Portugal and Spain: money supply falling dramatically, austerity increasing debts and destroying the economy, and no confidence fairy arrival!
And this is another reason why yesterday’s Eurozone package is doomed to failure. Until the ECB is made lender of last resort, establishes a price floor for government debt, and cuts interest rates to zero, contagion will be the only thing ongoing in Euroland.
Gorilla says: “Contraction, contractionary, reaction, unactionary!”
And the Italians and Spanish, too!!!
Mr. Market isn’t happy with all the extending and pretending from Angela Merkel. He wants to see big time bond purchases by the ECB to forestall a Euroland-wide contagion and the possible breakup of the single currency regime.
Hard to see this happening, given the complete dishonesty with which Chancellor Merkel has approached the inevitable. German and other relatively flush Northern European taxpayers will need to decide once and for all whether they’re ready to bail out the European banking system. Cost: at least $2 trillion.
Gorilla says: “Two speed Europe only has reverse gears!”
In Spain, austerity isn’t working, just as it isn’t working in Greece, Ireland, and the UK…
The confidence fairies remain elusive, while the strikes and demonstrations grow.
As with Greece, Spain’s best course would be to leave the euro, devalue their currency, and engage in actual economic growth.
But the desire to please German bankers apparently is just too great, whether you’re a socialist or whether you’re a conservative.
Gorilla says: “Here in America, we love our bankers nearly as much as they do in Madrid!”
Portugal’s getting a bailout (or rather Spanish, German and French banks are getting a bailout), and Spain is starting to sound an awful lot like Portugal, full of denial signifying something:
“The risk of contagion is absolutely ruled out…It has been some time since the markets have known our economy is much more competitive”.
So says the Spanish Finance Minister, although how a country with 20% plus unemployment coupled with massive austerity is to remain competitive must be something the markets also know.
Most of these indebted peripheral countries would be much better off leaving the Euro, giving their Northern European bankers a haircut, and devaluing their new (old) currencies.
Gorilla says: “The race is on, who will leave the Euro first? Club Med or the Germans?”
The Portuguese government looks like falling on the eve of yet another EU summit to deal (or not deal) with sovereign and bank defaults.
The answer from Frankfurt, as usual, is that Portugal can borrow more money, engage in crippling austerity, and see what happens in another 5-10 years.
The problem in this case is Spain, whose banks have a big stake in Portugal and are not adequately capitalized. If markets aren’t impressed, it will be a big problem for Chancellor Merkel, because Spain is a much larger economy.
Gorilla says: “Extend and pretend in a world without end!”
Most of Spain’s cajas are being asked to raise Tier I capital to at least 10% or face liquidation by the government.
In this instance, it may be helpful to recall that Lehman Brothers, before bankruptcy, had Tier I capital approaching 11%.
The problem in Spain is the property bust and the refusal so far by the cajas to admit just how large their exposure was and is.
The Spanish government thinks 20 billion euros will do the trick, but most analysts put the figure at 60-80 billion.
And of course this doesn’t include the very large exposure the major Spanish banks have to Portugal, which is now paying a record spread to finance its considerable debt.
Gorilla says: “In the land of Rioja, the one-eyed caja must sing!”
What do you do when your Eurozone partners are demanding austerity, your economy is forecast to contract again this year, and your unemployment rate’s over 20%?
If you’re sensible, you decide to leave the euro, devalue your currency, give your debt holders a haircut, and have some chance to grow your way back to prosperity over time.
If you’re Spain, you raise the retirement age (aka you cut pensions by 3%, thereby increasing poverty and decreasing consumption), continue with austerity, announce a “grand social pact” involving your extend and pretend government and your noncompetitive labor and industries, condemn your population to a decade or more of grinding deflation, unemployment and social upheaval, and hope Mr. Market will smile when it comes time to refinance your massive and growing sovereign debt.
Gorilla says: “Alas, when the disease is contagious, and your doctors are in denial, you can only expect to get sicker and sicker!!!”
And now the contagion begins in earnest, as the Spanish bail out their savings banks…
50 to 60 billion euros are needed (a cynic would say that means it’s probably over 100 billion), and it’s unclear where Spain intends to get the money. The private markets aren’t interested in buying up the cajas, and it remains to be seen whether international markets will continue to finance Spain.
Gorilla says: “Hello Frankfurt, time to wake up and smell another bailout!”
Or perhaps electricity is what you seek, come to Spain and Ireland for a really good deal!
Magically, the ECB hopes that the confidence fairies will return once enough lousy bonds are bought and/or more credit is extended to member states that have no chance whatever of paying their debts in full.
What’s being ignored are two things: 1) the PIIGS can’t finance their debts when their economies are bust and 2) the non-PIIGS banks are already bust.
Gorilla says: “It’s not the Merkel put, it’s the Trichet cliche!”
Spain’s local government units are gradually going bust, thanks to the property boom collapse and the austerity measures recently announced in Madrid.
And Spain apparently can’t really pay off its bonds and reduce budget deficits by 2012. Unemployment’s above 20%, and Spanish banks need fresh capital to the tune of 50-90 billion Euros. The outlook is for years, if not decades, of crippling deflation, social unrest and mass unemployment.
Haircuts for bondholders on the order of 30% (and you just know the haircuts actually being contemplated are far larger) would reduce Spain’s GDP by 40% and Eurozone GDP by 15%.
The stress tests currently being performed do not take into account the possibility of defaults, so the true picture of Euroland insolvency has yet to be painted.
Gorilla says: “Time for Spain to take a siesta from the Euro!”
