Thursday, November 06, 2008

The Spanish Agony Continues With October Services Hitting A Series Low

Well, just as you think it is getting really bad, you find out it can only get worse. I keep saying I have never seen anything like what is now happening in Spain, and that is undoubtedly true, but in the end you get tired of simply repeating the same point time after time, day in day out, on one occassion after another.

Services Activity Falls At A Record Rate

Spain's service sector shrank in October at a record pace with the Markit Purchasing Managers' Index for Spain dropping to 32.2, a second consecutive record low and the tenth consecutive month of contraction. The index was down from 36.1 in September, which at the time really seemed very, very low, and evidently well below the 50.0 level which separates growth from contraction.

"There is no immediate light at the end of the tunnel for firms in the Spanish service sector as activity continues to fall at an alarming pace," said Andrew Harker, economist at Markit Economics."The explosive combination of falling output charges and rising input costs has made it very difficult for businesses to make profits."

Global Services Contract

Outside Spain, service sector activity in the euro zone hit a fresh decade low in October pulled down in part by the very low reading in Spain, and a quite low one in Italy (45.7). The final Markit Eurozone Purchasing Managers' Index slumped to 45.8 the lowest in the survey's 10-year history. The fact that the final reading is significantly below the flash estimate (of only one week ago) and sharply down from September's 48.4 would seem to indicate that the contraction in services is accelerating rapidly at this point across the eurozone.

Global services activity also slumped to its lowest level since 2001 in October, dragged down by the especially weak European service sector, according to the Global Services Business Activity Index, produced by JP Morgan, which plummeted to 44.2 in October from 50.2 in September.

That was the second lowest result in the survey's 10-year history, behind only the month after the September 2001 attacks in the United States.

European Sovereign Yield Spreads Widen

The yield spread between German 10 year bunds and some other eurozone sovereign debt of equivalent maturity is currently the largest since 1997, with investors demonstrating a preference for only the most liquid government bond markets as the implications of the scale of the European bank bailout begin to dawn on the financial markets. The gap between bunds and their Italian counterparts widened to 127 basis points earlier in the week, while difference with Spanish 10-year debt shot to 69 basis points following the news that the country's economy contracted in the third quarter for only the first time since 1993.

Also we learnt earlier this week that credit-default swap traders were prepared to bet more on the risk of default for Italian and Spanish government debt, and for Deutsche Bank than they were willing to put on any other comparable risk wager, according to a Depository Trust and Clearing Corp. report that gives us the most extensive data yet on the credit-default swap market.

A total $33.6 trillion in transactions are currently outstanding on government, corporate and asset-backed securities worldwide, based on gross figures, the DTCC said in a report released Tuesday. After allowing for overlapping trades, the report found that investors have taken out a net $22.7 billion of contracts based on Italy's debt, $16.7 billion against Spain and $12.5 billion on Deutsche Bank of Frankfurt.

The DTCC, which operates a central registry of credit swaps trades, released the data for the first time this week as the industry steps up efforts to counter critics among lawmakers and regulators who blamed the lack of data for exacerbating the financial panic.

Investors have focused their wagers on debt associated with those industries and countries that may be most affected by a credit crisis which is now entering its 15th month. The Spanish economy is seen as particularly vulnerable as it enters its first recession in 15 years amid a slump in its housing market, with banking and finance shares dropping as the credit seizure piles the pressure on builders and property devopment companies and the danger of a sector collapse increases the risk to the banks.

Credit-default swaps on Italy were quoted at 108 basis points yesterday after reaching a record 138 basis points on Oct. 24, CMA Datavision prices on 10-year contracts show. The contracts have more than doubled since August. Yesterday's trading represents a cost of $108,000 a year to protect $10 million of debt for 10 years. Contracts on Spain climbed to 112 basis points on Oct. 24, from about 47 basis points at the start of September. They have since dropped back to 79 basis points.

Turkey, Italy, Brazil, Russia, GMAC LLC, and Merrill Lynch had the biggest gross amount of contracts outstanding on their debt as of Oct. 31. Turkey alone had $188.6 billion of default swaps written against its debt. The gross figure however doesn't take account of offsetting trades. After netting the trades, there were, for example, only $7.6 billion outstanding on Turkey's debt, giving a final number way below the Spanish and Italian values.

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