THINGS are rapidly getting worse in Spain. Bond yields have risen to over 7.5% today, on the back of a shaky government debt auction last Thursday, and the failure of one of its regions (Valencia) that now needs help from Madrid. In line with this bad news on the state of the government coffers, the cost of buying an insurance policy against Spanish default (credit default swap premia) is up, and is increasingly diverging from Italy’s (see chart). Investors’ views of Spanish companies are just as gloomy as of its government finances. The Spanish stock-market—the IBEX 35—is down 30% this year, as any expectations that company profits will lead to decent dividends anytime soon are thin on the ground. Things could get worse as the week progresses, particularly if preliminary measures of output to be released tomorrow are weak.
If Spain fails, yet another new plan for the euro zone will be needed, as Spain’s woes means three sets of existing ideas have been exhausted. First, Spain has already received the short-term treatment that was supposed to save it. A €100 billion bailout has already been set up, and approved last week by Germany. Second, another favoured response—booting out the head of government, to put in place a more market friendly leader—isn’t really justified. Since taking over in December 2011 Spanish prime minister, Mariano Rajoy, has worked hard to talk up its debt position and its banks; he has also largely put in place the policies demanded by Brussels (see here). Third, other potential boosts to the Spanish economy—things like productivity enhancing structural reform (see some ideas here)—are solutions to chronic weakness, and will take too long to help. Something new is needed.
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Why panic? I avoid the news because most of the time they only talk about negative things, because they sell. Spaniards, don't panic.
Last week I drove from Valencia to Perpignan,now I´m doing Bierritz to Burgos. Observation suggests that Spain could solve its economic problems at a stroke by charging French, German and Dutch drivers punitive fines for speeding. I suggest €200 for 160kph, €1000 for 180kph and €5000 for 200kph. The French would willingly pay up for the kudos of proving that they have the fastest car on the road.
The Problem With Spain Is The Problem
Most all Countries in the World are in financial difficulty and with a Global economy, all financial problems remain intertwined.
Spain cannot survive much more than 3-4 months, and other Countries will experience similar troubles.
The U.S. is concealing all these problems by spiking the Stock Market, PR and Spin, hoping to get through another election.
None of the government's economic reporting is reliable.
One day, the World economists state recession is upon us, the next day the U.S. and World Stock Markets suddenly spike upwards, and economists state the economy is in recovery.
A massive hoax is underway, and unfortunately, Spain's financial difficulties cannot be concealed.
And so, the problem is the problem and there are no solutions.
All World leaders and policy makers are doing is prolonging Worldwide, imminent financial collapse.
It's time to pay the piper, and start from the bottom, and climb back up slowly, steadily and without Government PR and Spin.
Richard Michael Abraham
Founder
The REDI Foundation
www.redii.org
The answer to the inordinately high interest payments on new bond issues by the Southern zone countries is surely combining the Euro zone bond issues.
That would inevitably mean an increase of rates paid by the fiscally responsible part of the zone and a decrease for the others. A system of compensation needs to be put in place to make this palatable to Germany.
Implementation of a fiscal union would solve the longterm effect. The problem is solving it for the short term. The other problem is to sideline the rating agencies. They will only muddy the waters for their clients' interests and aims.
I have no easy answer but surely the Commission and advisors of the government leaders could come up with an answer.
Failure is not an option and a resulting upheaval would cost the Euro zone and the world economy dear. It is simply too expensive to fail now.
Article written under urgency, and insubstantial, I like reading The Economist, not so much by its articles, but because the views of its wise readers, they are priceless!
Underway is conservation by other means:
- Deprecation of the euro as a means for Europe to obtain fuel imports cannot be stopped. Once the euro cannot be exchanged for fuel (if euro-countries begin using dollars or if a legacy currency is re-introduced within the EU) the euro is extinguished.
- When euro is gone other debt-money currencies will be held to scrutiny including dollar- and dollar-backed yuan.
- Finance/Wall Street credit embargo of Europe beginning to bear fruit for US fuel consumers (but is a gambit that has unintended consequences: ultimate conservation in the US and perhaps war).
- Europe is on the way to becoming car-free with a large part of the manufacturing industries walking the plank (see 'real estate'.
- Europe is overpopulated relative to resource base that is available to it. Look for Continent-wide crackdown on immigration, live births and medical services. Events are gaining speed and the establishment is fixed firmly in the past. Expect Greece to request international food aid before the end of this year.
One of the fundamental problems in Spain is their 17 Autonomic regions (or mini-fiefdoms as they see themselves). Everybody doing their own sweet thing and the central government not having what it takes to bring them all to attention means that all measures taken so far amount to little more than aspirin and sticky plaster for a patient who's head is about to drop off. Not good.
Perdona, però no tens ni punyetera idea del que dius.
Hi ha autonomies amb identitat pròpia i amb prou capacitat de ser el motor per a una "península".
El principi de la bona gestió consisteix en descentralitzar, i no es un invent, doncs s'aplica a altres estats.
El problema rau en el "café para todos", on han aparegut "autonomies" sense conciència ni fonament, no quedant correctament estructurat un estat federal.
Amb tot, es evident que s'ha de depurar la gestió, tant a nivell autonòmic...com central!!
Siau
You address me in your quaint domestic little lingo as if I had the obligation to understand. Obviously etiquette and good manners is not something that you often worry about.
Whilst I was not referring specifically (nor exclusively) to Catalonia (you are REALLY not that important), I think your answer has given me, and all readers, a clear picture of what the nature of the problem is. You guys would do well to understand that the world does not revolve around you and that you are neither better (nor worse) than your average Joe.
You have the rights to be 'treated different' but others don't. Is that it?. And please don't tell me about your 'historical rights' because I have done sufficient research to believe that not to be the case.
Decentralising does not justify the absence of strict controls nor the permissiveness to allow laws and judicial reviews to go unheeded. Which is exactly what you do. The old Spanish 'picaresca' seems to be the order of the day and that is something the rest of the world may not want to go along with.
So there you have my opinion. Without a single insult. Shocking isn't it!.
Excuse me if you felt offended.
I acknowledge that my reply in my native language is not appropriate, at one of many opinions and positions outsiders.
Completely agree that decentralization does not justify the absence of political and criminal responsibilities of all politicians, applicable equally to the governments of all countries.
I invite you to learn and understand the reality of our nation, either by visiting our country or recommending a bibliography. Sure you will discover an open and Europeanist, distant from the position of navel gazing.
Perhaps the only insult is ignorance. A greeting.
Hi RVKBCN and thanks for your reply. I do know enough about the history of conflict between Spain and Catalonia to be aware of the fact that Catalans have often (but not always) been taken advantage of. Catalonia WAS one of the (main) driving forces behind the Spanish economic exploits of the 90's and I do understand that at times like the present people object to paying more in 'solidarity' taxes than (what they consider) their fair share.
Catalonia is a beautiful place (have visited many times on business & pleasure), with a strong cultural legacy and identity and probably one of the most cosmopolitan parts in Spain.
However ... and this strictly my own personal opinion ... I believe that you are going about it the wrong way. This may not be the best forum to go into the intricacies of the Maquiavelian goings-on that one reads about in the likes of Avui/Punt (and yes, I do my best to speak a passable Catalan when I visit).
If you are going to work towards your independence, you have to prove to the world at large that you are ready for it. That you have the maturity of character, the responsibility, the willingness to work hard and the sense of fair play that Europe expects so that Catalans can be considered per-se and not an appendage of Spain.
Frankly, the burning of Spanish flags/photographs of the king, the shenanigans about 'Catalonia is not Spain', the bravado of your politicians, the dis-honest ways in which they conduct their business (instances are reported daily about some questionable dealings), the approach to linguistic integration that you have adopted, and a very substantial etc ... do not give me an acceptable picture of what Catalans are and stand for.
You (collectively) dislike Spain (it is not up to me to say whether you are right or not) and seek a break from what it is considered an oppressive (and detrimental to Catalonia) relationship. Two things I will say about it before I finish (A) Have you considered that from where other people stand, you are guilty of much the same sins? and B) Are ordinary Catalans FULLY aware of what independence REALLY means for Catalonia?.
All the best and may goodwill and common sense prevail at all times. Salut
Good afternoon,
As you say, this is not the forum to explain that:
- Catalunya does not start in the 90's.
- There are unfortunate and unpleasant facts that I disapprove. (your environment is pure, immaculate, kind and blameless?).
- We are many who believe that independence is NOT the solution (or to Catalonia or anyone in general), although the circumstances are unfavorable and is a form of defense.
- Etc ...
Fortunately, the "reality" is beyond their opinion and mine.
For this reason and not to bore the rest of participants with our opinions and responses, I invite you to continue this conversation (bcnrvk@gmail.com), where we can have a more fluid exchange of views on your ominous vision of Catalonia and the Catalans, what happens there, wherever you are and what happens in the world.
See you soon
vous trouver savez déjà où me / you know where you can find / ja saps on sòc.....
Hello again RVKBCN,
You are of course, totally correct in saying that the history of Catalonia does not start in the 90's (I have in front of me a PDF version of "A short story of the Medieval Crown of Aragon" (ex www.gutenberg.org)" and also in stating that the problem with shameless and undesirable politicians is a common one unfortunately.
I am also in agreement with you in that independence may not be the best course of action for either Spain or Catalonia.
Just wish that people were a bit more "cool, calm and collected" when dealing with such relevant issues. Just compare the opening phrase in your first response and the educated and formative tone of our dialogue now.
I appreciate your offer to continue the topic 'off line' and hope that you don't think me discourteous, but I really don't see much mileage in this discussion so I'll wish you and your compatriots all the best in your future endeavours (I myself have an Aragonese great-great grandfather) and sign off good night.
Adeu siau
Three days ago I posted a comment in "free exchange" that I wished him to be right that the cause for "And then, one day, it may all come apart in a flash. would be the periphery of Europe not Britain, Japan or an oil rich country explosion as I feared.
It looks as if "free exchange" is right, I wrong which makes me very happy.
"Free exchange's" pessimism is far easier to cure than mine.
Yet there is something that does worry me:
Moody's (but not the other two major rating agencies) is busy downgrading everything that smells Europe, bar the UK.
It's true that given their disastrous track record nobody pays any longer any attention to rating agencies.
Nobody, that is: except those deep thinking NYC investors who make stocks go up on sunny days or prefer stocks with celebs in their boards.
So, it looks as if Moody's (one of whose two major shareholders is one of Mr. Warren Buffet's flagships) is busy repeating the same tactic that made all hedge funds lose wads of money in 2010 and one of them (MF Global maybe of Goldman Sachs inspiration) go up in smoke.
Curious.
Free Exchange, definitely one of the clearer thinking bloggs in this magazine, could perhaps look into this.
I'd start, as I did a few years back, by looking into the ownership of the major rating agencies. Very public and easy to find in SEC files and proxy documents.
You'll find a curious thing: Fitch is majority held by one of the larger French finance house, Fimalac; S&P mostly by McGraw-Hill, with apparent help from a Soros company and certainly Capital Investments that also are the largest (ex aequo) shareholders of competitor Moody's.
Probably all above board, but a bit confusing for my almost 81 years old brain used to gentlemanly high finance not today's wrestling match atmosphere.
Mainly after the recent banking rates scandal, the seemingly unrelated Murdoch press scandal (by the way doesn't he own the Wall Street Journal and Dow Jones indexes?) and other unpleasantness around the world.
I hate conspiracy theories but as Spaniards say about witches, "I don't believe in them, but that they exist, they do..."
I still hope that "free exchange" is right in imagining "it will all come apart in a flash because of periphery Europe not because of London or NYC as I tend to believe.
The damage will be far less important.
Reality ALWAYS reasserts itself, its just a question of how long it will take, and how painful it will be when it snaps back. Wake up Brussels!
But we are talking about economics, not reality
Dear Queequeg123, how right you are. However, this particularly mad economic experiment is dooming 10s of millions of Europeans to poverty and is creating a long term debt burden of an unimaginable and unsustainable size, which will burden those Europeans of middle incomes for at least a generation. That is why I am pining my hopes on reality and not economics.....
Then, if it comes to reality, the main question should be: which amount of energy (measured in energy units, not in coloured bits of paper) will be needed to sustain such a situation as you so neatly describe? Which is its entropy rate? This known, we can predict how long it will last. Reality goes that way.
I sent out this question before, weirdly I got quite a few "recommends", but no answer (except somebody referring me back to a book from the '70s).
"I know this must sound so silly to financial gurus [...]. The potentially absurd question on a hypothetical sci-fi scenario is: what if, say by political agreement or sheer chance, the whole EU (UK included), the US and Japan decided or had to default on their debts simultanously? What could be the possible key chain of events after such massive combined default? The consequences to creditor and former debtor countries, in terms of market confidence, liquidity, financing options, etc.? Just curious if there had been any theoretical thinking on events on this scale."
Any time a nation defaults on its debt, those holding the debt are poorer. Check out the history of Argentina after it defaulted. Argentines became considerably poorer.
All that would happen if every industrial nation defaulted would be that the world would become that much poorer.
Keep in mind that since the beginning of the 20th century, nations have tended to inflate their way out of financial trouble rather than default, but it's the same thing. The result is everyone has grown poorer to the degree that the nations inflate their money supply and cause price inflation.
Things cold get worse - Typo - Things could get worse
Default, Non-Euro currency name, Devalue, and Inflate.
The way things are going, this is the only possible course for Greece certainly; unfortunately also now for Spain, probably Italy, Portugal, Ireland, and yes France.
The bow of the good ship Eurozone is now under the water.
Dragging out the misery is not going to solve much, though the belated reforms imposed by the EU are certainly necessary.
History is replete with sovereign defaults. On average, recovery, or 'rescheduling', only took three years in recent times. As for rescheduling, the next cab off the rank, my advice is to give the vulture funds little or nothing. Why should Germany pay?
As for this idiotic idea of mutualizing debt - don't be silly. A clear default is needed. Mutualizing debt is another name for making Germany pay. Good for the banks. Bad for Germany.
you seem to be German so possibly partisan.
Time to send i Obama that way Spain can collapse and Germany can pick up the pieces
If Barbara Tuchman were to write her classic The March of Folly today, chances are that European Monetary Union would figure prominently.
'Panic' is a bit overdone. A panic is when you have to suspend stock trading and close banks to prevent bank runs, not when government bond interest rates are still in single digits and markets can still function normally.
Spain banned short selling of bank shares.
That's close enough for me!
NPWFTL
Regards
Hedgie: I advised MGI of the Fed URL you passed me and await their response.
On banning short selling of bank shares, what's to stop every country under the same gun doing the same?
Horrors! A spelling mistake in the Economist!!
Things co(u)ld get worse as the week progresses..
The rain in Spain falls mainly on what has appeared a plain to many who commute on the Drain.
"The rain in Spain falls mainly on what has appeared a plain to many who commute on the Drain."
My Aunt died of [Spanish?] influenza, or so they said. But its my belief they done the old woman in...
no, it was the gin what done it.
A good article to understand what happened in Spain before the bubble burst and what is happening now
http://en.elconfidencial.com/opinion/2012/07/01/mandeville-and-the-spani...
@ Economist
Please correct the spelling error in the last sentence just above the graph, it is embarrassing:
"Things CO(-U-)LD get worse as the week progresses, particularly if preliminary measures of output to be released tomorrow are weak."
There are four options:
1. Default (or as some euphomistically call a "haircut")
2. Mutualize their debt across the EU
3. Print money
4. Leave the Euro and revalue the currency
The first three would carry far less risk if a single fiscal union was formed.
The final one could be Greece (likely), Spain (maybe) or someone like Germany (whose DM would appreciate and effectively devalue the Euro).
The reality is the Europeans have screweed themselves with the Germans not being the only culprit, but the main one. They did the right thing for Germany with the Euro, they worked hard at improving productivity while others demonstrated fiscal profiligacy on an epic scale. The result was the rest of Europe could not compete as the productivity improvements made by Germany could nomlomger be brushed aside with devaluations in the southern EuropeN countries.
For Germany to enter the Euro with this in mind (at best not considering this eventuality) is bad. The fact that after leading and signing agreements around maximum debt levels only to ignore them (along with France) is just as bad. The arrogance, hubris and lost opportunities to do something about this early on is al,pay criminal (or should be).
We are where we are and it looks more and more likely that events have overtaken the incompetent politicians. It seems unlikely these same politicians will discover these hereto nonexistant leadership qualities AND at the same time act in a coordinated way to avert some significant perversion of the Euro and what it's creators dreamed it could be/do.
A "haircut" is a partial default.
I'm not sure that the first three would carry far less risk if a fiscal union was formed. Default would be less likely (perhaps that's what you meant by "carry less risk"), but it would be far more dangerous if it occurred, because it would be the entire EZ defaulting.
Mutualization would carry less risk for debtors, because now they would have Germany standing behind them, but it would carry much more risk for Germany, who would be taxed to pay for everyone else's irresponsibility.
Printing money carries pretty much the same risk, whether or not there's mutualization.
A default is a failure to meet a commitment and has nothing to do with how much you default. Hence a default is a default and calling it a haircut is just a euphemism. To show how ridiculous the term "haircut" is I'll ask the question, what is the agreed point at which a default moves from a "haircut" to a "fully fledged" default? 50%? 80? 99%? or is a default only at 100%. Or do we go from haircut to shave to chemotherapy to default?
Correct, less risk for debtors and this is important if countries want to be able to raise fresh funds. Given all the Euro countries will need new funds (assuming printing is not the option they take) this would reduce the risk on in the aggregate for the countries within the Euro.
I agree that this may be unachievable because German and French debts levels are not low themselves and they may not be able to cover all the debts, but that's not my point. My point is that it will reduce the risk - I did not say eliminate it. I agree also that IF the whole EZ defaulted then that would be worse than one or two defaulting. But this too is assuming that if Spain and Greece default then Italy then the whole Euro zone wouldn't be next. That's the problem with "what if" statements - they are important to consider, but they can be turned into almost whatever you want.
Printing money would be better under one fiscal union assuming it was set up with fiscal authority and credibility. Then it would be much like the US where they are printing money without creating rampant inflation. Without it then debtors would necessarily run from the currency for fear that it would just be squandered by the fiscally profligacy. So If they just went and did it I agree and I perhaps should have put in the caveat to be more clear.