Spain Surpasses 90′s Perfect Storm
By Martin T., Macronomics
“It is better to meet danger than to wait for it. He that is on a lee shore, and foresees a hurricane, stands out to sea and encounters a storm to avoid a shipwreck.” – Charles Caleb Colton, English writer
While we already touched on the subject of “Rogue Waves” in our conversation “the Italian Peregrine soliton”, being an analytical solution to the nonlinear Schrödinger equation (which was proposed by Howell Peregrine in 1983), being “an attractive hypothesis to explain the formation of those waves which have a high amplitude and may appear from nowhere and disappear without a trace, the latest surge in Spanish Nonperforming loans to a record 10.51% and the unfortunate Sandy Hurricane have drawn us towards the analogy of the 1991 “Perfect Storm”.
Generally rogues waves require longer time to form, as their growth rate has a power law rather than an exponential one. They also need special conditions to be created such as powerful hurricanes or in the case of Spain, tremendous deflationary at play when it comes to the very significant surge in nonperforming loans.
Looking at the comparison between Sandy and the 1991 “Perfect Storm” Wave Height Analysis, Sandy has been telling us indeed a story of its own when it comes to wave conditions collected offshore Delaware on the 29th of October:
- source gCaptain, gCaptain is the top-visited maritime and offshore industry news blog in the world – NOAA buoy 44009. Sandy is shown in red while the “Perfect Storm” is in blue. (x-axis=Days since 10/23, y-axis=wave height in meters).
The Perfect Storm:
“On October 30, 1991, a buoy located 425 km (264 mi) south-southeast of Halifax reported a peak wave height of 30.5 m, or 100 ft., representing the highest wave height ever measured on the Scotian Shelf. Further south, a buoy located East of Cape Cod reported maximum sustained winds of 56 mph with gusts to 75 mph, and a significant wave height (meaning the average height of the highest waves) of 39 feet, or 12 meters, on October 30, 1991.” – source gCaptain.
Sandy Wave Heights:
“Oct 29, 2012 21Z wind/wave analysis has indicated 47 ft sea heights (again meaning the average height of the highest waves) associated with Hurricane Sandy. The storm is now even being declared the Atlantic’s Ocean’s biggest-ever tropical storm.” – source gCaptain
The Spanish storm surge, fast rising Nonperforming loans – source Bloomberg:
While the 1990-1994 saw a significant rise in nonperforming loans peaking at 8.99% in April 1994, the period going from 31st of October 2006 to the latest figure of 10.51% saw nonperforming loans rising significantly above the 1994 record in similar fashion hurricane Sandy has beaten the record of the 1991 “Perfect Storm”.
While we recently touched on correlations and causation, in significant fashion to “rogue waves”, for such “freak” phenomenon to occur, you need no doubt special conditions, such as the conjunction of fast rising unemployment (high winds), economic contraction (falling pressure towards 940 MB), and credit contraction as well as austeriy measures.
In that context, we decided to realise a similar comparison exercise between Hurricane Sandy and the “Perfect Storm” with the two periods that saw rising nonperforming loans in Spain in number of months:
While during the first crisis in the 1990, the wave of surging NPLs peaked after 50 months at 9.15%, in the on-going Spanish crisis, we are yet to see the peak in the surge of nonperforming loans with the latest record being broken at 10.51% after 70 months.
Whereas Hurricane Sandy has told us a story of its own versus 1991 “Perfect Storm”, the on-going Spanish crisis is as well telling us a special one as well with its economy contracting for a fifth quarter, declining 0.3% through September, compared to 0.4% the prior quarter with consumer prices rising 3.5% from a year earlier. Spain will most likely miss its 6.3% overall deficit goal for 2012 given after eight months the government shortfall was already at 4.77%, wider than the full year target. According to Bloomberg’s survey of economists, the shortfall points to 6.5% for the deficit and the 2013 outlook points to a contraction of 1.4% of GDP compared to the government’s prediction of 0.5%. Unemployment is expected to rise above 27% by 2014.
Spain is busy setting up a bad bank with the transfer of 45 billion euros worth of assets with a discount of 63.1% for foreclosed assets and 45.6% average discount on for loans, which is a condition for a European bailout of as much as 100 billion euros for its banking sector. The bad bank will also apply a 79.5% discount for foreclosed land, 63.2% on unfinished developments and 54.2% on foreclosed new homes.
With 200 billion euros of financing needed for 2013, Spain is indeed facing a perfect storm…
“Anyone who says they’re not afraid at the time of a hurricane is either a fool or a liar, or a little bit of both.” – Anderson Cooper
Stay tuned!
3 Comments
“It is better to meet danger than to wait for it. He that is on a lee shore, and foresees a hurricane, stands out to sea and encounters a storm to avoid a shipwreck.”
Yeah, right. Get out the Ouija board and ask the captain of the Bounty how that worked out for him.
Martin, if Spain is as bad off as you say, then why is the value of EUR/USD staying near 1.30 and not plunging? Why are European bank equities holding near recent highs? Investors may be confident, perhaps mistakenly?, that Super Mario Draghi’s ECB will come to the rescue. It is Halloween, and investors are whistling as they walk through the graveyard and hold their risk assets tightly.
Why Boston Larry? Very simple, the Mario Draghi implicit guarantee (put) in conjunction with the swap lines in place between the Fed and the ECB.
Back in January in the conversation http://macronomy.blogspot.com/2012/01/markets-update-credit-law-of-unintended.html we wrote:
“This leads us to the latest FOMC’s decision in relation to the existing swap lines agreement between the Fed and the ECB and the unintended consequences that come to our thoughts as indicated by Martin Sibileau:
“The institutional weakness of the Euro zone, having failed (back in March 2011) the move towards a unified bond and fiscal integration, triggered the jurisdictional arbitrage of deposits (Euro funding). Deposits were taken from banks in the periphery (Greece, Portugal, Spain, Ireland, Italy) and shifted to the core (Germany, France, Netherlands). This situation generated a funding squeeze that was and continues to be addressed by long-term refinancing operations (“LTROs”) by the ECB. In these operations, the ECB extends collateralized Euros to EU banks. These are loans, assets to the ECB, and liabilities to the EU banks. Since its inception, the ECB has steadily been decreasing the minimum quality of acceptable collateral and increasing the tenor of the financing. Most of these funds have been returning to the ECB as excess reserves, a disturbing fact. But at one point, the repression by the political apparatus and the temptation to use these cheap funds to buy high yielding EU sovereign debt is too strong and we start seeing the use of these funds to monetize (i.e. purchase sovereign bonds in the primary market) EU fiscal deficits.”
Hence the difference between the FED and the ECB, with the ECB financing flows (deficits).
Unintended Consequences according to Martin Sibileau:
“With the Fed swaps, as we pointed out on September 12th, the Euro is still artificially stronger than without the swaps, which makes the EU less competitive. Finally, the institutional uncertainty of the EU zone remains unaddressed. All these factors only contribute to prolonge the recession and a high unemployment rate.”
Given today’s decision of the FOMC to maintain US rates low until late 2014, it seems to us that the European recession can only be prolonged as indicated by Rcube Global Macro research in our previous conversation, increasing the likelihood of a Euro Breakup.”
At the time we asked ourselves:
“Does the FOMC’s latest decision put a floor to the drop of the euro versus the dollar? Are the FED’s swap lines and latest FOMC decision delaying a painful adjustment in Europe? We wonder.”
And the answer was of course, yes, it does put a floor to the drop of the euro versus the dollar.
Best,
Martin