As I have warned ad nauseum, the problems in Europe are being signicantly underestimated. From CNBC: Spain Jobless Rate up to 20.09 Percent
Spain's unemployment rate rose to a 13-year high of 20.09 percent in the second quarter, the government said Friday, as the job market lagged behind an economy that has barely managed to break out of recession. Though the rate increased from 20.05 percent in the first three months of the year, the National Statistics Institute said the number of people working actually increased. Still, the overall unemployment rate rose to its highest level since 1997 because of a large increase in the work force. Spain crawled out of recession in the first quarter of this year after nearly two years of economic contraction and has been a focus of concern in recent months, as investors fretted that its bloated deficit and troubled banking sector could necessitate a Greek-style bailout. The statistics institute said in Friday's report that there are now 4.645 million unemployed people in Spain, more than half a million higher than a year ago.
Proposed austerity measures on top of a collapsed bubble in the real estate market and banks that are playing hide the sausage with NPAs are not going to help the unemployment rate any. From our proprietary report on Spain's public finances, Spain public finances projections_033010 (click here to subscribe):
01:39 Spain struggles with staggering unemployment after real estate bubble pops January 2009
02:43 Spain economy hit by unemployment
The effects of the real estate bust from just 3 weeks ago, and a realistic query to the IMF!
As a result, we feel that there is also over-optimism in regards to the health of the Spanish banks - particularly those with heavy exposure to the consumer and to real estate. We first sounded the alarm in January of 2009 with BBVA, and the alarm over here keeps ringing. Reference Reggie Middleton on the New Global Macro - the Forensic Analysis of a Spanish Bank, Tuesday, January 27th, 2009:
In Spain, BBVA, the second largest domestic bank, could see a massive deterioration in its real estate and consumer loan portfolio. The Spanish real estate sector is making a high horsepower a U-turn after years of a massive housing bubble that has burst - culminating in an unemployment rate that has risen to an outrageous 13.4% level. The power skid is showing no signs of reaching an inflection point, and we believe is only in the beginning throes of a sharp downturn. In addition, the banks' other key growth areas including Mexico, the U.S and South America are witnessing a slowdown in economic activity, restricting BBVA's growth prospectus amid the current turbulent environment. With increasingly challenging economic conditions in each of these economies, BBVA's asset quality has deteriorated sharply with non-performing loans rising to 36% of its tangible equity without corresponding (equal) increase in provisions. As the bank deals with these tough times ahead, we expect BBVA's bottom line growth to remain subdued due to a slower credit off-take and higher provisions in the coming quarters.
Key Highlights
Sharp slowdown seen in Europe - According to the European Commission forecasts, the European economy is expected to contract 1.9% in 2009 with a modest recovery in 2010. Spain, in particular, is expected to be one of the worst hit due to the humbling of its housing sector which had, for several years, been a significant contributor to the country's economic growth. This will impact BBVA by slowing down its credit and loan growth in addition to significantly deteriorating the credit quality of its loan portfolio.
BBVA's asset quality is set to deteriorate rapidly as Spain enters recession - Problems in Spain are more pronounced than in most of its European counterparts. The Spain's budgetary deficit has already crossed the 3% threshold limit set by the European Commission and is expected to cross 6% by 2009, only behind Ireland. The unemployment has reached a 12-year high of 13.4% in November 2008, the highest in the Euro zone, while the real estate sector bubble (particularly residential vacation homes purchased by foreigners), the pillar of economic growth engine, has burst. BBVA, with nearly 40% of its total loan exposure tied to real estate & construction loans and individual loans in Spain could see massive deterioration in its asset quality.
Besides Spain the bank has to deal with other challenging economies including Mexico and the U.S - In 3Q2008, U.S and Mexico contributed nearly 29% and 16% of total revenues, respectively. The downturn in the U.S economy is showing no signs of stabilization, with an unabated fall in housing prices and frozen credit markets continuing to shatter consumer confidence. Recession in the U.S has also led to a sharp slowdown in Mexico which is highly dependent on US for exports and remittances. The slowdown in both of BBVA's key markets will not only impact the pace of BBVA's growth but also augment the risk profile for the bank as it now has to deal with vagaries of these economies to navigate itself in these turbulent times.
I reiterated the warning again back in January of 2010 with "The Spanish Inquisition is About to Begin...":
Now, it is time to see if fundamentals return to the market. From Bloomberg: BBVA Fourth-Quarter Profit Plunges 94% to $44 Million on Asset Writedowns
Jan. 27 (Bloomberg) -- Banco Bilbao Vizcaya Argentaria SA said fourth-quarter profit slumped to 31 million euros from 519 million euros a year earlier as the lender wrote down the value of some assets. BBVA fell the most in eight months in Madrid trading after saying net income fell to 31 million euros ($43.6 million) from 519 million euros a year earlier, the Bilbao, Spain-based bank said in a filing today. That missed the 1.05 billion-euro median estimate in a Bloomberg survey of nine analysts as the bank took a 704 million-euro writedown for its U.S. franchise. BBVA said it took the writedowns after analyzing its "most problematic portfolios" as it prepares for a tough year with recessions in its biggest markets of Spain and Mexico. [Emphasis added]
This is what those trades in the respective months of January looked like...
As I said, the situation in Spain, and particularly the Spanish banks, are worse than popularly publicized. Subscribers are welcome to review the following bank research:
A Review of the Spanish Banks from a Sovereign Risk Perspective - retail.pdf
Don't be surprised if the contagion moves into the insurance sector as well:
And, of course I am expecting financial and economic contagion to ensue, quite possibly before year end. See Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!
Click here to look into subscribing to our research services! The entire Pan-European Sovereign Debt Crisis series is available for free by clicking here. I will attempt to push out a detailed preview of a retail short and an technology company strategy and business model report by the end of the day. Cheers!
