Tag Archives: Business plans

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.



Spain faces cuts of €20 billion

13 Dec

Spain is facing EU subsidy cuts of €20 billion, which means that for the first time it will become a net contributor – that is, paying more in than it gets out.

The reduction, scheduled for the period 2014 to 2020, will reduce Spain’s GDP by 2%, further weakening the country’s already fragile economy.

The cuts will affect agricultural subsidies by 17% and ‘cohesion funds’, payments made to help balance disparities between the regions, by 30%.


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.”


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.


The European Weekly Crisis:

30 Nov

The weekly crisis:

The Euro Group and the International Monetary Fund has had to ‘bite the sour apple’ and ‘pardon’ 40,000 million euros of Greek debt, to avoid the country going formally bust and losing the 43.700 million, next installment of the ‘rescue package’….

The Spanish government has indicated that it will again use the reserve fund of the Social Security, which at present has 66,000 million euros, to pay pensions in December

FROB, the Government agency for banking restructure, has agreed to sell Banco de Valencia for 1 euro to Catalunya Bank, after first injecting 4,500 millions to keep it afloat

Bankia will reduce the staff by 6.000 people, 25% of the total, and close down 1.000 branch offices

FUNCAS (Foundation of the Saving Banks) predicts that the contraction in the economy this year will be 1.4% of the Gross Domestic Product, and 1.6 next year

The federation of the metal industry considers the Government budget for 2013 as ‘overly optimistic, which may deepen the crisis’

Non-financial companies assets fell 57.2% in the 9 first months of the year

The public deficit was in October 43,374 million euros, 4.13% of Gross Domestic Product. That is 9% more than at the same time last year

The results of the Catalan elections have made the country risk rise slightly over 420 points, the interest rate on 10 years bond to go over 5.7% and the IBEX to fall below 7,863 points


Spain Chooses the Worst Moment to Enter the Club of Rich Countries

30 Nov

Spain will become net contributor in the new European budgets. Analysts fear that cuts in the accounts of the EU will bring further adjustments.
Since Spain became part of the European Union back in 1986, the country has always received more than what has been given: that’s to say, Spain has been a major net receiver of European funds. Thanks to this, Spain was able to take a major leap forward in its development. But those days are gone: in recent years, with the enlargement of the EU, Spain has crosed the room to become part of the club of the wealthier countries in the EU. And that agreeable new condition within the EU makes it liable as a net contributor for the new Community budgets – cresting at a trillion euros – for the six years of 2014 – 2020.

Although there is no final agreement on new budgets of the EU for the next six years, it is certain that there will be major cuts. Germany, the Netherlands and Sweden want the cuts to be 100,000 billion; while the Commission prefers to consider cuts nearer the 80 billion mark. Regardless of the final agreement, Spain will, for the first time, have to contribute more than what she will receive. The amount is still to be determined and will only be known when the 27 Member States reach a consensus, expected in early 2013.
After the failure of the Brussels Summit, the Spanish EFE News Agency has consulted several experts: all coincide in stating that the cut in the budget of the European Union will inevitably mean additional cuts for Spain.
‘Community funds are a transfer to the Spanish State, and when they no longer arrive there will be less money available, obliging the State to make more cuts, or failing that, to use revenue from other sources’, explains the Professor of Economics at the IESE Javier Díaz Giménez.
Professor of Finance at the University of Santiago de Compostela, Luis Caramés, says bleakly: ‘it is the worst possible time for Spain to become a net contributor to the EU. The economic situation of the country and its extreme financial fragility leave little margin for negociation’.
That is why it is essential that Spain manages its alliances in the face of the forthcoming negotiations. Thus the case of the common agricultural policy: ‘France is the country that receives the largest share of funding for the countryside, followed at a distance by Spain’, says Robert Tornabell, a professor at the ESADE Institute. Tornabell thinks that Mariano Rajoy ‘is working well to regain protagonism in agricultural affairs with the President of France, François Hollande’.
According to Tornabell, ‘Spain should consider a Union with two axes: persuade the United Kingdom to remain in the EU, giving it prominence in what has been Britain’s traditional role: defence and foreign affairs. Germany would stay masters of taxation, the European banking system and other financial aspects’.
The strange thing is that, after a century of poverty, a cruel civil war and a rapid if uneven rise to some kind of prosperity, Spain, with its higher than ever barriers between the wealthy and the poor, with a crumbling middle class and a staggering unemployment figure set to rise over the winter, is now one of the Rich Countries of Europe.


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.