The Pits

Nearly every day, I have to report on something that very few people care about: the yields investors receive to buy Spanish government bonds. 

Bond yields are measurement of how much it costs to get a loan.  During this year, Spain’s economy was so weakened, it had to pay 7% to get a 10-year loan.  Consider that US 10-year bonds, or Treasuries, are paying under 2%, and you realize what a burden this interest rate can be.  And who pays for these loans? Spaniards of course. In the form of taxes, mostly. 

But Spain’s people are suffering. The nation is in its second recession in 3 years. Unemployment  is  nearly 25%  Again, the United States unemployment rate is currently 7.9%.

You would hardly notice how badly Spaniards are suffering if you travel through the most touristic cities.  When we toured Southern Spain last month, the highways were spectacular (we even avoided the toll roads without problems). Restaurants seemed full in the old quarters of Cordoba, Sevilla, and Grenada.

But there were tell-tale signs, literally. Everywhere we went, I saw these signs. See the red one that says “Se Vende?”  That means, FOR SALE.

For sale sign in Cordoba, Spain
copyright: Leslie Gersing

The pain in Spain is partly a result of the same real estate bubble we experienced in the United States –a massive construction boom nurtured through the low cost of borrowing money.  Banks loaned money like water from an endless well.

We saw giant, brand-new condominium complexes all along the Spanish riviera; so many units built that they swamped available demand.  Now many of them are ghost towns.    There are so many unsold or foreclosed properties in Spain, the Madrid government is setting up a “bad bank” to purchase the “toxic assets” and sell them off at more than 50% discounts. 

The default rate on Spanish consumer debt just hit a record.  Credit has now dried up or is very expensive to get. If you’ve lost your job, you can’t afford to repay your loans or buy much of anything else. 

I heard a story from Annie, who owns a converted farmhouse in Almeria.  She and the neighbors own groves full of olive and orange trees.  The olive trees were everywhere we drove and seemed to thrive in the arid Sierra Nevadas.

Olive grove in Purullena, Spain
copyright: ljg456

Each year the olives are harvested and delivered to a coop like this one in Ugijar, where they’re pressed to make oil.

Olive oil cooperative factory, Ugijar Spain
copyright: ljg456

But the orange trees are another matter.  Annie said it cost so much to water her own orange trees, she made no money when it came to harvest time.

Annie’s orange trees, near Almeria, Spain
copyright: Leslie Gersing
Annie’s just an ex-pat with a summer home in this rugged area of southern Spain. She’s not a farmer, who depends on these ancient trees to survive.  Annie said water has become so expensive for the locals, many have cut their trees down to nubs. That keeps the trees from dying, but leaves them in a dormant state, so they won’t need much irrigation.
Many Spaniards have also been cut to the quick; well-educated and proud, but forced to move back home with their parents or grandparents.  Their government is cutting budgets, so school books must be purchased; children who need meals must pay more or they won’t be fed.  Government workers are laid off, their pensions are cut; there’s no money for infrastructure. People can’t afford to buy much of anything.
The government raised the VAT to 21% from 18% in September. Talk about a regressive tax: can you imaging having to pay 21 cents on every dollar spent on food? 

Now last week, demand for Spanish government bonds was described as “insane.” What’s insane about this is the growing belief among bond investors that Spain will formally request a government bailout from its European Union partners. Just rumors of that request have driven Spanish bond yields down. Ironically, Spain’s capitulation, and acceptance of strict terms for borrowing money, have helped the euro and European markets rise.
And when demand rises for bonds, the interest rate goes in the opposite direction. So 10-year bond yields are now about 5.46%.  That’s down from 5.66% at the prior auction, and 1.5% below their peak.  But remember, US 10-year bond yields are about 1/3 that rate. 

The problems are not just confined to the Euro Zone’s fourth largest economy.  Portugal received a sovereign bailout and adopted tough reforms to reduce government spending.  Portuguese 10-year bonds are down about 2% since mid-September:  the government  pays about 7.7% to borrow money. You could say that’s a bargain from nearly 18% in January.

On November 14, many Portuguese are going to strike against austerity measures they say are destroying their nation, not growing the economy.  Spanish unions have just announced they are going to take to the streets that day, too. 

It’s worse in Greece, where overall unemployment is above 25%, and about 50% for the young. Tens of thousands went on strike this week, as the government planned to make another $17 billion in cuts and tax hikes in order to secure the next “tranche” of bailout money from the “Troika” of European Union, European Central Bank and IMF lenders.  Many Greeks say Germany and other wealthy nations in the European Union profit at their expense.  Greek animosity showed its ugly side when the head of Europe’s most properous economy, German Chancellor Angela Merkel, was portrayed as a Nazi during a recent visit to  Athens. Some demonstrators blame Germany for keeping an irrationally tight control on the aid spigot, forcing them into practical bondage.

A recent New York Times article mentioned the rising popularity of a neo-Nazi party, which blasts immigrants and people deemed insufficiently  “Greek.”  Robbers are mugging people on the streets, as food and fuel become too espensive for the increasing numbers of newly-destitute.

I just learned that most Greek olive oil isn’t even made by Greeks. Some of my favorite Greek olive oils are actually products of large multinational corporations in Italy or Holland. Greeks just grow the fruit; they don’t own the means of production.

Spanish bond yields sound pretty boring, and complex.   But it’s allowed me to learn a little bit about what happens when governments decide to cut spending as a means to reduce their deficits.

There’s a reason politicians, businesses and economists are divided over the notion of stimulating economies with cash and other incentives, instead of putting themselves on a budget diet. There’s a reason this has become a central argument in the 2012 presidential election.

The next time I buy olive oil, I’ll remember what’s happening in Spain..

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