Tuesday, 30 October 2012

Spain surpasses 90's perfect storm

"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), and being as well "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 forces 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!

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