Lecture: "Pain is finishing in Spain" 15 June 2016

Pain is finishing in Spain, but is
prosperity just around the corner in
this country?
15th June 2016
Ramón Bermejo Climent
Source: based on Bloomberg, ECB website and proprietary analysis
Audience: MBA Program Weatherhead School of Management - Case Western Reserve, University (Cleveland, Ohio)
Place: Madrid
LECTURE

Index
2
0. Introduction: placing Spain on the map.
1. Analysis of the housing bubble in Spain and loans.
• Evolution of the housing prices per m2 since 1995.
• Spain total defaulted mortgages housing purchases.
• Spain loan delinquencies proportion of total since 1990
• Spain mortgage statistics total number of newly mortgaged properties.
• Building Permits & Building (Housing) Starts.
• House Prices:
• New Homes & Existing Homes.
• Spain House Transactions.
• Spain total consumer loans.
2. The employment situation in Spain (Labor Market).
• Unemployment rate.
• Spain Registered Unemployment Level MoM Net Change (rate)
• Spain Registered Unemployment Level Latest Revision (in numbers).
• Spain wage income index.
• Wages & Labor Costs.
3. The GDP growth (% QoQ, YoY). Double Dip (2009-2012).
• Spain Annual GDP Constant Prices (by Eurostat) in numbers. Spain General Government Debt Total.
• Spain Budget Balance (% of GDP). Spain debt as percentage of GDP.
• Household consumption: the main component of GDP.
4. Industrial Production & Capacity Utilization. Production of Main Spanish Industrial Goods.
• Consumer Goods: Durable & Non Durable
• Intermediate Goods.
• Energy.
5. Surveys/Cyclical Indicators:
• European Commission Economic Sentiment Indicator Spain.
• EC Consumer Confidence Spain General Economic Situation Next 12 Month
6. Retail Sales & Wholesale sector.
• New Car Registrations.
7. Trade Balance.
8. Consumer Prices.
9. Producer Prices.
10. Corporate bankruptcies in Spain: Spain bankruptcy total level
11. CDS (Credit Default Swap) of the Kingdom of Spain & sovereign bonds in July 2012:
• The “help” of Mario Draghi and his “…whatever it takes to preserve the euro…” of 26 July 2012 in London, 2 August 2012 (ECB, Press Conference) and the OMT
(Outright Monetary Transactions – 6 September 2012).
• The OMT program had a sizeable impact on financial markets (equity markets & sovereign bonds & 10 years (Spain-Germany) sovereign bonds yield spread):
Working Paper of the ECB “The Financial and Macroeconomics effects of the OMT announcements” August 2014.
12. The expanded Assets Purchase Programme of the ECB –(APP) (22 January 2015) and its impact on the financial markets.
13. Appendix about the U.S economy: the situation of the current business cycle paying strict and special attention to the Change in Non Farm Payrolls and the Federal
Reserve Labor Market Conditions index in the coming months.

1. Introduction: placing Spain on the map
3
Spain is the fourth largest economy in the Euro Zone and the fifth biggest
economy in the European Union. The country has a strong and diverse
manufacturing industry and is one of the biggest tourist destinations in the
world.
However, in the third quarter of 2008, following the burst of a huge housing
bubble, the country plunged into a deep recession, -a double dip recession-, and
has only starting to recover in the middle of 2013 (as we will see in many gauges
later). The economic crisis gave rise to very high losses in output and
employment, as nearly one quarter of the active population has been
unemployed for the last 5 years, reaching the unemployment rate dramatic
readings of 26% in 2013, very similar to the Great Depression of the U.S. in the
1930s (25%).
On the expenditure side, household consumption is the main component of GDP
accounting for 55 percent, followed by gross fixed capital formation (22 percent)
and government expenditure (20 percent). Exports of goods and services account
for 32 percent of GDP while imports account for 29 percent, adding 3 percent of
total GDP

55%
22%
20%
3%
4
•Households and NPISHs Final Consumption Expenditure 55%
•General Government Final Consumption Expenditure 20%
•Gross Fixed Capital Formation 22%
Exports - Imports (Goods and Services) 3%
Domestic Demand
1. Introduction: the GDP in Spain.
Weight of its components - December 2015 (%)

• Evolution of the housing prices per m2 since 1995:
+214% between March 1995-March 2008
5
House Prices:
This concept tracks changes in residential
property prices (per meter square)

• Evolution of the housing prices per m2 since 1995:
-31% between March 2008 –September 2014
6
House Prices:
property prices (per meter square)

• Spain total defaulted mortgages housing purchases in
millions of Euros: improving since March 2014
7
Nonperforming (Bad) Loans:
This concept tracks loans that are in default or
close to being in default. A loan is nonperforming
when payments of interest and principal are past
due for a specified period of time (e.g. 90 days or
more).

• Spain Loan delinquencies proportion of total (DELINQUENCY RATE)
since 1990: improving since the level of 13% of December 2013.
Goods news for the banking sector in Spain!
8
Delinquencies:
Delinquencies represent a neglect in
making required payments on a debt.

since 1990: improving since the level of 13% of December 2013 and
showing a strong correlation with the unemployment rate.
9

since 1990: improving since the level of 13% of December 2013 and
showing a strong correlation with the unemployment rate and with
the end of the sovereign debt crisis in 2012 (e.g. Spain CDS 5 Years)
10

• Spain total number of newly mortgaged properties: improving
since August 2013
11
Mortgage Approvals:
This concept tracks the number of
mortgage loans that have been
approved by lenders.

• Building Permits: improving since August 2013
12
Building Permits (Number)
This concept tracks the number of permits
that have been issued for new construction,
additions to pre-existing structures or
major renovations.

• Building (Housing) Starts: is stabilizing since 2013
13
Building (Housing) Starts:
Housing (or building) starts track the number
of new housing units (or buildings) that have
been started during the reference period.

• New Homes Prices: improving since June 2013
14
New Homes Prices:
property prices.

• Existing Homes Prices: is stabilizing since 2013
15
Existing Homes Prices:
property prices.

• Spain house transaction: is stabilizing and improving
since April 2012
16
Spain house transactions:
This concept tracks changes in sales within
the construction industry.

• Spain Total Consumer Loans: is stabilizing since 2013
17
Consumer Credit Outstanding
(Nonmortgage):
Consumer or Household Credit tracks the
outstanding amount of credit (or loans) used
by consumers to finance purchases of goods
or services. It can include everything from
credit card lending, to auto loans, to lines of
credit but it excludes mortgage loans.

2. The employment situation in Spain.
• Eurostat Unemployment rate Spain (20%): in July 2013 we reached in
Spain a dramatic level (26%) very similar to the Great Depression in the U.S.
(25%) in the early 1930s.
18
Unemployment Rate:
The unemployment rate tracks the number of
unemployed persons as a percentage of the
labor force (the total number of employed
plus unemployed).

• Spain Registered Unemployment Level Month Over Month Net Change.
May 2016, the best data in May of the series: JOBLESS CLAIMS FALL 119.768 IN MONTH.
Spanish Labor Ministry registered unemployment fell 119,8k m/m in May to 3,89 millions.
19
Unemployment Claims (outstanding):
This concept tracks the total number of people
who have filed jobless claims with the appropriate
government labor office; typically, in order to
receive unemployment benefits. This is also
sometimes referred to as registered
unemployment.

Spain Registered Unemployment Level (in numbers): is improving from
February 2013. Spanish Labor Ministry registered unemployment fell in May
to 3,89 millions
20
Unemployment Claims (outstanding):
This concept tracks the total number of people who
have filed jobless claims with the appropriate
government labor office; typically, in order to receive
unemployment benefits. This is also sometimes
referred to as registered unemployment.

Wages & Labor Costs: Spain Wage Income Index: improving since October
2013
21
Wages:
This concept generally tracks total remuneration
(in cash or in kind) paid to employees in return
for work done (or paid leave).

Wages & Labor Costs: Spain Labor Costs Services Avg Monthly Salary Cost per Worker:
increasing since December 2012
22

3. The GDP growth in Spain.
Spain Real GDP Quarter over Quarter (+0,8%) & Year over Year (+3,4%):
DOUBLE DIP RECESSION (2009-2012)
23
Real GDP by Expenditure:
Gross domestic product (GDP) measures the final market value of all goods and services produced
within a country. It is the most frequently used indicator of economic activity. The GDP by expenditure
approach measures total final expenditures (at purchasers' prices), including exports less imports. This
concept is adjusted for inflation.

Spain (+0,77%) versus Euro Area (+0,50%) Real GDP Quarter over Quarter:
Spain is performing better than the Euro Area
24
within a country. It is the most frequently used indicator of economic activity. The GDP by expenditure
approach measures total final expenditures (at purchasers' prices), including exports less imports. This
concept is adjusted for inflation.

Spain (+3,4%) versus Euro Area (+1,7%) Real GDP Year over Year
Spain is performing better than the Euro Area
25
within a country. It is the most frequently used indicator of economic activity. The GDP by
expenditure approach measures total final expenditures (at purchasers' prices), including exports
less imports. This concept is adjusted for inflation.

Spain Real Chained GDP Prices Household Final Consumption Expenditure QoQ
(55% of GDP): is the main component of GDP accounting for 55 percent of
its total use (in the U.S. is the 71% of the GDP) and it is showing a DOUBLE DIP.
26

3. The GDP growth in Spain
Domestic Demand
A ) Final Consumption Expenditure (YoY):
Components (NORMALIZED BASE JUNE 2007):
1. Household Final Consumption Expenditure Double Dip (2009-2013)
2. NPISH (Non Profit Institutions) Final Consumption Expenditure
3. Government Final Consumption Expenditure
27

Domestic Demand
b) Gross Fixed Capital Formation (YoY):
1. GFCF Tangible Fixed Assets
• GFCF Construction
• GFCF Equipment and Cultivated Assets (managed forests, livestock raised for milk
production, etc)
2. GFCF Intangible Fixed Assets (Intellectual Property Products)
28

Exports & Imports (YoY)
1. Exports of Goods & Services
2. Imports of Goods & Services
29

Weight of its components December 2015 (%) Source: Eurostat
30
Households and NPISHs Final Consumption Expenditure 55%
General Government Final Consumption Expenditure 20%
Gross Fixed Capital Formation 22%
Exports - Imports of Goods and Services 3%
55%
22%
20%
3%

Spain Annual GDP Constant Prices (by Eurostat) in NUMBERS (Annual value):
1.071,9 millions of EUROS (31 December 2015)
31

Spain General Government Debt Total: 1.072 millions of EUROS (31 December 2015)
32
Government Debt:
This concept includes all financial liabilities of a
government (either central or central + local
governments). These liabilities are typically in the
form of government bills and bonds.

Spain Budget Balance (% of GDP): there is a budget deficit of -5,10% (December 2015).
It is improving since 2012 (the end of the sovereign debt crisis)
33
Spain Government Budget
Spain recorded a Government Budget deficit equal to -5,10 percent of the
country's Gross Domestic Product in 2015. Government Budget in Spain
averaged -3.81 percent of GDP from 1995 until 2015, reaching an all time high of
2.20 percent of GDP in 2006 and a record low of -11 percent of GDP in 2009.
Government Budget in Spain is reported by the Eurostat and is an itemized
accounting of the payments received by government (taxes and other fees) and
the payments made by government (purchases and transfer payments).
A budget deficit occurs when an government spends more money than it takes
in. The opposite of a budget deficit is a budget surplus.

Eurostat Spain Government Debt as a Percentage of GDP: 99,20% (December 2015)
34

35
Industrial Production (Volume):
Industrial production measures the output of
industrial establishments in the following
industries: mining and quarrying, manufacturing
and public utilities (electricity, gas and water
supply). Production is based on the volume of the
output.
4. Industrial Production & Capacity Utilization.
Spain Industrial Production Index (YoY): SPAIN APRIL SEASONALLY ADJUSTED
INDUSTRIAL OUTPUT WAS 2,7%

70
75
80
85
90
95
100
01/04/2008
01/07/2008
01/10/2008
01/01/2009
01/04/2009
01/07/2009
01/10/2009
01/01/2010
01/04/2010
01/07/2010
01/10/2010
01/01/2011
01/04/2011
01/07/2011
01/10/2011
01/01/2012
01/04/2012
01/07/2012
01/10/2012
01/01/2013
01/04/2013
01/07/2013
01/10/2013
01/01/2014
01/04/2014
01/07/2014
01/10/2014
01/01/2015
01/04/2015
01/07/2015
01/10/2015
01/01/2016
01/04/2016 36
Industrial Production (Volume):
Industrial production measures the output of industrial establishments in the following industries:
mining and quarrying, manufacturing and public utilities (electricity, gas and water supply).
Production is based on the volume of the output.
SPAIN INDUSTRIAL PRODUCTION MoM NORMALIZED BASE 100
since March 2008 using data since May 2007 and a simple moving average of 12 months
+6%
-28%
Minimum October 2013

Capacity Utilization Spain (Quarterly - European Commission): improving
since March 2013 (Level: 77,80%)
37
Capacity Utilization:
Capacity utilization tracks the extent to which the
installed productive capacity of a country is being used
in the production of goods and services. For some
countries this concept is reported as the percent of
capacity being used for production (as opposed to
sitting idle). For other countries, this concept is
measured through business surveys (tracking business
leaders' opinions on their use of productive capacity).

38
NOTE:
Seasonally and working day adjusted (SWDA) data have been adjusted for both seasonal patterns and working
day effects.
1. Seasonal patterns can include things such as increased retail spending around Christmas or decreased construction
activity during winter months in colder climates.
2. Working day effects (or calendar variations) include differing number of working or trading days in a given month
or quarter. Since some months (or quarters) naturally have more working days than others (due to the differing
number of holidays or Sundays, Mondays, etc.), this adjustment seeks to smooth out the working day differences
between months.
Analysts generally prefer to use seasonally adjusted data, as it is easier to observe the underlying trend in the data
series.
Transformation
YoY%: Data with the transformation YoY% represent growth rates between the reference period and that same period
one year ago. Year-on-year growth rates can be calculated by taking the underlying data of the reference
week/month/quarter (e.g. Jan 2013) divided by the same period one year ago (e.g. Jan 2012) as per the following
formula: (M[t]/M[t-12]-1)*100 or (Q[t]/Q[t-4]-1)*100 [where M[t] (or Q[t]) = underlying level in reference month (or
quarter), t]
4. Production of Main Spanish Industrial Goods
Spain Industrial Production Consumer Goods SWDA Y

39
Spain Industrial Production Consumer Goods SWDA YoY: +2,8%
Spain Industrial Production Consumer Goods SWDA MoM: 96,34
+(96,34-93,69)/93,69 =
2,8%

40
Spain Industrial Production Durable Consumer Goods SWDA YoY: -5,5%
Spain Industrial Production Durable Consumer Goods SWDA MoM: 66,15
=+(66,15-69,99)/69,99
=-5,5%
Durable Goods :
goods usable for a relatively long time, as machinery, automobiles, or household appliances

41
Spain Industrial Production Non Durable Consumer Goods SWDA YoY: +3,1%
Spain Industrial Production Non Durable Consumer Goods SWDA MoM: 99,68
=+(99,68-96,65)/96,65=
3,1%

42
Spain Industrial Production Capital Goods WDA YoY: +11,5%
NOTE: WDA: Working day adjusted (WDA) data have
been adjusted for nonseasonal effects related to the
number of working or trading days in a given month
or quarter (calendar variations).
Since some months naturally have more working, or
trading, days than others (due to the differing
number of holidays or Sundays, Mondays, Tuesdays,
etc.) this adjustment seeks to smooth out the
working day differences between months. Working
day adjustment is sometimes also referred to as
trading day adjustment.
Capital Goods :
Assets used to produce other goods. For example, a machine used to produce bolts would be a
capital good.

43
Spain Industrial Production Capital Goods WDA YoY: +11,5%
Spain Industrial Production Capital Goods WDA MoM: 105,62
=+(105,62-94,76)/94,76
= 11,5%

44
Spain Industrial Production Energy SWDA YoY: -1,6%
Spain Industrial Production Energy SWDA MoM: 92,83
=+(92,83-94,34)/94,34
= -1,6%

45
Spain Industrial Production Intermediate Goods SWDA YoY: 0,5%
Spain Industrial Production Intermediate Goods SWDA MoM: 93,32
There is an error in Bloomberg: 0,1% is wrong.
The correct reading is 0,5%.
=+(93,32-92,86)/92,86=
= 0,5%
Intermediate Good
Definition
An intermediate good is a good or service that is used in the eventual production of a
final good, or finished product. These goods are sold by industries to one another for
the purpose of resale or producing other goods. An example of an intermediate good
would be sugar, which is directly consumed but is also used to manufacture food
products.

46
• European Commission Economic Sentiment Indicator Spain: improving since August
2012 (after the Mario Draghi´s “magic” words of 26 July 2012 in London)
The Economic Sentiment Indicator is calculated from the
European Commission's Business and Consumer Surveys:
It is constructed from the following indicators: the
industrial confidence indicator (40%), the service
confidence indicator (30%), the consumer confidence
indicator (20%), the construction confidence indicator
(5%), and the retail trade confidence indicator (5%).

47
• EC Consumer Confidence Spain General Economic Situation Next 12 Month: improving
since August 2012 (after the Mario Draghi´s “magic” words of 26 July 2012 in London)
Target Audience: households
Sample Size: 2,000 households
Date of Survey: first 2 or 3 weeks of the month

48
6. Retail Sales & Wholesale sector.
• New Car Registrations (113.671 cars in May 2016): in a road to recovery since
the through of September 2012 (35.148 cars)
Motor Vehicle Sales (Registrations):
This concept tracks the number of motor
vehicles newly registered with a government
authority.

49
7. Trade Balance: -759,9 Millions Euros (deficit)
International Trade Balance (Nominal/Value):
The international trade balance measures the
difference between the movement of
merchandise trade leaving a country (exports)
and entering a country (imports).
This measure tracks the value of the
merchandise trade balance.

50
7. Trade Balance: difference between Exports and Imports:
22.443,1 – 23.238,9 = -759,9 Millions Euros (deficit)
Exports Imports

8. Consumer Prices in Spain.
Spain (white) versus Euro Area (red) CPI Year over Year: IN DEFLATION
51
Harmonised Index of Consumer Prices:
The harmonised index of consumer prices (HICP),
used primarily within the European Union, is a
measure of prices paid by consumers for a market
basket of goods and services. It is calculated using
the same methodology across countries to allow for
comparable measures of inflation. The yearly (or
monthly) growth rates represent the inflation rate.

9. Producer Prices in Spain (YoY): still falling…
52
Producer Prices (Output Prices):
Producer prices (output) are a measure of the
change in the price of goods as they leave
their place of production (i.e. prices received
by domestic producers for their outputs either
on the domestic or foreign
market).

10. Corporate bankruptcies in Spain.
Spain Bankruptcy Total Level: improving since March 2013
53
Spain Bankruptcy Total Level:
Since September 2004, this statistic
replaces the Suspensions of Payments and
Bankruptcy Declarations Statistic, which
was no longer published after the entry
into force of the Insolvency Act on 1st
September 2004.
Levels indicate number of bankruptcies.

11. CDS (Credit Default Swap) of the Kingdom of Spain & sovereign bonds in July 2012
The huge sovereign debt crisis of Europe in the summer of 2012:
54
Since the onset of the financial crisis in August 2007, the Eurosystem (ECB + NCBs) has engaged in
several unconventional monetary policy measures to ensure the correct pass-through of the
monetary policy stance to the economy.
After an initial phase in which the non-standard measures were mostly intended to address
impairments in the interbank markets, the financial fragmentation stemming from the sovereign
debt crisis and the resulting concerns of international investors about excessive national debt in
several euro area countries led to an extension in the scope of intervention to the secondary
sovereign bond markets. Among other forms of interventions intended to safeguard orderly
monetary policy transmission, during the period July to September 2012, the Governing Council of
the ECB announced that the bank might engage in outright monetary transactions (OMTs) in the
secondary markets for government bonds.

• Spain CDS USD SR 5Y
55
•Mario Draghi and his “the ECB is ready
to do whatever it takes to preserve the
euro and believe me…it will be enough” -
26 July 2012.
•ECB (European Central Bank) and the
OMTs (Outright Monetary Transactions)
announcements - 6 September 2012

• Spain CDS USD SR 5Y
56
26 July 2012.

• Spanish Sovereign Bonds 10 years maturity
57
26 July 2012.

• Spanish Sovereign Bonds 10 years maturity
58
26 July 2012.

• Spain CDS USD SR 5Y versus IBEX 35 index (inverse or negative correlation)
59
26 July 2012.

• It was, by far, the worst moment and the turning
point of the financial crisis (sovereign debt crisis)…
60
•Mario Draghi, President of the ECB (European Central Bank) and his “magic” words:
“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it
will be enough.” 26 July 2012, at the Global Investment Conference in London.
https://www.ecb.europa.eu/press/key/date/2012/html/sp120726.en.html

• …the situation improved again the 2nd August 2012 in
the Press Conference of the ECB…
61
•Mario Draghi, President of the ECB (European Central Bank) and his words in the introductory
statement to the press conference: “The Governing Council, within its mandate to maintain price
stability over the medium term and in observance of its independence in determining monetary policy,
may undertake outright open market operations of a size adequate to reach its objective. (…)
Furthermore, the Governing Council may consider undertaking further non-standard monetary policy
measures according to what is required to repair monetary policy transmission.” 2 August 2012

62
• …and, definitely, the 6th September 2012 with the OMT
(Outright Monetary Transactions) announcements, the
“sun” started to shine in Spain, again.
Coverage: “Transactions will be focused on the shorter part of the yield curve, and in
particular on sovereign bonds with a maturity of between one and three years. No ex ante
quantitative limits are set on the size of Outright Monetary Transactions.”
http://www.ecb.europa.eu/press/pr/date/2012/html/pr120906_1.en.html

63
• …and there is a very interesting working paper titled:
“The Financial and Macroeconomics effects of the
OMT announcements”
• Among other forms of intervention aimed at
avoiding impairments in monetary policy
transmission, in the period July to September 2012,
the Governing Council of the ECB announced that
the bank might engage in outright monetary
transactions (OMTs) in the secondary markets for
government bonds. In particular, on July 26, 2012,
during a conference in London, President Draghi
said that the ECB was ready to do “whatever it
takes” to preserve the euro within the limits of its
mandate.
• On August 2, 2012, during the press conference
after the Governing Council meeting, President
Draghi announced, “ECB may undertake outright
open market operations.” Finally, on September 6,
2012, the ECB’s Governing Council announced a
number of technical features of the OMT program.

64
More precisely, the ECB stated that no ex ante
quantitative limits would be considered for
outright transactions in secondary sovereign
bond markets, that purchases would concentrate
on bonds with remaining maturities of up to
three years.
Although none of the euro area countries has
asked to activate the OMT program, had a
sizeable impact on financial markets
This study aims to quantify the financial and
macroeconomic impact of OMT announcements
in four euro area countries: Germany, France,
Italy, and Spain and suggests that the reduction
in bond yields due to OMT announcements is
associated with a significant increase in real
activity and credit in Italy and Spain.

65
“Our evaluation suggests that OMT announcements
have statistically significant and economically
relevant effects on credit, as well as on economic
growth in general, in Italy and Spain, with relatively
limited spillovers in France and Germany.”
Changes in financial prices originated by the OMTs
announcements altered the behavior of private
agents, affecting positively the rest of the
economy.

66

67
Called QE (Quantitative Easing)
It includes 4 types of assets:
A. Third Covered Bonds Purchase Programme (CBPP3)
4 September 2014
B. Asset-Backed Securities Purchase Programme (ABSPP)
4 September 2014
C. Public Sector Purchase Programme (PSPP)
22 January 2015 – Started: 9 March 2015
D. Corporate Sector Purchase Programme (CSPP)
10 March 2016 – Started: 8 June 2016
12. ECB announces expanded asset purchase programme
(22 January 2015). Impact on the financial markets.

68
•ECB expands purchases to include bonds issued by euro area central governments,
agencies (e.g. ICO) and European institutions (e.g. EIB)
•Combined monthly asset purchases to amount to €60 billion
•Programme designed to fulfill price stability mandate
This programme add the purchase of sovereign bonds to its existing private sector asset
purchase programmes in order to address the risks of a too prolonged period of low
inflation.
The Governing Council took this decision in a situation in which most indicators of actual
and expected inflation in the euro area had drifted towards their historical lows. As
potential second-round effects on wage and price-setting threatened to adversely affect
medium-term price developments, this situation required a forceful monetary policy
response.
Asset purchases provide monetary stimulus to the economy in a context where key ECB
interest rates are at their lower bound. They further ease monetary and financial
conditions, making access to finance cheaper for firms and households. This tends to
support investment and consumption, and ultimately contributes to a return of inflation
rates towards 2%.

69
Covered Bonds - Cedulas Hipotecarias Españolas (10 years ) –daily series–
Third Covered Bonds Purchase Programme (CBPP3) 4 September 2014

70
Covered Bonds - Cedulas Hipotecarias Bankia (10 años) –daily series–
Third Covered Bonds Purchase Programme (CBPP3) 4 September 2014

71
German Sovereign Bond “on the run” DBR 0 ½ 02/15/25 –daily series–
Public Sector Purchase Programme (PSPP)
22 January 2015 – Started: 9 March 2015 on secondary markets

72
–
22 January 2015 – Started: 9 March 2015 on secondary markets
German Sovereign Bond “on the run” DBR 0 ½ 02/15/25 –daily series–

German Sovereign Bond “on the run” DBR 0 ½ 02/15/25
73
–

7474
22 January 2015 – Started: 9 March 2015
Germany Generic Government 10 years –daily series– (Yield)

7575
Additional questions about the QE:
Can the asset purchase programme help the ECB to foster growth and job creation in
Europe?
The ECB has a clear mandate: maintaining price stability. This programme will help to
bring inflation back to levels in line with the ECB's objective. But it will also help
businesses across Europe to enjoy better access to credit, boost investment, create jobs
and thus support overall economic growth, which is a precondition for inflation to
return to and stabilise at levels close to 2%. Subject to price stability, these are also
important objectives to which the ECB contributes in line with the Treaty.
Is the asset purchase programme monetary financing?
The ECB strictly adheres to the prohibition on monetary financing by not buying in the
primary market. The ECB will only buy bonds after a market price has formed. This
ensures that the ECB does not distort the market pricing of risk.

7676
Additional questions about the QE:
Is the ECB the only central bank conducting asset purchases?
Many central banks have used outright purchases as part of their monetary policy, often
referred to as quantitative easing, or QE. It has been employed by the Federal Reserve
Board, the Bank of England and the Bank of Japan.
Open market operations are a core instrument of central banks even in normal times.
Outright purchases become useful when policy interest rates cannot be reduced any
further. They can help central banks to fulfil their mandate, which in the case of the ECB
is maintaining price stability, and thereby support growth and the creation of jobs.
Is the asset purchase programme aimed at helping specific countries?
The programme is designed to push inflation and inflation expectations back to levels
closer to the ECB's objective in the euro area as a whole. It does not reduce the debt of
any particular country.

77
13. Appendix about the U.S economy:
the situation of the current business cycle
paying strict and special attention to the
Change in NonFarm Payrolls and the
Federal Reserve Labor Market Conditions
index in the coming months.
77

Where is the peak of the U.S.
business cycle?
8th May 2016
Ramón Bermejo
Source: based on Bloomberg

S&P 500 index versus Fed Labor Market Conditions Index versus Recession Indicator
79

According to the criteria of the NBER (National Bureau of Economic Research) from the last
trough of the Great Recession (Peak: December 2007 -published by the NBER in December 1,
2008-; Trough: Jun 2009 -published by the NBER in September 20, 2009-), the
economic expansion of the U.S. current business cycle has just entered its 83rd month,
so tomorrow 9th of May at 16:00 (Spain time) we are going to pay close attention to the
Federal Reserve Labor Market Conditions Index release, because its last three readings
have suggested that the labor market has deteriorated in each month of the last three
months.
The Federal Reserve Labor Market Conditions Index is calculated as a weighted average
based on 19 monthly labor market indicators to gauge improvements in the labor market.
The 19 labor market variables used by the Fed are: the unemployment rate, the labor
participation rate, part-time for economic reasons, private payroll employment, government
payroll employment, temporary help employment, average weekly hours, average weekly
hours of persons at work, the average hourly earnings, the composite help-wanted index,
the hiring rate, the transition rate from unemployment to employment, the insured
unemployment rate, job losers unemployed less than 5 weeks, the quit rate, job leavers
unemployed less than 5 weeks, the Conference Board Survey on job availability, the NFIB
Survey on hiring plans and difficulty to fill a job.
80

As you can notice in the shadows areas in blue color (2000, 2002, 2007, 2016) of the
charts (showing the correlation between the S&P 500 index vs Fed Labor Market
Conditions Index vs U.S. Recession Indicator), the LMCI started a tendency in negative
territory.
The question now is...Is this the start of something similar for the U.S. equity markets that
we saw in 2000 (April-June), 2002 (June-August) and 2007 (May-July) in the LMCI?
We are going to stay vigilant about the possibility that the reading of tomorrow could be
in negative territory again and deeper than the three precedent months (January: -1,8
points; February: -2,5 points; March: -2,1 points). It could be an excellent leading
indicator to detect a turning point in the current business cycle again.
81

Lecture: "Pain is finishing in Spain" 15 June 2016

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Lecture: "Pain is finishing in Spain" 15 June 2016