ECB to Spain: Drop Dead.

[Puppycow]

(Apologies to Gerald Ford (http://www.nytimes.com/2006/12/28/nyregion/28veto.html))

ECB Opposes Helping Fund Spain's Bankia (http://online.wsj.com/article/SB10001424052702303674004577434881708460926.html)

MADRID—European Central Bank officials signaled they would oppose any attempt to fund the €19 billion ($23.8 billion) recapitalization of Spain's Bankia SA via the central bank's lending facilities, according to people familiar with the situation.

Spain has pledged the rescue of Bankia, its third-largest lender by assets, at a time when its finances are stretched to their breaking point and the government is desperately trying to ward off an international bailout.

Spain's own bailout fund has only about €9 billion left and, though it can be replenished through debt issuance, recent auctions have seen soaring borrowing costs and falling demand.

So by refusing to bail out Bankia, they make Spain's position more precarious, increasing the likelihood that they will have to bail out Spain, or that, if they refuse to do that, Spain will default on its debts and banks all over Europe will have to be bailed out. Great thinking! It worked so well with Lehman.

[Puppycow]

ECB rejects Madrid plan to boost Bankia (http://www.ft.com/intl/cms/s/0/7730ca10-a9b4-11e1-9772-00144feabdc0.html#axzz1wJbdDGUH)

A Spanish plan to recapitalise Bankia, the troubled lender, by indirectly tapping the European Central Bank for cash, was bluntly rejected as unacceptable by the ECB, European officials said.

News of the rejection came as Spain faces elevated borrowing costs in the bond markets, tries to persuade investors it can contain problems in a banking sector weighed down by €180bn of bad property loans and, on Tuesday, saw its central bank governor stand down early.

Madrid had floated the unorthodox idea over the weekend of recapitalising Bankia by injecting €19bn of sovereign bonds into its parent company, which could then be swapped for cash at the ECB’s three-month refinancing window, avoiding the need to raise the money on bond markets.

The ECB told Madrid that a proper capital injection was needed for Bankia and its plans were in danger of breaching an EU ban on “monetary financing,” or central bank funding of governments, according to two European officials.

. . .

Senior government officials in Madrid argue that bailouts in Portugal, Greece and Ireland have been catastrophic and Spain will not compromise on its refusal to accept a similar form of intervention.

They said the country had implemented reforms requested by Brussels and must now be granted relief by the ECB, or the future of the single currency will be threatened. The government would like to see the ECB restart its government bond-buying programme and wants the nascent European Stability Mechanism to be retooled as a bank bailout fund.

“This is like a game of poker now,” one government adviser said, “and I don’t think Spain is bluffing”.

Spain says they won't compromise, the ECB says they won't compromise. I don't think this will end well.

[Democracy Simulator]

Spain is too big to bail. Likewise the European banking system. The money printing required is not politically tenable, especially in Germany, which would be picking up the tab. Europe is between a rock and a hard place.

[Blue Mountain]

The United States went through something like this four years ago. Didn't Europe learn anything from that?

[Puppycow]

Martin Wolf's latest column (http://www.ft.com/intl/cms/s/0/4fe89d8c-a8df-11e1-b085-00144feabdc0.html#axzz1wJbdDGUH) is worth reading.

This is how I understand the views of the German government and monetary authorities: no eurozone bonds; no increase in funds available to the European Stability Mechanism (currently €500bn); no common backing for the banking system; no deviation from fiscal austerity, including in Germany itself; no monetary financing of governments; no relaxation of eurozone monetary policy; and no powerful credit boom in Germany. The creditor country, in whose hands power in a crisis lies, is saying “nein” at least seven times.

. . .

In brief, the eurozone is now on a journey towards break-up that Germany shows little will to alter. This is not because alternatives are inconceivable. What is needed is to turn some of the Nos into Yeses: more financing, ideally via some sort of eurozone bond; collective backing of banks; less fiscal contraction; more expansionary monetary policies; and stronger German demand. Such shifts would not guarantee success. But they would give the eurozone at least a chance of avoiding the cost of partial or total break-up. To work in the long run, such shifts would also require greater political integration.

[Francesca R]

You can't recapitalise a bank (or any firm) by lending it money. The term means give it more equity. Governments do that ( . . . From borrowed money, naturally), so this news story is likely a spat about nothing. The ECB has already found myriad ways to support the solvency of governments and private institutions while being able to claim it is doing nothing of the sort.

Similarly Germany has already signed up for quite a lot of things that give it direct risk exposure to other sovereigns as well as indirect risk to them if they were to leave the currency zone. My view is that everyone involved is sufficiently far down the road to fiscal union (while occasionally still being able to say that nothing of the kind has been countenanced) that they will not back out of it now. They just need more and more ways to engineer fiscal union without it looking like that's what's happening. The European Redemption Pact (a German idea) is one such proposal.

[kevsta]

The European Redemption Pact (a German idea) is one such proposal.

ah, the (Endgame) gold-grab you mean? :)

[Puppycow]

The ECB has already found myriad ways to support the solvency of governments and private institutions while being able to claim it is doing nothing of the sort.

But it doesn't seem to be doing enough to give markets confidence that it's safe to lend to these governments and private institutions. They have to be perceived to be solvent too. In this way, it seems like their measures won't have the intended effect unless they are honest about them.

If the ECB says "We will definitely not bail out Spain" then interest rates will rise for Spain, making it more likely that they will need to bail out Spain. Conversely, if they say "We will bail out Spain if necessary" then interest rates for Spain will fall, making it less likely that they will need to bail out Spain.

No?

[kevsta]

They have to be perceived to be solvent too.

...

No?

and therein lies your problem, they are not.

trying to play poker against the markets, when you have no cards, is always bad idea.

[Democracy Simulator]

You can't recapitalise a bank (or any firm) by lending it money. The term means give it more equity. Governments do that ( . . . From borrowed money, naturally), so this news story is likely a spat about nothing. The ECB has already found myriad ways to support the solvency of governments and private institutions while being able to claim it is doing nothing of the sort.

Similarly Germany has already signed up for quite a lot of things that give it direct risk exposure to other sovereigns as well as indirect risk to them if they were to leave the currency zone. My view is that everyone involved is sufficiently far down the road to fiscal union (while occasionally still being able to say that nothing of the kind has been countenanced) that they will not back out of it now. They just need more and more ways to engineer fiscal union without it looking like that's what's happening. The European Redemption Pact (a German idea) is one such proposal.

Do you think the German people will have a say, or do you think that they will be hoodwinked into a transfer union by the sophistry of desperate politicians and bankers? I don't think that the powers that be will be able to pull such a fast one.

[Francesca R]

But it doesn't seem to be doing enough to give markets confidence that it's safe to lend to these governments and private institutions. They have to be perceived to be solvent too. In this way, it seems like their measures won't have the intended effect unless they are honest about them.The central bank has never been interested in giving markets confidence if the only reason for the confidence is an ECB backstop, hence the (often misunderstood) observation that their actions have consistently fallen short of market "demands" and that they have never yet taken up the role ascribed to them of "the only institution that can save the euro".

The ECB would probably say that Berlusconi wouuld still be in power, there would be no "fiscal compact" and Spain would not have a constitutional requirement to balance its non-cyclical budget, had it done everything that market commentators have clamoured for from the start.

The downside of this mode of behaviour is that there have been much larger income/output losses suffered by many European citizens and businesses, and greater socialisation of state and private liabilities, than might have been the case otherwise. The central bank (probably correctly IMO) is not going to blame itself for that though.

[Francesca R]

Do you think the German people will have a say, or do you think that they will be hoodwinked into a transfer union by the sophistry of desperate politicians and bankers? I don't think that the powers that be will be able to pull such a fast one.So far the average German has only seen economic benefit from all this (not that they think this). The country has its lowest unemployment rate in decades, lowest cost of capital ever, cheapest (and most stable) real exchange rate for ages and a massive net export surplus. And as of now, no German taxpayer has forked over anything to a government she didn't have a vote for.

Just sayin'. Rubbish sales job so far from the politicians, but a case could rather be made that this is better than Germany's only viable alternative which is to leave the euro unilaterally itself. Plus, Merkel remains one of the most popular chancellors ever IIRC.

[kevsta]

http://www.marketwatch.com/story/6-reasons-spain-will-leave-the-euro-first-2012-05-30

uh huh. this is going well then. Opinion I know, but I tend to agree.

The Spanish are a lot more likely to pull out of the euro than the Greeks, or indeed any of the peripheral countries. They are too big to rescue, they have no political hang-ups about rupturing their relations with the European Union, they are already fed up with austerity, and there is a bigger Spanish-speaking world for them to grow into. There are few good reasons for the country to stay in the euro — and little sign it has the will to endure the sacrifices the currency will demand of them.

[Democracy Simulator]

So far the average German has only seen economic benefit from all this (not that they think this). The country has its lowest unemployment rate in decades, lowest cost of capital ever, cheapest (and most stable) real exchange rate for ages and a massive net export surplus. And as of now, no German taxpayer has forked over anything to a government she didn't have a vote for.

Just sayin'. Rubbish sales job so far from the politicians, but a case could rather be made that this is better than Germany's only viable alternative which is to leave the euro unilaterally itself. Plus, Merkel remains one of the most popular chancellors ever IIRC.

Given that all the polls of German voters re: the Greek bailout were decisively against it, I would be very surprised if the majority would be for bailing out the whole of Europe. I expect that when it comes to the crunch, that all the dirty tricks will come out - playing on the German's sense of guilt for past aggression; threats that the world will end if the Germans don't stump up. It's not going to be pretty.

[Hlafordlaes]

Don't forget that much of Europe's trade is among member states. Germany cannot view the collapse of too many of the peripheral countries as anything other than the beginning of a deep depression across the region. While Greece is just small enough to fail, Spain is not, and if it goes, the pressure is next on Italy. There lie monsters in that direction.

No one in their right mind here in Spain is thinking of leaving the euro; US pundits to the contrary have something to sell their target audience.

No, the real problem is that European leaders have been content with a step-wise approach to union for decades, usually avoiding the hard choices. They seem to subscribe still to the notion that this will continue to suffice. The best guess right now is that GreExit will lead to the rest of the EU getting finally serious about what needs to be in place for a common currency to work. Whether that will be too late is a bettor's choice.

[Puppycow]

Why Spain is Officially Europe's Biggest Crisis (http://www.theatlantic.com/business/archive/2012/05/why-spain-is-officially-europes-biggest-crisis/257736/)

[Puppycow]

Spain reveals €100bn capital flight (http://edition.cnn.com/2012/06/01/business/spain-capital-flight/index.html)

(Financial Times) -- Madrid was dealt a double blow on Thursday after it emerged that almost €100bn in capital had left the country in the first three months of the year and the head of the European Central Bank lambasted its handling of Bankia, the troubled Spanish lender.

Data published by Spain's central bank showed €97bn had been pulled out in the first quarter -- around a 10th of the country's GDP -- as concerns mounted over Madrid's ability to contain its twin economic and financial crises, which have forced government borrowing costs to euro-era highs.

The data appeared to corroborate earlier assessments from economists that foreign investors were selling Spanish assets, while Spanish banks were increasing their holdings of domestic bonds, helped by cash accessed through the ECB's three-year liquidity operations.

"My concern is that we haven't yet seen the most recent numbers, which could be far worse," said Raj Badiani, an economist at IHS Global Insight. "We are seeing a perfect storm."

[kevsta]

Spain reveals €100bn capital flight (http://edition.cnn.com/2012/06/01/business/spain-capital-flight/index.html)

indeed, and those figures are from before Spain really fell apart, publicly anyway

[Puppycow]

Can kicked a little further down the road:

Euro, Asia Shares Climb on Spain Bank Bailout; Oil Gains (http://www.bloomberg.com/news/2012-06-11/euro-asia-shares-climb-on-spain-bank-bailout-oil-gains.html)

Spain asked euro-region governments over the weekend for as much as 100 billion euros ($126 billion) to help shore up its banking system, a sign Europe is tackling a crisis that has roiled markets around the world.

[kevsta]

Can kicked a little further down the road:

Euro, Asia Shares Climb on Spain Bank Bailout; Oil Gains (http://www.bloomberg.com/news/2012-06-11/euro-asia-shares-climb-on-spain-bank-bailout-oil-gains.html)

it's just Greece all over again, $100Bn isn't nearly enough, and actually the ESM still needs to be ratified in the German parliament, and the opposition dont appear too happy about unconditional bailouts of foreign banks.

the bond market also knows this, I expect we'll get a brief respite bounce on Spanish bonds, and then the market will turn and pressure again because 100Bn is not nearly enough (and billions are so 2010 anyway) this will be into 0.25 trillion at least before it's done.

ps. I was in a local branch of Bankia (Bancaja) at 8.15am this morning, one member of staff and 12 people queuing, it's not fixed by any means.

[kevsta]

given ZH's previous accuracy on the Greek bond situation, I think this is relevant.

http://www.zerohedge.com/news/goldman-spanish-bond-subordination-its-only-13-existing-spanish-debt

Sadly however, the mere assumption that €100 billion in senior debt will be sufficient to plug the hole in Spanish banks, which rose from €40 billion to €100 billion in under one week, is laughable. And of course, every incremental dollar of senior debt means less value to existing subordinate Spanish bonds.

Finally, confirming that one should get the hell out of Dodge, is the fact that Goldman now is telling its clients to, wait for it, buy Spanish bonds.

and given Goldman's documented sell side Muppetry this means they are unloading Spanish bonds as fast as they can to any remaining muppets left whatsoever.

[kevsta]

lol. pathetic. bailout half-life approximately 8 hours of markets opening.

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012/06/Spain%20Italy%20Bonds.jpg

Changed hotlink to regular link. Please see Rule 5.

Spanish and Italian sovereign bond spreads exploding (http://www.zerohedge.com/news/so-much-bailout).

Recall what we said yesterday: "Keep a close eye on Spanish sovereign bonds at the moment when the bond market understands what just happened, and once the euphoria over the very short-term bailout of insolvent Spanish banks passes. Because a month from today another €100 billion will be required, then another €100, and so on." The moment can be seen very distinctly on the chart below: it happened at 2:00am Eastern, and the bond market has not looked back since. We are likely hours away from screams for the ECB to come and re-bail out a just bailed out Spain.

[kevsta]

and given Goldman's documented sell side Muppetry this means they are unloading Spanish bonds as fast as they can to any remaining muppets left whatsoever.

lol :D

Goldman Sachs set a new speed record in "Facebooking" muppets clients (http://www.zerohedge.com/news/goldman-sets-new-speed-record-facebooking-clients)

this is yield, the price went in the opposite direction.

http://www.zerohedge.com/sites/default/files/images/user5/imageroot/2012/06/SPGB%203%

Changed hotlink to regular link. Please see Rule 5.

[Eddie Dane]

The United States went through something like this four years ago. Didn't Europe learn anything from that?

I'm sure we did.
But have you ever seen 'Europe' make anything resembling a decision?

My feeling is that we're pretty much screwed unless we turn on the printing presses.
Germany will never let us because 'inflation=hyperinflation=chaos=Hitler'.

[Democracy Simulator]

I expect that when it comes to the crunch, that all the dirty tricks will come out - playing on the German's sense of guilt for past aggression; threats that the world will end if the Germans don't stump up. It's not going to be pretty.

Here we go:

Italian law professor and elder statesman Antonio Padoa-Schioppa wrote in an open letter to Mr Schaeuble that "the German government is playing with fire" by blocking the crucial steps needed to halt the immediate crisis and restore faith in monetary union.
"The German federal republic has a heavy historical responsibility, more than any other country in the union," he said, warning that the current course threatens "a catastrophe comparable to a third world war."

http://www.telegraph.co.uk/finance/financialcrisis/9327825/Debt-crisis-Bundesbank-scuppers-all-talk-of-EU-banking-union.html

Expect more.

[UndercoverElephant]

They just need more and more ways to engineer fiscal union without it looking like that's what's happening.

Except that nobody is going to be fooled anymore. The people of Europe have been subjected to a 50 year period of fantasy state-building. The eurozone consists of 17 independent democracies, and however much the people running the europroject would like to be able to engineer a closer union (not just fiscal), they have the slight problem of 17 skeptical parliaments and 17 electorates needing to agree to it....next week.

[UndercoverElephant]

Why Spain is Officially Europe's Biggest Crisis (http://www.theatlantic.com/business/archive/2012/05/why-spain-is-officially-europes-biggest-crisis/257736/)

...until Italy is. And then France.

[UndercoverElephant]

I'm sure we did.
But have you ever seen 'Europe' make anything resembling a decision?

My feeling is that we're pretty much screwed unless we turn on the printing presses.
Germany will never let us because 'inflation=hyperinflation=chaos=Hitler'.

From the German perspective, it is even worse than that. Last time they printed money like there was no tomorrow, the money was at least going into German pockets. This time they are being asked to print money, devaluing the money already in German pockets, but with the new money going to stabilise banks in other countries.

They may do it anyway. Why? Because the immediate consequences of not doing so are much worse than doing so. That's a fascinating political call, and will have a big influence on how this whole thing plays out. We will find out next week, after Syriza win in Greece, what the Germans are going to do.

I am not yet convinced that any but a tiny minority of people in the eurozone (anywhere in the eurozone) believe that the euro has to break up, but I can't see a politically credible plan to prevent that break up either. That suggests to me that the most likely outcome is a very messy breakup of the eurozone.

[Puppycow]

From the German perspective, it is even worse than that. Last time they printed money like there was no tomorrow, the money was at least going into German pockets. This time they are being asked to print money, devaluing the money already in German pockets, but with the new money going to stabilise banks in other countries.


I thought it was going to pay war reparations.

Anyway, looks like things in Spain are getting worse again:

http://www.nytimes.com/2012/07/24/business/global/spanish-bond-yields-soar-while-global-stocks-sink.html

[geni]

I thought it was going to pay war reparations.

Anyway, looks like things in Spain are getting worse again:

http://www.nytimes.com/2012/07/24/business/global/spanish-bond-yields-soar-while-global-stocks-sink.html

Oh no, the markets are angry again. Quick, sacrifice another country.

[PixyMisa]

Just sayin'. Rubbish sales job so far from the politicians, but a case could rather be made that this is better than Germany's only viable alternative which is to leave the euro unilaterally itself. Plus, Merkel remains one of the most popular chancellors ever IIRC.
Just reading the thread again - if Merkel is so popular at home, maybe the sales job worked exactly as intended.

[UndercoverElephant]

I thought it was going to pay war reparations.

Anyway, looks like things in Spain are getting worse again:

http://www.nytimes.com/2012/07/24/business/global/spanish-bond-yields-soar-while-global-stocks-sink.html

Yep. Short selling of stocks has just been banned for 3 months. Like that'll solve the problem...

[Puppycow]

Yup. Doomed:

http://www.theatlantic.com/business/archive/2012/07/how-you-can-tell-spain-is-doomed/260233/

[kevsta]

Yep. Short selling of stocks has just been banned for 3 months. Like that'll solve the problem...

because it worked so well this time last year :D

Yup. Doomed:

http://www.theatlantic.com/business/...doomed/260233/

when the 2 year and the 10 year bonds invert thats the market saying a default is certain, - they'll be going down the PSI route ala Greece (default 1 - 2 is now imminent)

the UK law bonds are now trading (http://www.zerohedge.com/news/spains-15-legal-arbitrage-6-month-return-rate-signaling-imminent-bailout) at 15% above the Spanish law ones, if this follows the Greek precedent UK law will be paid out at full value and everybody else gets a crew cut.

[Francesca R]

ECB to everyone: We'll do whatever it takes (http://online.wsj.com/article/SB10000872396390443931404577550190525296540.html?m od=WSJEurope_hpp_LEFTTopStories).

[kevsta]

ECB to everyone: We'll do whatever it takes (http://online.wsj.com/article/SB10000872396390443931404577550190525296540.html?m od=WSJEurope_hpp_LEFTTopStories).

notice he waited until the usual German rumour refuters were all on holiday..

I think he is going to be called upon to back that statement up.

[Tippit]

They're considering monetizing bonds, which was prohibited. But since they have a mandate to loot the public via inflation, debt monetization is now a-ok because they have deflation.

They might as well come out and declare that they have the authority to counterfeit as much money as they want, for any purpose they want, because that's exactly what they will do, if it suits them.

Draghi would be hilarious, if he weren't a hardcore criminal.

[UndercoverElephant]

ECB to everyone: We'll do whatever it takes (http://online.wsj.com/article/SB10000872396390443931404577550190525296540.html?m od=WSJEurope_hpp_LEFTTopStories).

...unless the German constitutional court stops us...or some other spanner is thrown in the works.

[Puppycow]

ECB to everyone: We'll do whatever it takes (http://online.wsj.com/article/SB10000872396390443931404577550190525296540.html?m od=WSJEurope_hpp_LEFTTopStories).

The words must be followed by action, and soon, or the markets will conclude that they were only words.

Draghi Boxes Himself Into a Corner With Bond Signal: Euro Credit (http://www.bloomberg.com/news/2012-07-26/draghi-boxes-himself-into-a-corner-with-bond-signal-euro-credit.html)

European Central Bank President Mario Draghi may have boxed himself into a corner.

Spanish and Italian bond markets rallied yesterday as investors cheered Draghi’s signal that the ECB is prepared to intervene to reduce soaring yields. Now he has to deliver, or face deep disappointment on financial markets, analysts said. The risk in doing so is alienating key policy makers on the ECB council, such as Bundesbank President Jens Weidmann.

“Draghi is damned if he does and damned if he doesn’t,” said Carsten Brzeski, senior economist at ING Group in Brussels. “He maneuvered himself into an extremely difficult situation. Expectations are very high.”

The ECB is under pressure to lower borrowing costs after three interest-rate cuts since November failed to stop bond yields rising to records in Spain and Italy, threatening the survival of the euro. The Frankfurt-based central bank shelved its bond-purchase program in March amid opposition from council members including Weidmann, and some economists doubt it will be revived any time soon.

[kevsta]

notice he waited until the usual German rumour refuters were all on holiday..

there we go, a day late, but well, everyone's on holiday

http://in.reuters.com/article/2012/07/27/markets-europe-stocks-negative-idINL6E8IR6R920120727

(Reuters) - European shares turned negative and the euro fell on Friday, after the Bundesbank said it had not changed its critical stance on the ECB buying government bonds.

Draghi said nothing he hasnt said before anyway.

[Tippit]

The words must be followed by action, and soon, or the markets will conclude that they were only words.



Who gives a ****. Why should the public at large be looted to prop up the "markets"? I know I'm tired of manipulated financial markets, endless bank bailouts, and insiders growing rich off of counterfeit money and credit.

Let it burn.

[UndercoverElephant]

Who gives a ****. Why should the public at large be looted to prop up the "markets"? I know I'm tired of manipulated financial markets, endless bank bailouts, and insiders growing rich off of counterfeit money and credit.

Let it burn.

Indeed. I'm unashamedly on the political left and do not believe that the "free market" is the best means of making strategic decisions. BUT...if we are going to have a free market system then at the very least the markets have to actually be free. And if we're going to have an "unfree market" then it has got to be organised by people working in the public interest, not a bunch of bankers who are working in their own interest.

All we have at the moment is systematic fraud.

[Tippit]

Indeed. I'm unashamedly on the political left and do not believe that the "free market" is the best means of making strategic decisions. BUT...if we are going to have a free market system then at the very least the markets have to actually be free. And if we're going to have an "unfree market" then it has got to be organised by people working in the public interest, not a bunch of bankers who are working in their own interest.

All we have at the moment is systematic fraud.

I think the free market is the best way of allowing people to voluntarily serve the needs and wants of others. But freedom is meaningless without justice, a concept that seems to elude most so-called "conservatives" who endorse the status-quo, and the system we have is most certainly unjust.

Governments operate using coercion, because everything they do first requires the involuntary separation of wealth from the general population. It is my opinion that given human nature, the tendency is for government power and influence to grow perpetually, and eventually become tyrannical. Even if we are to presume, contrary to human nature, that politicians could operate a large collectivist government for the public's benefit, they have absolutely no way of knowing what I need or want, or what anyone else does, and thus central planning fails even when it is benevolent.

Even though I may disagree with some of your politics, I respect the fact that you're honest.

[UndercoverElephant]

I think the free market is the best way of allowing people to voluntarily serve the needs and wants of others. But freedom is meaningless without justice, a concept that seems to elude most so-called "conservatives" who endorse the status-quo, and the system we have is most certainly unjust.

Governments operate using coercion, because everything they do first requires the involuntary separation of wealth from the general population. It is my opinion that given human nature, the tendency is for government power and influence to grow perpetually, and eventually become tyrannical. Even if we are to presume, contrary to human nature, that politicians could operate a large collectivist government for the public's benefit, they have absolutely no way of knowing what I need or want, or what anyone else does, and thus central planning fails even when it is benevolent.

Even though I may disagree with some of your politics, I respect the fact that you're honest.

What people want is relatively unimportant. Part of my problem with a free market system is that it tries to deliver what people want, but that what people want is not necessarily what is good for either them or for the health of the planet. I have to go back to the example of the Chinese one child policy. I suspect that not many Chinese people wanted to be subjected to that policy when it was first implemented by their non-democratically-accountable government. But it was absolutely necessary nevertheless. The same currently applies to our whole mode of consumerism. There is no way to avoid a massive ecological catastrophe without a complete rethink of the way our economic system works.

If it was up to me then we'd have a "weighted" market - one which was openly "rigged" in order to produce changes in the way things are done (e.g. high taxes on anything that produces CO2 and use the money to subsidise alternatives.) What neither of us (and presumably nobody else either) wants a system where the rigging/weighting is done covertly. People managing money today are in fact trying to predict what the riggers are going to do next, not where a genuinely free market would take us.

It's all going to come back to gold. A lot of people are apparently shocked about LIBOR rigging. Should be interesting to see what happens when they discover that the US government has been rigging the gold and silver market for the last 20 years.

[PixyMisa]

What people want is relatively unimportant.
Thus speaks every authoritarian despot in human history.

I have to go back to the example of the Chinese one child policy. I suspect that not many Chinese people wanted to be subjected to that policy when it was first implemented by their non-democratically-accountable government. But it was absolutely necessary nevertheless.
Absolute nonsense. The West has achieved population control by increasing freedom, rather than by crushing it.

The same currently applies to our whole mode of consumerism. There is no way to avoid a massive ecological catastrophe without a complete rethink of the way our economic system works.
Communism and totalitarianism have wreaked ecological havoc far beyond anything in democratic, capitalist countries.

[Francesca R]

What people want is relatively unimportant.Candid honesty but breath-taking arrogance and worthy of the opposite of respect.

[UndercoverElephant]

Candid honesty but breath-taking arrogance and worthy of the opposite of respect.

I stand by what I said. What should be the priorities of our economic system? What do we want it to do?

You apparently think that what it is for is making sure that people are supplied with "what they want." What most humans want is to have a higher standard of living - to consume more/better of whatever they want. This, for you, is the primary purpose of our economy.

I suggest to you that actually making sure that we don't completely trash the planet and inflict unimaginable misery on both our descendents and pretty much anything else that moves on the surface of this planet is a more important priority than making sure Johnny gets the latest features on his new iPhone.

You think I'm arrogant? I think you are immoral and irresponsible.

[PixyMisa]

I stand by what I said. What should be the priorities of our economic system? What do we want it to do?
Apparently what we want is relatively unimportant.

[Puppycow]

http://theatlantic.com/business/archive/2013/04/spain-is-beyond-doomed-the-2-scariest-unemployment-charts-ever/275324/

[kevsta]

http://theatlantic.com/business/archive/2013/04/spain-is-beyond-doomed-the-2-scariest-unemployment-charts-ever/275324/

and the article doesn't even go into the true state of the banking system. much more in the way of as-yet undeclared losses in the system to come.

I really don't see any way out of this whilst in the Euro. I gather there is a big employment law shake up in the works which is definitely required because its quite oppressive for small self-employed businesses here.

as an example tax, NI & required legal fees is approximately double every month compared to the same activity / earnings in the UK.

[WildCat]

I really don't see any way out of this whilst in the Euro.
And what is the way out ditching the Euro?

[kevsta]

And what is the way out ditching the Euro?

that wouldn't necessarily be very easy either. but do you ever see Spain & Germany competing long term on an even playing field, with the same currency?

even if Spain were not hopelessly insolvent and spiraling down, its not a very realistic proposition is it? Not unless the Germans want to get printing and devaluing quicktime to get back in the race with everyone else

[WildCat]

that wouldn't necessarily be very easy either. but do you ever see Spain & Germany competing long term on an even playing field, with the same currency?

even if Spain were not hopelessly insolvent and spiraling down, its not a very realistic proposition is it? Not unless the Germans want to get printing and devaluing quicktime to get back in the race with everyone else
Spain's problems have nothing to do with the Euro and everything to do with economic policy and budgeting.

You can't borrow or print your way to long-term prosperity, but you can gain short-term prosperity like that. And apparently that allure is too much for Spanish pols to resist, and the current results are predictable as sunrise.

[kevsta]

Spain's problems have nothing to do with the Euro and everything to do with economic policy and budgeting.

You can't borrow or print your way to long-term prosperity, but you can gain short-term prosperity like that. And apparently that allure is too much for Spanish pols to resist, and the current results are predictable as sunrise.

they may not have been caused wholly by the Euro, but to say it has nothing to do with their predicament now, is a bit simplistic.

and had they not been in the Euro, they would never have been able to borrow at Germanic rates and get into this situation so easily.

edit. and once again I note Spain & USA are virtually interchangeable in your statements ;)

[WildCat]

edit. and once again I note Spain & USA are virtually interchangeable in your statements ;)
Nope, people are still buying US bonds and at historically low interest.

[kevsta]

Nope, people are still buying US bonds and at historically low interest.

lulz. if by "people" you mean "the Fed", and by "historically low interest rates" you mean "historically artificially manipulated interest rates", then we're in agreement.

[lomiller]

And what is the way out ditching the Euro?

That’s one way, and probably the only way to address the problem without significant external assistance. Spain is stuck in a deep liquidity crunch, outside of safe government paper no one is willing to lend which leads to a contraction of the effective4 currency supply. (the M2 money supply in US terms)

The solution monetarists like Milton Freidman proscribe for this is expanding the base money supply, but Spain uses the Euro so it doesn’t control it’s own money supply. Different regions within the US would have similar issues if it wasn’t for the equalizing effect of consistent federal spending that funnels tax dollars from prosperous States like California and New York to ones with weaker economies like Alaska, Alabama or Mississippi.

[WildCat]

That’s one way, and probably the only way to address the problem without significant external assistance. Spain is stuck in a deep liquidity crunch, outside of safe government paper no one is willing to lend which leads to a contraction of the effective4 currency supply. (the M2 money supply in US terms)

The solution monetarists like Milton Freidman proscribe for this is expanding the base money supply, but Spain uses the Euro so it doesn’t control it’s own money supply. Different regions within the US would have similar issues if it wasn’t for the equalizing effect of consistent federal spending that funnels tax dollars from prosperous States like California and New York to ones with weaker economies like Alaska, Alabama or Mississippi.
Explain how that solution helps Spain. What will they pay for imported goods with, their worthless pesos?

[allanb]

The eurozone problem will not go away until the euro is abandoned.

No system of fixed exchange rates between groups of fiscally separate countries has ever worked: the gold standard, Bretton Woods, the ERM – they all fell apart in the end. This one will too, eventually, but great damage is being done in the meantime.

Admittedly there have been some countries that have decided to maintain a fixed rate against some other currency (e.g. Saudi Arabia against the US dollar, or – in the pre-euro era – Luxembourg against the Belgian franc) but those were in exceptional circumstances. And even then, the separate currency was not abolished; the decision could be reversed at any time.

In a group as disparate as the 17 countries of the euro zone, the idea of a permanent single currency is insanity.

[Puppycow]

Explain how that solution helps Spain. What will they pay for imported goods with, their worthless pesos?

That's kind of the point of currency devaluation. Domestic goods become cheaper relative to imports, so more people buy domestic goods boosting the local economy. At the same time exports become more competitive increasing exports, so foreign money comes in. Note that the pesos would not be "worthless", just "worth less".

[lomiller]

Explain how that solution helps Spain. What will they pay for imported goods with, their worthless pesos?

If their pesos are worthless every product produced in Spain will be cheaper than products produced anyplace else making Spain the industrial powerhouse of Europe.

[lomiller]

That's kind of the point of currency devaluation. Domestic goods become cheaper relative to imports, so more people buy domestic goods boosting the local economy. At the same time exports become more competitive increasing exports, so foreign money comes in. Note that the pesos would not be "worthless", just "worth less".

Currency devaluation not actually the point, more like a side effect. A weaker economy inherently reflects the need for a weaker currency. Trying to deliberately weaken your currency in order to spur exports is ultimately just going to trigger inflation and asset bubbles.

[lupus_in_fabula]

Spain's problems have nothing to do with the Euro and everything to do with economic policy and budgeting.

From where do you get your information?

BBC (http://www.bbc.co.uk/news/business-17549970): Spain's story illustrates the fact that the eurozone's problems run far deeper than the issue of excessive borrowing by ill-disciplined governments.

Greece, Portugal and Italy all had way too much debt.

But the Spanish government's borrowing was under control - that is, it ran a balanced budget on average every year until the eve of the 2008 financial crisis.

And as Spain's economy grew rapidly before 2008, its debt-to-GDP ratio was falling. Germany's, by contrast, continued to rise.

[kevsta]

From where do you get your information?

BBC (http://www.bbc.co.uk/news/business-17549970):

exactly. Spain has gone bust trying to bail out it's banking system, after the people (buyers, developers, speculators, foreigners etc) blew themselves up in a property bubble caused by easy money at Germanic interest rates.

Wildcat likes to lecture about government fiscal irresponsibility, when in fact Spain's government are a paragon of virtue by comparison to the US.

[lupus_in_fabula]

exactly. Spain has gone bust trying to bail out it's banking system, after the people (buyers, developers, speculators, foreigners etc) blew themselves up in a property bubble caused by easy money at Germanic interest rates.

Yeah well … the people (and the government) are certainly taking the hit now. It's not so much about Germanic interest rates; it's still private sector borrowing and lending within a common currency area, EMU €, which makes it difficult for a single government to do much about it. And yes, oh dear, we're looking at the basic €-problem again. Go figure?

Reuters (http://in.reuters.com/article/2012/06/29/spain-germany-bailout-ifr-idINL6E8HTFC820120629): German banks were facing deep losses linked to potential Spanish bank failures. However, a bailout of Spanish banks - backed initially by Spanish taxpayers and potentially later by the European Stability Mechanism - will ensure creditors won't take losses, making the bailout effectively a back-door bailout of reckless German lending.

Among European lenders, those in Germany are by far the most exposed to Greece, Ireland, Portugal, Spain and Italy, with outstanding loans worth 323 billion euros at the end of last year, according to BIS data.

Total periphery exposure equates to about 4 percent of the 7.3 trillion euros of assets held by German banks and almost an eighth of the country's annual GDP. Perhaps because of the size of the exposure, Germany has continually pushed against private sector losses - and was initially hostile to writing down Greek government debt.


Wildcat likes to lecture about government fiscal irresponsibility, when in fact Spain's government are a paragon of virtue by comparison to the US.

The "lecture" is more like bringing a rugby ball to a basketball game.

[WildCat]

If their pesos are worthless every product produced in Spain will be cheaper than products produced anyplace else making Spain the industrial powerhouse of Europe.
Spain isn't going to suddenly eliminate its widespread corruption and develop industrial infrastructure by dumping the Euro. They were western Europe's economic backwater (along with Portugal) prior to adopting the Euro, I see no reason for that to change if they get rid of it. And in the global economy you have to import most modern conveniences - computers, industrial machinery, energy. I don't see Spain becoming a major producer of those items. It will be just as it was before the Euro.

[WildCat]

From where do you get your information?

BBC (http://www.bbc.co.uk/news/business-17549970):
So Spain was doing good under the Euro until the crisis hit, much better than they were doing under their own currency.

[kevsta]

Spain isn't going to suddenly eliminate its widespread corruption and develop industrial infrastructure by dumping the Euro. They were western Europe's economic backwater (along with Portugal) prior to adopting the Euro, I see no reason for that to change if they get rid of it. And in the global economy you have to import most modern conveniences - computers, industrial machinery, energy. I don't see Spain becoming a major producer of those items. It will be just as it was before the Euro.

Spain GDP by sector http://en.wikipedia.org/wiki/Economy_of_Spain

The economy of Spain is the 13th-largest economy in the world, the fifth-largest in the European Union, and the fourth-largest in the Eurozone, based on nominal GDP comparisons

agriculture (2.3%),
energy (2.3%),
industry (11.7%),
construction (10.0%),
services (66.6%) (December 2009)

Exports €248.9 billion ($341.6 billion) F.O.B. (2009)[1]
Export goods Machinery, motor vehicles, chemicals, shipbuilding, foodstuffs, electronic devices, pharmaceuticals and medicines, other consumer goods


USA GDP by sector http://en.wikipedia.org/wiki/Economy_of_the_United_States
agriculture: 1.2%,
industry: 19.2% [inc construction?]
services: 79.6% (2011 est.)

If Spain became cheaper than the rest of Europe once more, then tourism here would also become particularly attractive once again.

During the last four decades Spain's foreign tourist industry has grown into the second biggest in the world and was worth approximately 40 billion Euros, about 5% of GDP, in 2006.[65] The total value of foreign and domestic tourism came to nearly 11% of the country's GDP and provided employment for about 2 million people.[66] In August 2012 Spain beat its own record of monthly arrivals, having registered 7.9 million visitors.

the country actually has quite a lot going for it if it could slip the noose of the Euro and associated banker debt that needs repaying.

[lupus_in_fabula]

So Spain was doing good under the Euro until the crisis hit, much better than they were doing under their own currency.

Many countries were, both within and outside the Euro zone. That was due the global financial sector ballooning beyond reasonable proportions (the Euro made that considerably easier as well - freer movement of capital).

The private sector went boom and bust … and now the public sector is trapped; self-amputated.

[lomiller]

Spain isn't going to suddenly eliminate its widespread corruption and develop industrial infrastructure by dumping the Euro.

Evidence for widespread corruption? Besides, China has widespread corruption and it hasn’t hindered their industrial production.
Leaving the Euro would not make Spain’s currency “worthless” as you claim but if it did this is identical to saying Spain’s cost of producing goods is zero. That’s a pretty tough number for anyone else to compete against.

And in the global economy you have to import most modern conveniences - computers, industrial machinery, energy. I don't see Spain becoming a major producer of those items. It will be just as it was before the Euro.

Spain may or may not end up producing these items but the Law of Comparative Advantage tells us it doesn’t matter. Spain would produce something and trade if for items it wants to import. This is why their currency wouldn’t become worthless as you suggest, it would simply drop to the point where Spanish exports become desirable enough to pay for Spanish imports. The whole point of a floating currency is that is it rises/falls to equalize trade balance and capital flows.

[NWO Sentryman]

Evidence for widespread corruption? Besides, China has widespread corruption and it hasn’t hindered their industrial production.

Really? From what I've been reading, China has cut out so much corruption in the past few years that their GDP growth has stalled, and their luxury goods market has collapsed. It's not the third world hellhole that people think it is.

[kevsta]

Evidence for widespread corruption?

rare though it is for me to agree with wildcat, there is a good amount of corruption at local and municipal level, and probably about average for the western world at government level.

worse though, you have a decent sized black market because of bad and noncompetitive employment laws one way and another. not sure if black market is the right phrase, maybe black economy?

edit.. corruption goes right to the top lol http://www.theibizasun.com/issues/bi_noticias.asp?id=51&categ=2

It was announced last week that the son-in-law of the King of Spain will be tried for crimes of embezzlement, corruption, unfair influence and falsification over his management of the non-profit making Nóos Institute. Urdangarin, the Duke of Palma and married to the monarch’s younger daughter Cristina, is accused of siphoning millions of euros from the Institute for organizing sports and tourism conferences in the Balearic Islands. As part of the investigation into his business activities, 63 company owners and administrators were questioned by the police about invoices issued to the Institute for work which was never carried out. The additional charge of tax evasion for the non declaration of 375,000€ in a Swiss bank account has been dropped.


edit2 http://soerenkern.com/web/?p=700

yep, quite a lot..

[kevsta]

http://blogs.telegraph.co.uk/finance/jeremywarner/100024476/spain-is-officially-insolvent-get-your-money-out-while-you-still-can/

What's projected to occur is essentially what happens in all bankruptcies. Eventually you have to borrow more just to pay the interest on your existing debt. The fiscal compact requires eurozone countries to reduce their deficits to 3 per cent by the end of this year, though Spain among others was recently granted an extension. But on these numbers, there is no chance ever of achieving this target without further austerity measures, which even if they were attempted would very likely be self defeating. IN any case, it seems doubtful an economy where unemployment is already above 25 per cent could take any more.

In the past, the IMF has been guilty of being far too optimistic about Spain, both on the outlook for growth and the public finances, so it's possible it is now committing the reverse mistake of undue pessimism. Yet somehow I doubt it. Spain is chasing its tail down into deflationary oblivion.

All this leads to the conclusion that a big Spanish debt restructuring is inevitable. Spanish sovereign bond yields have fallen sharply since announcement of the European Central Bank's "outright monetary transactions" programme. The ECB has promised to print money without limit to counter the speculators. But in the end, no amount of liquidity can cover up for an underlying problem with solvency.

Europe said that Greece was the first and last such restructuring, but then there was Cyprus. Spain is holding off further recapitalisation of its banks in anticipation of the arrival of Europe's banking union, which it hopes will do the job instead. But if the Cypriot precedent is anything to go by, a heavy price will be demanded by way of recompense. Bank creditors will be widely bailed in. Confiscation of deposits looks all too possible.

I don't advise getting your money out lightly. Indeed, such advise is generally thought grossly irresponsible, for it risks inducing a self reinforcing panic. Yet looking at the IMF projections, it's the only rational thing to do.