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Euro Negative Yield Hits Jobless Spaniard to Munich Fund Manager

December 13, 2012

Spanish Electrician Fran Lopez

With Europe’s debt crisis entering its fourth year, Fran Lopez’s life-lived-backwards is an extreme example of the upheaval that people across the continent -- at all levels of society and up and down the financial scale -- are gradually having to accept as the norms of a deleveraging world. Photographer: Angel Navarrete/Bloomberg

Divorced and unemployed, Fran Lopez is back at home with his parents again.

Five years ago, he was living in Madrid’s wealthiest suburb with his wife and new-born daughter and earning as much as 4,000 euros ($5,175) a month upgrading electricity substations for Iberdrola SA (IBE), Spain’s largest utility. Now Lopez, 26, is studying for his high-school diploma.

“I’m starting from zero,” Lopez said. “They want a load of qualifications. So I’m studying. My aim is to work, and if there’s no work, I’ll keep studying.”

With Europe’s debt crisis entering its fourth year, Lopez’s life-lived-backwards is an example of how the fortunes of many of the continent’s 500 million citizens have been upended. Rich and poor, north and south, the upheaval is the face of a new economic reality as taxes increase while people get less from the governments and the bond markets they used to rely on.

European Union leaders are meeting this week in Brussels to thrash out their next steps to shore up the euro. Finance ministers agreed yesterday to put the European Central Bank in charge of all euro-area lenders.

In the German city of Munich, 1,500 kilometers (930 miles) away from Madrid, Daniel Just is bemoaning the lack of returns for his pension clients. With five euro countries needing international bailouts, yields on two-year German government bonds turned negative in July and again last month, meaning investors are prepared to pay to keep their money safe.

Accepting Reality

“One has to accept the new reality,” said Just, 55, chief investment officer at Bayerische Versorgungskammer, Germany’s biggest public retirement fund. “One only has two alternatives basically: reduce return expectations and payouts, or try to practice some form of magic.”

German pension funds are traditionally conservative when it comes to investing. Unlike those in the U.K. and U.S., they hold most of their money in fixed income and the law tells them to invest in assets that guarantee “the best possible safety.”

In 2012, Just more than doubled the amount of money he allocated to more risky securities such as stocks to 64 percent of the overall portfolio, according to the annual report for his 52 billion-euro pension fund. The 2012 figures are due to be released on Jan. 15.

Market Returns

The benchmark German DAX stock index has risen 29 percent this year after falling 11 percent in 2011, while the best- performing bond markets in the euro region are Portugal and Ireland, countries that required international bailouts partly funded by Germany.

German bonds returned 4.1 percent this year as of Dec. 12, compared with 54 percent for Portugal and 28 percent for Ireland, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

The German fund manager and Spanish electrician are at either ends of the same predicament confronting European leaders as they try to restart economic growth.

Government debt in the 17-nation euro area jumped to 90 percent of gross domestic product in the second quarter from 69 percent five years earlier, according to Eurostat, the statistics agency in Luxembourg. Countries borrowed 2.4 trillion euros, more than the entire annual output of France, to sustain economic activity, the figures show.

Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., coined the term “new normal” in 2009 to describe a global economy facing low growth and high unemployment in the aftermath of the global banking meltdown.

Age of Leverage

In Europe, that changing reality led the AAA-rated northern nations fronted by Germany to expect southern Europe to rein in government borrowing even if that means crushing economic growth and driving up unemployment.

“Having gone too far during the ‘great age’ of leverage and credit entitlement, western economies now face the challenge of overcoming the combined drag of very poor growth dynamics, excessive unemployment and too much debt in the wrong places,” El-Erian said in an e-mailed response to questions.

As a result, Just and Lopez are revising their financial outlook as the euro region arrives at 2013 in recession for the second time in less than four years.

For the German in Munich, it means looking for new ways to make money for future retirees from a place with the highest purchasing power among the country’s cities, according to market research firm GfK SE. For the Spaniard, it means studying to get the qualifications he was once told he didn’t need.

Depressed Rates

“I’m learning more now,” Lopez, whose state benefits add up to a little over a 10th of what he used to earn, said over a coffee in central Madrid. “Last time I was just a kid and I’m having to do now what I should have done then.”

Unprecedented rates of unemployment make it easier for companies to hold down wages, while the European Central Bank’s record-low interest rates are depressing returns for investors as companies, consumers and governments struggle to pay down the debts they took on during the credit boom.

GDP in the euro area declined an annual 0.6 percent in the third quarter. Analysts predict the trend will persist until the third quarter of next year, according to forecasts compiled by Bloomberg. In 2006 and 2007, the year-on-year growth rate averaged 3.2 percent.

The jobless rate in Lopez’s native Spain stands at 26 percent, jostling with Greece for the rank of highest on the continent. In 2007, it was at a low of 8 percent.

“If you’ve had a long period where imbalances grew, then you have a long period where those imbalances have to unwind,” said Ken Wattret, chief euro region economist at BNP Paribas SA in London. “You have the feast and then the famine.”

Back to Franco

The collapse of the Spanish labor market, which has seen the number of unemployed triple in five years to 5.8 million in the third quarter, rolled back many of the social gains achieved by bringing women into jobs following the return to democracy after General Francisco Franco in 1978.

As a result of the job losses, just 45 percent of Spaniards over 16 are working, a decline of 9 percentage points since unemployment touched a record low in 2007, according to the National Statistics Institute.

Across the euro area, the percentage of working-age people in jobs dropped to 64 percent in the third quarter from 66 percent at its 2007 peak, giving up more than half the gains achieved since the single currency came into circulation in 2002, according to Eurostat.

School Dropout

Lopez got work as an electrician paying 800 euros a month in 2004 off the back of an apprenticeship after drifting away from high school at 16. Within two years, he parlayed that opening into a job improving substations as Iberdrola and Union Fenosa SA rolled out power connections to hundreds of thousands of new homes being built each year.

“I was really set there,” he said. “I had a permanent contract, good work, I got on well with my colleagues.”

Lopez lost his job in 2009 when the first wave of the financial crisis following the collapse of New York-based investment bank Lehman Brothers Holdings Inc. brought Spain’s building boom to a halt. His father’s door-making business was also hit by the slump, while his mother, who stopped work to bring up her two sons, found employment caring for seniors to boost the family’s income.

“They said to me, ‘you work or you study, we’re not having layabouts in this house,”’ Lopez said.

In Munich, Just, whose pension fund covers occupations from architects and doctors to orchestra members and chimney sweeps, has looked further afield for investments. Last year, he flew to Brazil to assess the relative value of timber producers.

German Headache

“The job as an asset manager has become much more difficult because of the European debt crisis,” Just said. “It’s important to remain calm and not go crazy to match the returns seen the past. Diversification is key.”

The biggest headache for Just at the moment is that the government bonds he can invest in are returning between 2 percent and 2.5 percent, while the ones expiring in his portfolio paid 5 percent to 5.5 percent a year. German 10-year bonds yielded 1.29 percent this week, down from 2.2 percent a year earlier. The rate on two-year German government debt was 0.08 percent, compared with negative 0.01 percent on Nov. 28.

“Trying to practice magic to boost returns is a risky and dangerous endeavour and asset managers have to be careful not to fall into that trap,” Just said at his office in Munich. “The industry understood that as a lesson from the financial crisis. Customers have also understood that the returns of the past are passé and that we won’t see them again anytime soon.”

Looking back on the boom years, Lopez said that with hindsight it was out of control.

Sovereign Spending

Spanish developers started to build 700,000 homes in 2006, more than Germany and the U.K. combined. They then saw demand for housing decimated by credit shortages. The banking system is saddled with about 182 billion euros of bad loans, or 11 percent of total lending, according to Bank of Spain data.

“It was spending for the sake of spending,” said Lopez, who lives off 226 euros a month after sending half his monthly stipend from the state to support his daughter. “They put up so many new buildings and most of them are empty now.”

Spain is heading into the sixth year of a slump that has pushed unemployment among the young people of Lopez’s generation to more than 50 percent. Economic output in Greece has fallen by about 20 percent since the government said in October 2009 that it had been understating its budget deficit. Portugal is set to contract for a third straight year.

Mask Making

The transformation in the European economy has shifted the goalposts for people like Lopez who started their careers when credit was cheap and plentiful and the economy was booming. They now find the horizons have been drastically foreshortened.

“That situation went on for a long period of time and people think it’s normal,” said Wattret at BNP Paribas. “But that wasn’t normal, it was exceptional. I don’t expect people who were experiencing it at the time to understand it, but with hindsight it’s quite clear.”

Lopez, who wears a long, shaped goatee beard and chunky metal rings in his ears, dreams of studying mask-making so he can do makeup for feature films. He leaves his resume at Burger King and McDonald’s restaurants in the hope of picking up part- time work. No one calls.

In the evening, he goes down to the park and plays soccer with kids from the neighborhood. When his friends go out drinking over the weekend, he buys beers from the Chinese-run convenience store to drink at home. He thinks about moving to the U.K. or Germany to look for work.

It’s all so far from how he used to live that new friends struggle to grasp the transformation he’s experienced. So Lopez keeps the paperwork to prove it.

“People don’t believe me when I tell them,” he said. “But I still have the pay slips. I say, ‘look, just look.”’

To contact the reporters on this story: Ben Sills in Madrid at Oliver Suess in Munich at

To contact the editor responsible for this story: Tim Quinson at

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