If there is a clear evidence on which we all agree is in the strong relationship between unemployment and non-payment of debts in general and of bank loans in particular. Today I will check Wyman results forecasting Unpaid Loans using Unemployment as determinant variable
Main Model Assumptions.
We will assume that job losses won’t stop until the second quarter of 2014 and at a rate similar to the past two years, something consistent with the scenario sketched by the CEOE . It means a total loss of a million jobs.
Unemployed Workers and Unpaid Loans.
Logically, any increase in unemployment increases dishonored loans. After a follow-up and a study of both variables I think there is a exponential component, mainly by the lengthening of the crisis and the increasing impoverishment that creates a recessionary spiral with its chain of defaults. With this setting, with this tool the forecast would be a total of close to 211,000 million Euros in unpaid loans by the second quarter of 2014.
Unemployment Rate and Delinquency Rate or UR-DR.
This method of calculation, although the exponential component, reminds Okun’s Law, that in Spain does not apply (as we saw) as Spain does not fulfilled its assumptions, although some have used it wrongly and with clear ideological motivations. We believe that my model UR-DR (or TP-TM) ©, of our property, is valid if: a) There has been a serious crisis of financial origin, b) there are no abnormal variations in the labor force, as great migrations, c) there is consistency in quantification standards in defaults and d) Total credit growth remains similar. Under these assumptions the results should be taken with caution.
With this way of calculating the delinquency data obtained would be about 199,500 million or a default rate of 12.4% (today it is 9.7%) for a total credit of 1.61 billion Euros, that “today” is about 1.72 trillion; topic apart is how bad will the total income of the sector, requiring more capitalization. If the adjustment is made multiple linear and not exponential as above, we would go up to a 15.85% default rate or 255.481 million Euros, which we leave as more adverse event.
Employed Workforce and Unpaid Loans.
The number of workers employed tells us who are able to support the weight of debt through their production. It can also be assumed that companies, before the financial strangulation are forced to destroy employment either by bankruptcy or by their need to release funds; this process can also occur by overtaxing, something which we have repeatedly denounced.
So when we see these relationships between employment and delinquency data (observations) we not only gather information on their relationship, but also among the health of the companies and arrears, which is why we use the total delinquency and not just the one of families. With this approach, the result would be a total delinquency of 193,000 million Euros and a ratio of 11.98% by the end of the second quarter of 2014.
Use of The Results.
From the point of view of the government, it has to be considered that the credit line of 100,000 million Euros to be used to shore up the system is more than enough as the total delinquency between 11.98% and 15.85%, or between 193,000 and 255,000 million Euros, requiring (25,000-90,000 million Euros). But what is next, zombie cajas, once the fund is exhausted? Additionally, the fall in total loans means a fall of sector revenues.
If you are an investor you should model scenarios and them track how they grief, that could end affecting companies in which you invest and their access to credit. Do not forget that the capital and reserves of the financial system is close to 330,000 million Euros, that our institutions generate funds to cover all or part of these additional losses of between 25,000 and 87,000 million in the worst case scenario, that be found will be distributed and how this aid will be controlled between institutions (how much to whom), and that could be key in the future of companies and banks.
The first independent estimate imposed on the Bank of Spain, made by Oliver Wyman and Roland Berger, to which we made the severe criticism on the 22cond of June , fixed the needs for capitalization between 26,000 and 50,000 million by the end of 2014. Now Wyman, with the assumptions that we had strongly criticized, indicates how this fund will be distributed. But another question persists: Why nobody wants to talk about restructuring cajas? Why is that?
More on this matter clicking this link: Jobless, homeless, suicidal: Spain’s government can only blame itself for this crisis from Quartz News, the economic news media of The Atlantic.
© Luis Riestra Delgado.