The Pain In Spain Falls Mainly... Everywhere

Tyler Durden's picture

Authored by Mint's Bill Blain,

European GDP and Spain – where it’s going?

Europe Q4 GDP declines 0.6%, and economy contracts 0.9%. No one should be surprised at the latest disappointing European GDP numbers, but they hide important trends – Germany’s Q4 0.6% GDP drop was worse than expected, although the expectations remain for growth later this year. France is going to miss the 3% GDP deficit target because of low growth. For the rest of Europe the numbers were generally worse than expected – and no one credible is talking about significant growth prospects. (Sure, the Euro Elites are telling us they see growth tomorrow.. but tomorrow is always tomorrow..)

The poor GDP numbers are likely to have significant knock-on effects in terms of confidence and the Euro – sure enough European Stocks are lower. France GDP was down 0.3%, Netherlands down 0.2%. And the critical peripheral worries: Italy down 0.9% in Q4. Spain Q4 contracted by 0.7% when its number was released in Jan.

Of course, slowing economies would normally be good news for bonds – rates should fall as the need for economic stimulus rises. True for Germany, but since the rest of Europe moves in step with Germany… until it doesn’t, and renewed doubts about the Euro economies take over!

Are we likely to see another round of Euro Peripheral weakness?

The difference now is NO-ONE really believes the Euro is going to break up. There are some doubts about Italy as the political tensions rise, and the Euro Elites face up to the implications of a Berlusconi resurgence. He’s back, and this time he’s serious... Get over it.

Let’s look at Spain. I’m assured there is nothing to worry about. The country is determined to stick with the programme and stay within the Euro. Sure, there have been some wobbles in terms of agreeing GDP/deficit targets, bailing out the banks, and refusing to be handcuffed to OMT shackles.

Let’s go back to 26th July 2012, the day Draghi promised to “do what is needed to preserve the Euro”... If you bought Spain that July day, you are sitting pretty. 5-year Spain CDS rallied from 642 to 244 in Jan. Spain’s worst of a bad bank bunch, Bankia, has seen its senior CDS tighten from 1575 in July to 709 currently! Spain stocks, IBEX, is up 38%.

What’s not to like..? Think hard about that one.

As we all know, the moment to exit a position is when you first think about it... not when you have to. So if you are bought into the Spain rally, let me ask... what’s the next move? Hold for now, hold to maturity, or sell?

What are the risks for Spain? We have few doubts it will stay in the Euro. If needed, it will get a bailout in whatever form the ECB can make acceptable -  unlimited bond purchases and/or direct cash injections if markets close. Anything will be done to avoid an embarrassing default. The risks are more subtle – economic and the long-term consequences of economics.

I spent yesterday’s quieter moments reading through rafts of Spain stuff – particularly some excellent stuff from David Watts at CreditSights. I generally ignore most of the bank analysis – it’s ever so slightly biased and as turgid as over-ripe halibut. No bank is going to write negative Spain comment when there are potential Spain bond mandates to be won.

My current interest in Spain was pricked by Blackrock CEO Larry Fink’s comments to ABC following a visit to Madrid. He reckons “Spain will be a star economy if reforms continue”  but it still faces 3-4 years of hard adjustment. Hmm.. so Blackrock has become establishment – agreeing with that the Spanish claims of an: “unprecedented fiscal consolidation effort”. However, there was nothing in the press release to back up any of Fink’s claims with real data or trends.

Data and graphs are the territory of my Macro-Man – Martin Malone - but he’s currently glad-handing in Japan, so let me present my own Spain snapshot:

  • The government is extremely unpopular – that’s why the apparently faked attempts to frame them as slush fund recipients had limited effect. Rajoy et al are already marginally less welcome than Ebola fever.
  • The government still has many unpopular spending decisions to take. Domestic tension remains high and with still rising unemployment, it could get worse. Which could spawn yet more anti-centralisation from the regions.
  • Lowering Spain wages has made Spain more “competitive”, but only in European wage terms.
  • Sadly, Spain’s only competitive advantage is lower wages: Spain isn’t a leader in the value-added factors of mature European economies; like cutting edge technology, unmatched engineering prowess, world class design, financial innovation or even sophisticated marketing. There are exceptions; Spain’s top company Zara is successfully selling middle market clothing on a pile ‘em high, sell ‘em cheap basis. Otherwise, Spanish manufacturing is basically making things cheaper than others.
  • While European manufacturers may well be looking to move production to Spain because of low wages, it doesn’t help the strong Euro makes the whole country uncompetitive  on the world stage, and that European consumers aint consuming very much.
  • The improvements in Spain do mean it’s well placed in the short-term if… if… there is a recovery. Long-term prospects look worse with the university educated future generation now working as barista’s in London or anywhere outside Europe, and little being done to invest in a technology driven future.
  • Emigration of the best and brightest adds to the demographic time bomb ticking in the Spain pension funds.
  • Although the 25% plus Spain unemployment probably underestimates the black economy – it’s a simple fact the whole Spanish private sector is massively overleveraged, especially as family heads are losing their jobs. Falling wages and job losses increase the burden. Banks remain massively vulnerable to rising retail distress.
  • All the above without even mentioning fact the economy is burdened by millions of unsellable homes with no one likely to buy. I really don’t understand how SAREB (the Spanish bad bank) is apparently selling property 30% above market.. If I don’t understand it.. my default position is its dodgy.
  • Spanish banks may be funding again.. whoopee.. But that’s not a factor of better conditions or outlook – it’s entirely a factor of the scramble for yield rather than better Spain financial fundamentals.

When I ask the question.. what’s not to like about Spain..? Well actually quite a lot.. What are the positives. Well, turning to Mr Fink, the Euro Elites and the IMF, they all praise Spain for making great progress.. In what way? Last year the Spaniards told us they were targeting a 6.3% Deficit GDP. Everyone harrumphed and whined, but had little choice but to accept the number.

Guess what. Spain will miss that number by a significant margin. Now they say 7.4% is likely due to the cost of bank bailouts. But as CreditSights point out, they are probably underestimating the true impact of the 3.5% GDP cost of the bank bailouts. Even the Spain MOF predicts a 8.1% deficit number!

CreditSights suggests a significant Deficit miss will undermine Spain’s borrowing position. They say investors should lighten up on Spain because the likely deficit miss is one sided: if the number was hit, it won’t move market higher, but on a miss there will likely be a sell off – particularly at the long end.

Perhaps... but I’d add Spain’s borrowing position is only sustained by the Draghi promise of OMT support. What if that proves to be just talk and illusion? If Spain is so obviously failing to control its deficit, name a German politician who will be keen to allow them access to emergency OMT funding if there is a reversal? German election later this year.

One Key CreditSights soundbite: “Spain last ran a balanced budget in Q1 2008 when growth was 2%. Now the economy is shrinking 1.7% on an annualised basis.” That’s a massive amount of catch up to be achieved.

The real danger in Spain is long-term. Thus far the government has contained youth unemployment and social unrest. But long-term how will that fare as Spain comes to realise that the only future for it within the Euro is to remain the most competitive production country by dint of lower wages. That’s hardly an attractive option within the United States of Europe – being little more than low-paid arbiters for Corporate Germany.

We are looking at another 3-4 years of economic misery just to get the Spanish economy back into the EU’s 3% deficit/GDP groove. Then we’re looking at on-going relative poverty for Spanish workers within Europe. At some point... something has to give...

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Sudden Debt's picture

well.... at least it's not as bad as....

Monedas's picture

It's hard to be poor and arrogant ?

MillionDollarBoner_'s picture

Hasta la Vista, Bitchez !!!;o)

Sudden Debt's picture

we only need 1, as in ONE, 1 bank that suddenly tips over... out of the blue... while nobody saw it comming...



skydrake's picture

In EU, if a bank fails, at worst is put on bail by a government. Do you remember a case like Lehman Brothers?


The worst Spanish bank is Bankia and in fact it is bailied out. So a bank problem became "only" a public debt problem.

Super Broccoli's picture

please can it be a french bank ? like CA, or SG those clumsies deserve it !

Element's picture

S-pain ... where the music stops and the chairs are in short supply

Shizzmoney's picture

At least they have football.

Sudden Debt's picture

In the 90's... when the USSR broke down... and the wall fell...

europe.... was flooded with cheap Russian hookers....




MillionDollarBoner_'s picture

Spanish and Italian hookers?

Too much hair, a banger went off in their knickers...

_ConanTheLibertarian_'s picture

I noticed your typing style is a bit stressed lately. Looks like you're quite ready to bang some hookers.

falak pema's picture

Meanwhile back in HF hotel the smart boys make ou big on Japan's Yen devaluation currency war : 

George Soros Has Made $1 Billion In Just A Few Months On The Plunging Yen - Business Insider

and it aint over...

rsnoble's picture

I've about had it with these massive economic recoveries.

Lucius Cornelius Sulla's picture

"Germany’s Q4 0.6% GDP drop was worse than expected, although the expectations remain for growth later this year."

Until articles lose these conditional remarks which spew hopium, we are not even close to a bottom.  This is what is written at a market top where greed still rules.  We will be near a bottom when the articles are filled with fear proclaiming the end of the world as we know it has arrived and there is no hope for the future.  Then I will buy.

rsnoble's picture

Or the quadrillion derivative market blows, nukes start getting lofted and it turns out to really be the end.

spanish inquisition's picture

How to stay ahead of the pack in the race to the bottom.

(Edit: When hitting enter isn't enough anymore!)

schatzi's picture

Great article, yet the author, in concluding that Germany's politicians will dump Spain like a hot potato if deficit targets are not met, is overestimating their ability to change course. They've committed to saving the Euro - no matter what. It's not like Germany has no history in hanging on to bad ideas, come hell or high water.

Element's picture



German cabinet minister calls for Greek euro exit


By Richard Blackden, in Mexico City


25 Feb 2012


The Telegraph

Germany’s interior minister called for Greece to leave the eurozone on Saturday as hopes that the world’s richest countries would stump up more cash to help the International Monetary Fund (IMF) fight Europe’s debt crisis faded.


Becoming the first member of Germany’s cabinet to openly call for a Greek exit, Hans-Peter Friedrich told Der Spiegel magazine that Greece’s chances of restoring its financial health would be greater outside the euro.


“I’m not saying that Greece should be thrown out but rather to create incentives that it can’t say ‘no’ to,” he added.


Isn't that what they are still clearly doing in effect to Greece? The pain simply hasn't become explosive enough yet within Greece, but each day it gets closer to total collapse, a tipping-point that can't be held off any longer by external concerns. German policy RE the Euro and printing becomes redundant pretty fast at that point.

As Tyler pointed out awhile back, how Greece goes is how the rest of the periphery will go as well.

Dewey Cheatum Howe's picture

This is the real reason why they are not letting Greece out of the Euro.

Greek Debt Crisis: How Goldman Sachs Helped Greece to Mask its True Debt

By Beat Balzli

Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules. At some point the so-called cross currency swaps will mature, and swell the country's already bloated deficit.

Greeks aren't very welcome in the Rue Alphones Weicker in Luxembourg. It's home to Eurostat, the European Union's statistical office. The number crunchers there are deeply annoyed with Athens. Investigative reports state that important data "cannot be confirmed" or has been requested but "not received."

Creative accounting took priority when it came to totting up government debt.Since 1999, the Maastricht rules threaten to slap hefty fines on euro member countries that exceed the budget deficit limit of three percent of gross domestic product. Total government debt mustn't exceed 60 percent.

The Greeks have never managed to stick to the 60 percent debt limit, and they only adhered to the three percent deficit ceiling with the help of blatant balance sheet cosmetics. One time, gigantic military expenditures were left out, and another time billions in hospital debt. After recalculating the figures, the experts at Eurostat consistently came up with the same results: In truth, the deficit each year has been far greater than the three percent limit. In 2009, it exploded to over 12 percent.

Now, though, it looks like the Greek figure jugglers have been even more brazen than was previously thought. "Around 2002 in particular, various investment banks offered complex financial products with which governments could push part of their liabilities into the future," one insider recalled, adding that Mediterranean countries had snapped up such products.

Greece's debt managers agreed a huge deal with the savvy bankers of US investment bank Goldman Sachs at the start of 2002. The deal involved so-called cross-currency swaps in which government debt issued in dollars and yen was swapped for euro debt for a certain period -- to be exchanged back into the original currencies at a later date.

Fictional Exchange Rates

Such transactions are part of normal government refinancing. Europe's governments obtain funds from investors around the world by issuing bonds in yen, dollar or Swiss francs. But they need euros to pay their daily bills. Years later the bonds are repaid in the original foreign denominations.

But in the Greek case the US bankers devised a special kind of swap with fictional exchange rates. That enabled Greece to receive a far higher sum than the actual euro market value of 10 billion dollars or yen. In that way Goldman Sachs secretly arranged additional credit of up to $1 billion for the Greeks.

This credit disguised as a swap didn't show up in the Greek debt statistics. Eurostat's reporting rules don't comprehensively record transactions involving financial derivatives. "The Maastricht rules can be circumvented quite legally through swaps," says a German derivatives dealer.

In previous years, Italy used a similar trick to mask its true debt with the help of a different US bank. In 2002 the Greek deficit amounted to 1.2 percent of GDP. After Eurostat reviewed the data in September 2004, the ratio had to be revised up to 3.7 percent. According to today's records, it stands at 5.2 percent.

At some point Greece will have to pay up for its swap transactions, and that will impact its deficit. The bond maturities range between 10 and 15 years. Goldman Sachs charged a hefty commission for the deal and sold the swaps on to a Greek bank in 2005.

The bank declined to comment on the controversial deal. The Greek Finance Ministry did not respond to a written request for comment.


Remember this was done under one Mario Draghi now the head of the ECB bank.


This gets better when this deal was done Lucas Papademos was the head of the central bank of Greece.

In 2011 Prime Minister George Papandreou (who was democratically elected) was forced out of office and replaced by an unelected technocrat. Guess who replaced him. You guessed it Lucas Papademos.


This is why the Greek govt. under the influence of Goldman Sachs will stay in the Eurozone for awhile longer people be damned. Goldman Sachs needs to recoup it's investment and hide some dead bodies in the derivatives cesspool at the same time. Greece unless a revolution happens won't be allowed to be cut loose until then, end of story.


It all funnels through the central banking system to Goldman Sachs and other investors. That is why mass corruption and fraud happens on such a grand scale. They are all in on the scam. Nothing short of hanging people in the streets will stop it since the money is too great to overcome with them buying off whole governments, national law enforcement and regulatory agencies.

Element's picture


Greece unless a revolution happens won't be allowed to be cut loose until then, end of story.


Agree with the logic of the article, but a revolution is indeed what I'm thinking about when I said a 'tipping-point' that can not be contained by external concerns.  60% of the young in Greece are without a job and the Govt is not their friend.

As for the unaccounted military spending on credit mentioned in the article, I consider this to be a tacit recognition that NATO chiefs and govts know they absolutely need Greece (and Turkey) to have a very strong and well-equipped military - no matter what it takes to make it so (as Draghi might say). Greece is on one of the major threat-axis's into Europe. This I think is the defining and underlying geopolitical realism and reason for Greece to be permitted into the Euro-sphere, and to borrow (unseen) to incredible excesses, and the corruption tolerated, and for them to use this geopolitical ace up their sleeve to repeatedly default (which again they are). This situation is extraordinarily bound-up with the geopolitics, especially as a quasi-cold-war v2.0 comes into view. You simply have to try keep Greece in your pocket, no matter what Greek politicans do to abuse the situation.

GS simply saw all the connections, understood the need for providing discrete hidden credit flows, understood the political opportunism at work, and capitalized on the captured-eurozone and the NATO security imperative.

But Draghi and Germany both understand that printing is not going to save the day, nor save the euro. Does anyone in Germany or Spain or Brussels seriously think that printing whatever it takes will save the euro, or destroy the euro?It's absurd to say that printing without limit will save the euro system. The euro system is already dead, it just hasn't fallen over and decomposed yet.

The 'support' bailouts are only being done to stave-off the pan euro-zone revolution(s), plus the butt-covering the article mentioned.

CrashisOptimistic's picture

My man, Greece are the greatest defaulters on debt in the history of mankind.

They Are Getting Away With It.  They have played the systemic destruction card and the EU and IMF will fund them til the end of time.

Forget financial this and financial that.  Money is an invention.  It's not a law of nature.  If money threatens disintegration, it will just be redefined.  Gold is no different.  Its value is in the heads of people.

Oil's value existed before people arrived on Earth.  It is oil that will disintegrate the system.  Watch it, and only it.

FeralSerf's picture

Oil's value is also a giant fraud.  It depends on massive financial manipulation, hiding competing reserves and suppression of alternate energy technologies.

ebworthen's picture

The real people of the world need a universal term for "Hang the Bankers!"


Eally Ucked's picture

GDP's of all Western World countries have to drop for one most important reason: they have to get rid of parasite Financial Industry which constitutes from 25 to 45% of those numbers. As long as they still suck life from everything around there won't be any recovery! And who cares if their input drops to 15%, you and me and everybody else will be better off but GDP will drop ha ha, ha....

Sach Mahoney's picture

Amazing how long the global markets have hung on to this notion, this wildly stupid belief that the big government, centralized, socialized model works.  This mess will never be sorted out without experiencing serious financial pain. The markets will soon wake up to the fact that Italy, Portugal, Spain, Ireland and Greece are unsaveable....dare I say America, too. And when the first one tips, and it will, just as the banks here started falling one after another, so so too will this happen in the EU, except it will be countries failing, followed soon by the EU banks that have massive sovereign exposure to each of these nations. We will soon experience "Too Big to Save".  The dominos are queued up.  

Sach Mahoney's picture

I'll add Japan to this mess...3rd straight negative quarter just reported in

Dewey Cheatum Howe's picture

The value of the money is proportional to the amount of guns pointed at your head at any given time. That is the new exchange rate in the new normal.

Lord Of Finance's picture

Yeah. I remember seeing Blackcocks' Larry Fink pretty much saying the same thing last summer on 'Taking Cock' with Pimp Fox.


I think I would take investment advice from 'hustlers' Larry Flint, before I'd place my chips on what 'blackcocks' Larry Fink has to say. Most especially when he is giving investment advice on da t.v..

The Swedish Chef's picture

You had me until "that’s why the apparently faked attempts to frame them as slush fund recipients had limited effect". 


There is nothing fake about it at all. Swiss bank accounts don´t appear out of thin air. 

Stuntgirl's picture

I agree. FRAMED? they don't need no framing, like Berlusconi doesn't need honey trap set ups...

Haus-Targaryen's picture

It simply amazes me that these countries have some truly horrible poverty numbers (don't forget Italy) and yet the people keep voting for the political establishment.  I don't buy the Greeks are really wanting to solve their problems until Syriza and Golden Dawn can togeter get over half the vote.

spotdawa's picture

DieBold.  Or just die broke. 

Not saying that Diebold has voting machines in Greece (wouldn't that take the cake), but just that computers or no, fascists only care that people are "voting," not what or who they are voting for.  Nobody ever voted for Goldman Sachs...

Dewey Cheatum Howe's picture

Everything is peaches and cream across the whole eurozone. It is rainbows and unicorns good. Draghi said so.

The euro zone slipped deeper than expected into recession in the last three months of 2012 after its largest economies, Germany and France, shrank at the end of a wretched year for the region.


It marked the currency bloc's first full year in which no quarter produced growth, extending back to 1995. For the year as a whole, gross domestic product (GDP) fell by 0.5 percent


This is the best 0.5 GDP miss ever and is really good for the eurozone in general.

CrashisOptimistic's picture

Wait!  Maybe it was just because their DoD spending was down 22% (after being up 13% in Q3, explaining most of its sharp rise).

Oh, they have no DoD?  Well, then that's why!

Monedas's picture

Italy was on the wrong side, Spain was neutral .... that's why they are lower down on the Ponzi Pyramid .... to the Victors go the spoils of war !

dataanalytics's picture

"We are looking at another 3-4 years of economic misery just to get the Spanish economy back into the EU’s 3% deficit/GDP groove."

What an idiot. 26% official UE. More like 35%-40%...but it's only going to take a few years...


web bot's picture

But Morgan Stanley said that Spain is the new Deutchland? 

Banksters's picture

Once the deflationary event horizon is hit, all rules of ponzinomics go out the window.   I could write a lengthy explanation, but   most hedgies get it. 

The Central Banksters credo, repeated by a phalanx of talking head economists and magnified through a controlled media system:

We promise a 2nd half recovery with GDP growth moderated by various structural changes in blah blah blah.


In the background, they are preparing to print their asses off to 'save' their system from another derivatives meltdown.  

Dewey Cheatum Howe's picture

Out of curiousity, what scenario(s) would you consider as a deflationary event horizon?