Spain's Debt and Housing Crisis: An Analysis - Prof. 195, Diapositivas de Macroeconomía

¡Descarga Spain's Debt and Housing Crisis: An Analysis - Prof. 195 y más Diapositivas en PDF de Macroeconomía solo en Docsity! SOLAS The Pain in Spain CARMEL ASSET MANAGEMENT 2 Five Reasons Why Spain’s Problems Are Worse than the Market Anticipates 1. Spain’s national debt is 50% greater than the headline numbers Spain’s debt-to-GDP balloons from 60% to 90% of GDP with regional and other debts 2. Spain’s housing prices will fall by an additional 35% Spain built one house for every additional person added to the population during the past two decades; the fall will decrease GDP by ~2% each of the next two years 3. Spain has “zombie” banks with massive loans to developers and to homeowners Banks have not begun to realize losses and are vastly undercapitalized 4. Spain’s economy has not stabilized and will continue to deteriorate Spain has the highest unemployment in the developed world, one of the highest overall debt loads, and the most uncompetitive labor market in Europe 5. The EU will not have the firepower or political will to bail out Spain Rescue fund headline numbers are misleading and count capital that is not yet committed Spain’s National Debt Is 50% Greater than the Headline Numbers 5 0 50 100 150 200 250 P e r c e n t a g e Debt to GDP (As of YE '11) Source: IMF € 0  € 100  € 200  € 300  € 400  € 500  € 600  € 700  € 800  € 900  € 1,000  Sovereign Debt Regional Debt Bank Guaranteed  Debt Other Sovereign  Gtd. Debt Local government  debt Total Debt Spain's Det to GDP is closer to 90% than 60% Sources:  Bank of Spain Statistical Bulletin for National, Regional and Local Debt; Bloomberg for Soveriegn Guaranteed debt Spain’s Housing Prices Will Fall by an Additional 35% 6 Spain Has “Zombie” Banks with Massive Loans to Developers and to Homeowners 7 € 21.8 € 143.2 € 382.0 € 98.5 € 298.3 € 656.5 € 37.7 € 99.5 € 1.4 € 7.7 € 17.9 € 17.4 € 62.4 € 18.3 € 2.2 € 7.2 Total Loans Billions of Euro YE 2011 Doubtful Loans Billions of Euro YE 2011 Agriculture Industry Services Other Than Real Estate Construction Real Estate  Services Personal Mortages Consumer Durable Consumer Other 6.5% 5.4% 4.7% 17.7% 20.9% 2.8% 5.8% 7.3% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% Percentage of Doubtful Loans 10 Summary: CDS on the Kingdom of Spain Cost / Capital Commitment 3.5% of notional per annum – effectively an option premium on the default of Spain during the next 10 years Rationale We began buying Spain CDS in Q4 2011 because the country has significant structural problems within its economy, a debt load that is higher than the headline number, and a banking system with unrealized losses Expected Return Should the Spanish crisis flare up in 2012 as we expect, we can generate a 300% return on the annual premium Instrument 10-year CDS on the Kingdom of Spain ojo Io LO hbS CARMEL ASSET MANAGEMENT Spain’s Debt Is 50% Greater than the Headline Numbers 15 There are agencies and banks that have been explicitly guaranteed by the Kingdom of Spain The ICO (Insituto de Credito Ofical) is a state backed lender – no maximum draw FROB (Fondo de Reestructuracion Ordenada Bancaria) is a fund for the restructuring of banks - maximum draw could be €27bn FADE is the (Fundo de Amortizacion del Deficit Electrico), which covers the amount by which Spain fails to cover electricity costs – Maximum draw €22bn The banks are getting guarantees so that they can post this funding to the ECB – no maximum draw AIF (Administrador de Infraestructuras Ferroviarias) operates the rail network in Spain At these current draw amounts, debt-to-GDP would increase by 14.8% Cumulatively Spain approaches 100% debt-to- GDP Debt Increases Further When Contingent Liabilities Are Added Banks, € 59.3  FROB, € 10.9  FADE, € 12.9  ICO, € 75.7  AIF, € 0.2  Debt Guaranteed by the Kingdom of Spain Source: Bloomberg (Units € Bn) Spain’s Surplus in the 2000’s Coincided with a Building Boom 16 Spain budget balance as a percentage of GDP Only the Rosiest Projections Reach the 3% Deficit Goal for 2013 17 The Government had agreed with the European Union to meet a 2012 deficit of 4.4% On March 2nd , the government adjusted the target to 5.8% It has since agreed to 5.3% Even this looks aggressive ‐9 ‐8 ‐7 ‐6 ‐5 ‐4 ‐3 ‐2 ‐1 0 2011 2012 2013 Pe rce nt ag e o f G DP Spain Budget Deficit Actual Target Bloomberg Forecast JPM Forecast EU Budget Deficit Targets Regional Government Debt Is Not Counted in the Country’s Overall Debt-to-GDP 20 As opposed to almost all other European countries, Spain’s healthcare is paid by the regions, with limited central government interference As the population ages and healthcare costs escalate, the fiscal pressure on the regions will become more intense Some regions have started to look to the central government to fund healthcare directly Spain’s Housing Prices Will Fall by an Additional 35% Compared to the US, the Housing Bubble in Spain Was Extreme 22 Housing Has Been a Great Investment in Spain, but It Is Not Affordable Now 25 Strong Investment Returns on Housing Have Boosted Home Ownership Rates 26 Source: IMF Germany Denmark Netherlands France Japan Sweden United States United Kingdom Australia Ireland Portugal Belgium Italy Spain 0 200 400 600 800 1000 1200 40 50 60 70 80 90 YE  20 11  CD S  Le ve ls Home Ownership Rate CDS Levels vs Homeownership Rates High investment returns tend to draw people in Thus creating a “bubble” and diminishing returns Also encouraging speculative borrowing High rates of homeownership can also reduce labor mobility Over time housing excesses diminish the credit quality of the country itself Retirees Will have to Sell their Houses but There Are No Obvious Buyers 27 Already at homeownership age, with few buyers behind them Spain Has “Zombie” Banks with Massive Loans to Developers and to Homeowners Banks in Spain Are Holding Devastating Real Estate Losses 31 We estimate that Spanish banks may need €200bn of additional capital – nearly 20% of GDP Given the losses experienced in the last housing crash of ‘93-’94, we would expect losses to be much higher than the banks have admitted This bubble was larger in scope and scale, yet mortgage losses are 50% what they were then – they should be much higher Spain has likely 50% of GDP in commercial real estate assets, many of these are to distressed builders and developers, with minimal recovery value likely Problem Loans are still below what was experienced in the early ‘90’s while corporate bankruptcies are 10x that period The LTRO has given Spanish banks some new financing, which they seem to have put into Spain sovereign debt If prices on this debt falls even by 0.5%, the banks will be asked for additional collateral – this was a similar situation to MF global Banks’ government holdings are now 33% greater then their tangible equity While banks can be more profitable by adding additional leverage, they would still lose money on their current asset base Mortgages Default Rates Will Rise Dramatically 32 During the last housing boom mortgage default rates peaked about 5.5% 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% M ar ‐0 7 Ju n ‐0 7 Se p ‐0 7 D e c‐ 0 7 M ar ‐0 8 Ju n ‐0 8 Se p ‐0 8 D e c‐ 0 8 M ar ‐0 9 Ju n ‐0 9 Se p ‐0 9 D e c‐ 0 9 M ar ‐1 0 Ju n ‐1 0 Se p ‐1 0 D e c‐ 1 0 M ar ‐1 1 Ju n ‐1 1 Se p ‐1 1 D e c‐ 1 1 Default Rates ‐ Current Crisis Source: Asociacion Hipotecaria Espanola Given the enormous jump in housing prices and unemployment, default rates could double or more Current Crisis Is Much Worse than ‘93-’94, but Loan Delinquencies Are Lower (So Far) 35 Corporate bankruptcies are 8x the amount during the ’93-’94 crisis and 20% more than ‘09 We are likely not even near the peak of delinquencies and therefore defaults and losses CAM Estimates that Bank Losses are Sizeable With Even a Modestly Poor Economic Outlook 36 Rationale Total Loans Default rate Loss on Default Loss Euro Bn Default Rate Loss on Default Real Estate Services € 298.3 40% 75% € 89 2x current "Doubtful"  Effectively unsecured loans to businesses Services Other Than Real Estate € 382.0 15% 75% € 43 Reflection of greatly increased bankruptcy rate Effectively unsecured loans to businesses Personal Mortages € 656.5 11% 50% € 36 2x '93‐'94 default rates Losses mitigated by recourse to borrower Construction € 98.5 40% 75% € 30 2x current "Doubtful"  Consideration to Real Estate already owned by banks Consumer Other € 99.5 10% 75% € 7 Increase reflective of unemployment Unsecured loans to consumers Industry € 143.2 10% 40% € 6 Reflective of weakening economy and austerity Reflective of mix of secured and unsecured loans Consumer Durable € 37.7 10% 50% € 2 Increase reflective of unemployment Secured loans to consumers Agriculture € 21.8 10% 50% € 1 Modest increase to current default rates Estimate Total € 214 % of GDP 19.97% LTRO Has Relieved Funding Pressure, but Spreads Are Rising Again 37 CDS spreads on domestically focused Spanish banks Spain’s Economy Has Not Stabilized and Will Continue to Deteriorate 41 SANS or SS Spain's economy has enjoyed the lower interest rates that came with Eurozone membership = This translated into a building boom that masked the decline in competitiveness in the economy = Atthe peak there 1-in-7 people worked directly in construction (vs the US at 1- in-22) and this had a multiplier effect creating other jobs Since the advent of the Euro, Spain's labor force has become increasing uncompetitive » Labor costs have to fall 14% to match the Eurozone average and 30% to match Germany The structural defects in the labor market are only starting to be addressed Unemployment is at a developed country high of 24%, with youth unemployment at almost 50% The combined effect of falling asset prices, declining wages and high unemployment will have deleterious effects on consumer confidence and consumption = Consumption is 60% of the economy CARMEL ASSET MANAGEMENT Spain’s Labor Is Expensive 42 Unit Labor Costs since the introduction of the Euro – Source OECD ¡GLEN CAI O EEE %ofTotal * % of Total Absolute MM) Expos Extra-Euro zone E ris France 45,061 18.7% : United States 7,846 33% Germany 25,179 10.7% : Turkey 4,108 20% Portugal 21.986 9.1% Switzerland 44m 19% Italy 21610 9.0% . Poland 3,594 15% United Kingdom 15,236 6.3% - China 3,391 14% United States 71,845 3,3% : Mexico EJE] 14% Netherlands 1,115 32% . Algena 2,646 11% Belgium 6,920 29% - Braal 2,599 11% 1 Turkey 4,708 20% - Russia 2,503 10% 2007 2008 2009 2010 2011 Switzerland 4473 1.9% . Czech Republic 2,074 0.9% > Top 10 Extra-Euro um TIL EME mum ESTER SECTOR ONTRABTOA Top 10 Export - Zone Export e pcia Partners 161335 — 669% - Partners 37,308 155% *Shaded cells indicate Euro zone members Bources: INE, Bank of Epala Source: IMF Direction of Trade Statistics; Knight Research CARMEL 45 A ASSET MANAGEMENT Spain’s Exports Are Getting Cheaper and Its Imports More Expensive 46 (€ 50,000) (€ 40,000) (€ 30,000) (€ 20,000) (€ 10,000) € 0  € 10,000  M IN ER AL  P RO DU CT S M AC HI NE S  AN D  AP PA RA TU S,  EL EC TR IC AL  M AT ER IA L PR OD UC TS  F RO M  C HE M IC AL  IN DU ST RI ES  A ND   … TE XT ILE  M AT ER IA LS  A ND  T HE IR  P RO DU CT S CO M M ON  M ET AL S  AN D  TH EIR  P RO DU CT S OP TIC S,  PH O TO GR AP HY  A ND  FI LM . P RE CI SI ON  … M ER CH AN DI SE  A ND  D IF FE RE NT  P RO DU CT S LIV E  AN IM AL S  AN D  PR OD UC TS  O F T HE  A NI M AL  K IN GD OM AR TIF IC IA L P LA ST IC  M AT ER IA LS , R UB BE R  AN D  TH EIR  … FO OD  PR O DU CT S,  B EV ER AG ES  A ND  TO BA CC O W OO D,  CO RK  A ND  T HE IR  P RO DU CT S HI DE S,  S KI NS  A ND  T HE IR  P RO DU CT S PA PE R,  IT S  RA W  M AT ER IA LS  A ND   P RO DU CT S FIN E  PE AR LS , P RE SIO US  S TO NE S  AN D  PR EC IO US  M ET AL S FO O TW EA R,  H AT M AK IN G,  U M BR EL LA S,  A RT IF IC IA L … W O RK S O F A RT  FO R  CO LL EC TIO NS  A ND  A NT IQ UE S FA TS  A ND  O IL S,  PR O DU CT S  O F T HE IR  S EP AR AT IO N,   … PR OD UC TS  O F S TO NE , C EM EN T,  .. . C ER AM IC , G LA SS PR OD UC TS  O F  TH E  VE GE TA BL E  KI ND GO M TR AN SP OR T  M AT ER IA L 2008 net exports Foodstuff Oil Oil prices rising Food prices falling Manufacturing in Spain Is Weakening Even Relative to the Rest of Europe 47 Eurozone PMI and GDP Spain PMI and Production Spain Has Too Much Overall Debt Which Is Owned by Foreigners 50 0% 20% 40% 60% 80% 100% 120% Net external debt as a % of GDP (YE '10) Source: McKinsey Global Institute & The World Bank These two countries have control of their own currency Europe Will Not Have the Firepower or Political Will to Bail Out Spain The Headline Numbers for the European Firewall Are Unrealistic and Misleading 52 The headline numbers on the combined European firewall is as large as €940bn This counts €220bn of funds already committed to Portugal, Ireland and Spain Germany would owe a total of €401bn – they currently only have approval both by the Bundestag and the Constitutional Court for €211bn Greece would owe €20bn – impressive for a country that just was bailed out Spain would owe €176bn – which is 16% of GDP and 154% of the expected Government tax revenues for 2012 Obviously if Spain needs to be bailed out the size of the Fund will be much smaller than the headline