets, lined with rows of small houses built over the last two decades, a bus driver with 16 years behind the wheel tells us that he and his colleagues are resigned to their fate. They too are owed money, and are unlikely to be paid any time soon. “We’re on strike. But the truth is that we’ve no longer got any way to put pressure on City Hall,” he says. “We’ve been on strike for 25 weeks now. But we’re a laughing stock. We’re owed nine months back pay, around 12,000 euros each. Jerez privatized its bus services, but in 2010, the company, called Cojetusa, part of the FCC construction group, went bust. The former manager in Jerez has since been dragged into Operation Malaya, the far-reaching investigation into corruption in Marbella.
Another company tried running the buses, but in May Jerez City Hall cancelled the contract. The bus service is now being run by a local civil servant. City Hall says that after it has settled up back pay, drivers will be offered a 20-percent salary cut in exchange for being able to keep their jobs. “When you see so many people around you with nothing, if they pay me my 12,000 euros and cut my pay by a fifth I will consider myself fortunate,” says the driver.
Jerez, once an important part of the industrial revolution in Spain, and with its long tradition of sherry- and wine-making, once hoped to establish itself as a leading commercial center in Andalusia. Those hopes are now long gone.
This is where the first railway in Andalusia was built to ship brandy and sherry out to the markets in Europe. The industry grew throughout the last century, with sherry production reaching around 200 million bottles a year in the 1990s. Output is now barely 55 million bottles. Of the workforce of 10,000 people directly employed in the wine-making industry a decade ago, just 1,000 or so remain. Juan Luis Bretón Abrisqueta, the former director of vintners Williams & Humbert and John Harvey, says that Jerez’s wine sector is a shadow of its former self. “This is no longer a place where the different wineries are respected for their respective identities.”
Firefighters are only covering emergencies and are not training or checking vehicles
By the end of the 1990s, Jerez was caught up in the construction boom that had swept through the rest of Spain, fueled by cheap credit. Land that for centuries had been used for grape growing was rezoned and sold off for building houses. City Hall was suddenly awash with cash, and used its new-found liquidity to borrow more money. Bretón describes what happened as “a curious approach to municipal management: the city began to grow rapidly, all paid for by City Hall, which was getting deeper into debt as it drove the local economy and became its biggest employer. A motor-racing circuit was built, and costly events were staged to raise the city’s profile, but that brought in little investment.
“This city scares the living daylights out of me,” says Pedro Pacheco, who took over as mayor in the late 1970s, staying in office for 24 years. He is now a local councilor for the left-leaning Citizens’ Forum party, which emerged out of the Andalusian Socialist Party. He tells his version of events. “I was 29 when I was elected. I was very young, and expectations were high. We transformed this city, putting in new roads, sidewalks, lighting, the sewers, sports and leisure facilities… We built the motor-racing circuit, a new sports stadium, and we promoted the show jumping competition. Jerez was a pioneer in a new approach to running a city.”
More than that, as he now admits, “Jerez was living way beyond its means,” borrowing money and getting deeper and deeper into debt: “We wanted to do it all, and we got so caught up in the job that we stopped listening to what people wanted.” He stepped down in 2004, but under a deal with the Socialist and Popular parties, he stayed on as head of urban planning until 2007, by which time the scale of the financial disaster was huge.
Everybody involved in what happened over the last two decades in Jerez has their version of events. Pilar Sánchez, the Socialist Party Mayor between 2005 and 2011, agreed to talk for a few moments during a break at a meeting in City Hall, where she is still a local councilor. Outside, a group of protesters stood forlornly in the rain, being roundly ignored by everyone in the building.
Of the 10,000 people who worked in the wine industry, just 1,000 or so remain
Sánchez blamed her predecessor, Pacheco, for the city’s problems, saying that she inherited an already disastrous situation. “Pacheco’s dreams resulted in a 50-million-euro debt for the motor-racing circuit; 70 million for the show jumping events… During the boom times, the money coming in from the construction sector covered all eventualities. But when the market collapsed, we went from revenues of 22 million euros to two million euros in a single year. We had to pay what we owed, along with the debts we had inherited. And now I’m the one getting all the blame.” She admits that she should have taken tougher measures to reduce the city’s spending, for example cutting the municipal workforce, and putting employees on part-time contracts.
Later that day we joined her for a glass of sherry at the González-Byass winery, where officials were deciding on who would play the three wise men in the Christmas parade.
We were there in the hope of an interview with the mayor, María José Garcia-Pelayo, who eventually found time to talk to us at the end of a very long day. “It’s been a very difficult time, since the first day that I took over,” she says. “The worst moment so far was when we announced the mass layoffs.” When she was elected, her team of accountants recommended declaring the city bankrupt. “I am determined to get this sorted out. But there is no way that we can do that in just 15 months.” Her goal is to reduce the city’s deficit to zero by August 2013, and that means cutting spending everywhere. “We are already into our third financial restructuring plan,” she says.
This has involved renegotiating with suppliers to get them to bring their prices down by 20 percent. García-Pelayo met personally with Florentino Pérez, the president of Real Madrid. He is also the owner of Urbaser, an affiliate of his ACS construction company, and is owed 88 million euros by Jerez city council. She says that more jobs will be shed from the municipal payroll. The city’s water supply is to be privatized. “That will give us a vital supply of oxygen,” she explains. Her approach to resolving the city’s finances is that of a gym instructor hired to get a flabby has-been into shape. She believes that Jerez has a bright future, once it is back on track. “This is a luxury brand; this is not some failed city. The failure has been on the part of the people who ran it: we’re finally waking up,” she says.
Land that had been used for grape growing was rezoned for building houses
But for many of Jerez’s inhabitants, the wake-up call has come too late, and they are unsure what kind of future awaits them; people like Cristóbal, a 78-year-old who survives by selling cane baskets and lives in an abandoned 19th-century sugar processing plant in El Portal, a run-down area to the south of the city. Both Pacheco and Sánchez intended to develop El Portal. All that remains is a half-built sports center and unfinished office buildings, as well as land set aside for low-rent apartments that were never started. On one abandoned site a horse is tied up, chewing on the little grass that remains. A boy squeezes through the fence. He sets a trap for birds using ants as bait. He has already caught one. When he has a dozen he says he’ll take them home for his mother, who will fry them up for lunch.

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Manufacturers warn economy too weak for more austerity

26 Nov

Britain’s economy is not strong enough to cope with further austerity, the manufacturers’ trade body has warned, adding to the pressure on the chancellor to reject bigger spending cuts in his autumn statement next month.

The EEF said George Osborne should focus on restoring growth by increasing competition in the small business banking market and making purchases of new plant and machinery fully tax deductible.

After a month of weak economic data that culminated last week in a higher than expected public sector deficit, the EEF’s call for a series of measures to increase lending and investment will resonate with most business leaders.

Bank of England governor Mervyn King unnerved the business community recently when he said Britain could suffer a triple dip recession after a brief recovery in the third quarter of the year. King warned that the recovery will take long and may include periods of contraction.

EEF chief executive, Terry Scuoler, said that despite a better third quarter, the economy has shown no growth in the past year and business investment remains 15% below its pre-recession peak. “There’s little that the government can do about the world economy but there’s a lot it can do at home,” he said.

“In recent months, the government has been more vocal about the need for growth and importance of speeding up delivery. The autumn statement now needs to match these good intentions by providing some clarity on how this will happen.

“It should start by being clear on its ambitions for the economy in a way that will drive action across Whitehall and send a clear signal to business about its intentions. We have seen how the £1tn export target is stimulating action across government but we now must see the same urgency and clarity of purpose on all the issues that matter to growth.”

His message was reinforced by figures from Lloyds Bank that showed consumers had the same amount of money left over at the end of the month to spend on discretionary items in October as they did a year earlier.

“Despite inflation receding throughout much of this year, consumers are yet to see this fully translate by way of more pounds in their pockets once essential spending has been accounted for.”

Consumer sentiment improved slightly from September, according to the survey, but remained subdued.

Osborne is understood to be considering a series of cost saving measures to boost the government’s finances, including ending tax relief for pension savers who pay tax at the higher rate. He has also identified several areas for further spending cuts, which he could unveil on 5 December.

He is under pressure after a two year period of zero growth that has depressed tax receipts and pushed up welfare spending.

The Institute for Fiscal Studies said in a report that the deterioration in the government’s finances would lead to a £13bn shortfall and could force the Treasury to extend spending cuts for a further year. The government has extended its original five year programme by two years. The IFS said the poor performance of the economy could force Osborne to extend the austerity programme, which began in 2010 when the coalition came to power, to 2018 A series of spending cuts are scheduled to hit the unemployed and disabled next year as a cap on housing benefit and reductions in disability living allowance take effect.

Some Tory backbench MPs have called for further austerity measures to put the public finances back on track, but the EEF said it would be folly to inflict further pain on the economy when the result would be slower growth and lower tax receipts.

Scuoler said: “Our economy is not strong enough to withstand any more austerity. The government’s first budget saw big cuts in capital investment spending and they need to be reversed.

“Temporary tax cuts are also needed because even though there have been cuts in corporation tax, the effective tax rate paid by businesses is still high. The UK is still outside the top 10 OECD countries that provide the best tax environment for business,” he said.

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