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Will Spain Default?

Tyler Durden's picture




 

With 10Y yields trading below those of US Treasuries, asking the question of Spain's rising default risk seems risible but as Bloomberg's Maxime Sbaihi notes, the longer the euro flirts with deflation, the higher the risk that the heavily indebted (and becoming more so) countries will be tempted to default. Of course, this 'concern' is entirely ignored by the 'market' as Draghi has promised enough liquidity to soak up every short-dated bond but as the European Union's so-called "1/20 rule" suggests - requiring states to reduce excessive (over 60% Debt/GDP) by 1/20th every year or face a fine of 0.2% of GDP - Spain, it appears has 5 options to escape this vicious circle... and one of those is restructuring...

 

 

To reduce its public debt, Spain can choose among five options, which are not mutually exclusive.

  1. The first is to attempt to grow GDP faster than public debt in order to reduce the ratio. According to International Monetary Fund forecasts, annual GDP growth in Spain will remain below 1.3 percent until 2020. This is not enough to stabilize the debt ratio, according to Bloomberg Brief calculations.
  2. The second option is to pursue fiscal adjustment until the primary balance — the budget balance without debt interest payments — reaches a surplus. With a primary deficit of 4 percent, Spain still needs further consolidation, heightening political risk from voters who show increasing signs of austerity fatigue. Reducing the deficit too quickly might also endanger the recovery.
  3. Another option is financial repression, involving state-dictated measures such as interest-rate caps, direct lending to the government or regulation of capital flows. This runs up against reputation risk, political backlash and legal issues, especially in a currency union. Yet it remains a possibility after some features were implemented during the banking sector bailout in Cyprus.
  4. Another even more radical option is to restructure or fully default on the debt. That has become more conceivable with the Greek precedent and years of austerity fatigue. In a December 2013 paper on debt restructuring, Carmen Reinhart and Ken Rogoff warned: “restructurings will be needed, particularly, for example, in the periphery of Europe, far beyond anything discussed in public to this point.”
  5. One final option is to rely on inflation. Spain’s public debt is fixed in nominal terms, except for one 5 billion euro inflation-linked bond issuance last month. Higher inflation means a lower real value for repayments. Given the current debt stock, even 3 percent inflation in Spain would only reduce public debt to GDP by 1 percentage point by 2025, according to Bloomberg Brief calculations based on IMF projections

Repression has been tried and the banks are already neck deep in it... growth is a joke in the new normal... fiscal adjustment is simply (as we have seen) too much pain for politicians... and inflation is going the wrong way... leaving one option (as unpalatable as it is)... default/restructure.

 

Source: Bloomberg Briefs @MxSba

 

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Wed, 06/11/2014 - 09:33 | 4844172 eucalyptus
eucalyptus's picture

i hope all this shit melts down. 

Wed, 06/11/2014 - 09:38 | 4844190 Headbanger
Headbanger's picture

Just don't step in the puddle when it does.

Wed, 06/11/2014 - 09:41 | 4844200 doomandbloom
doomandbloom's picture

Spain is not Venezuela

Wed, 06/11/2014 - 09:49 | 4844232 Grande Tetons
Grande Tetons's picture

Yet. 

Wed, 06/11/2014 - 09:53 | 4844253 COSMOS
COSMOS's picture

Who would of thought, Draghi announcing publicly that they will provide the liquidity, I am surprised the German public is not out on the streets overturning Italian cars and setting fire to the ECB.

So the Eurotrash will set fire to their currency and watch it burn like the dollar.  I guess when you don't have oil you have to come up with something to burn to stay warm.

Wed, 06/11/2014 - 10:59 | 4844615 Newsboy
Newsboy's picture

"When", was left out of the header, "Will Spain Default?"

Wed, 06/11/2014 - 09:56 | 4844260 Thought Processor
Thought Processor's picture

 

 

I suppose if we've learned anything from the previous five years it is that there will be no defaults on any country specific debt instruments.

They'll do bail'ins first using money market and savings accounts and that will be the real red flag.   

 

Why?

Because  "It's a big fuckin club........  and you ain't in it."   George Carlin

Wed, 06/11/2014 - 21:18 | 4846997 StychoKiller
StychoKiller's picture

Wait, I thought they were saying Spain is not Uganda.  Can I get a scorecard up in here?

Wed, 06/11/2014 - 09:40 | 4844198 wmbz
wmbz's picture

It needs to melt down and would if not for the sons of bitches pulling the strings. They will lie, cheat, steal, rape, pilage and fuck their own mother as they rob the system as much as possible and then flee. Without any fear of prosecution.

Wed, 06/11/2014 - 13:48 | 4845437 therover
therover's picture

"Without any fear of prosecution" Right...what they need to fear is DEATH.

Wed, 06/11/2014 - 09:35 | 4844176 youngman
youngman's picture

No they wont..Belgium will buy it all...does Belgium have a large deep water Navy..they are going to be a powerhouse in the next few years...

Wed, 06/11/2014 - 09:41 | 4844204 Winston Churchill
Winston Churchill's picture

Mistranslation youngman, those are groups of farriers.

Wed, 06/11/2014 - 09:34 | 4844177 Millivanilli
Millivanilli's picture

Not as long as super Mario, GOldman sux alum and frau Merkel have their back.  Sure, they'll destroy the currency but shit, dats how dey roll.

 

Oh, and in other news, 500k Iraqis are fleeing Mosul.  Can you say FULL BLOWN CIVIL WAR IN IRAQ?  

 

Let's see how rising oil prices work on inflation.

Wed, 06/11/2014 - 09:38 | 4844178 Millivanilli
Millivanilli's picture

Double post...

 

So a little news.

 

Calls to act on ‘humanitarian crisis’ following Mosul exodus Half a million estimated to have left northern Iraq city after militant jihadists take over

http://www.irishtimes.com/news/world/middle-east/calls-to-act-on-humanit...

Wed, 06/11/2014 - 09:35 | 4844180 SAT 800
SAT 800's picture

Will it rain next year? Of course, it will. It's mathematically certain that Spain will default. And no, I don't know when.

Wed, 06/11/2014 - 09:39 | 4844188 Grande Tetons
Grande Tetons's picture

Math? What the fuck is that?

Wed, 06/11/2014 - 10:00 | 4844276 FinalEvent
FinalEvent's picture

The truth.

BUY BITCOIN BEFORE IT IS TOO LATE.

Wed, 06/11/2014 - 13:27 | 4845333 crazytechnician
crazytechnician's picture

Is that Fone ?

Wed, 06/11/2014 - 09:39 | 4844195 SheepDog-One
SheepDog-One's picture

What's U.S.A. Americas debt/GDP ratio....any better? Of course not, it's astronomically off the charts so what about a U.S. default? Is that 'off the table' just like impeachment? Of course it is.

Wed, 06/11/2014 - 09:40 | 4844202 q99x2
q99x2's picture

Spain will not default until Greece defaults. I've put in too much damn time waiting for Greece to default. A man can only stand so much.

Wed, 06/11/2014 - 13:28 | 4845340 SDShack
SDShack's picture

Exactly, Default? LOL. Did Greece default? Did Cyprus? Did any of the PIIGS? Default will never occur because they just change the rules if the dreaded event actually MIGHT occur. Did it with Greece. Did it with Cyprus. Bailed in bond holders. Manipulated quotas to just get 50.1% to participate, and deem it "Good". Defaults and CDS will NEVER happen! Why? Because the insane fuckers that designed the toxic nuclear options will be the same ones that get fucked by it going off. They will never allow that to happen out of simple self-preservation. Look at TARP. Look at AIG. Look at Government Motors. The Rule of Law is Dead! The New Feudal World Order has arrived.

Wed, 06/11/2014 - 09:41 | 4844207 Quinvarius
Quinvarius's picture

Hell no.  The ECB will gobble up their shit debt like it was pop rock chocolate bars.  The Spanish public will be hunting rats with spears and bartering with seashells long before that debt defaults.

Wed, 06/11/2014 - 09:56 | 4844262 Citxmech
Citxmech's picture

Have they boosted their GDP by adding hookers and blow yet?  The could buy them a few months. . .

Wed, 06/11/2014 - 09:56 | 4844263 COSMOS
COSMOS's picture

I think the rat hunting comes after all the politicians have been speared as practice for the rats.  All it takes is one real hot summer to get the tempers flaring and the crowds enraged.  Eurotrashland is in for some big unrest.

Wed, 06/11/2014 - 09:45 | 4844213 RiverRoad
RiverRoad's picture

Well, we're all going to default our debt away at some point in the future right?

Wed, 06/11/2014 - 09:45 | 4844220 LawsofPhysics
LawsofPhysics's picture

We have been here before in the no so distant past.  Will a "credit event" ever trigger a CDS payout? LMFAO!!!!

Not going to happen.  WWIII will happen first.  Technically, if you are printing money to simply pay interest, you have already defaulted and guess what?  Everyone on the fucking planet is printing money.

Hedge accordingly.

Wed, 06/11/2014 - 12:17 | 4845032 dracos_ghost
dracos_ghost's picture

Good point. So why do we allow these fucking CDSs? They are despicable little gambling chips that at the end of the day are worth less than an average person's bowel movement.

Wed, 06/11/2014 - 13:30 | 4845354 SDShack
SDShack's picture

CDS exist because the Rule of Law is dead. There are only two types of laws. One for the elites. The other for the masses. The New Feudal World Order has arrived.

Wed, 06/11/2014 - 09:47 | 4844227 Spungo
Spungo's picture

I don't understand. Is someone saying there's a small chance Spain will not default?

Wed, 06/11/2014 - 09:48 | 4844231 Dr. Engali
Dr. Engali's picture

How is Spain supposed to rely on inflation when they don't have access to a printing press? Spain will never make any hard choices until Dragqueen turns off the printing presses and the market forces those choices on them.

Wed, 06/11/2014 - 09:49 | 4844235 RiverRoad
RiverRoad's picture

WWIII is already happening.  It's called Financial WWWIII.  And the central banks have the bazookas.  Main reason why economic fundamentals, if there ever were any, have disappeared from the markets.

Wed, 06/11/2014 - 09:49 | 4844236 taketheredpill
taketheredpill's picture

 

 

Shouldn't the "1 / 20 Rule" should have kicked in in 2013, the 3rd year after the 60% "breach" without any reduction in Debt/GDP?

As can be seen, Spain's Debt has continued it's moonshot and will continue until default.

The EU rules are a joke (including allowing countries to do an end run on the 3% deficit via Goldman WTF debt swaps).

Spain nears default but its debt trade below US.  Sure, whatever.

 

Wed, 06/11/2014 - 09:50 | 4844238 JRobby
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I thought they already had? Guess I need to wait for a knowledgable, professional determination.

Wed, 06/11/2014 - 09:50 | 4844241 canonball
canonball's picture

Just have belgium buy the debt....obviously thats the U.S. answer?

Wed, 06/11/2014 - 09:50 | 4844242 Kina
Kina's picture

Spaniards...dudes....by gold...quick

Wed, 06/11/2014 - 09:53 | 4844250 Hindenburg...Oh Man
Hindenburg...Oh Man's picture

thought that it might be another nice day for gold...a few attempts at a pop through the morning, but its just been picked away at relentlessly

Wed, 06/11/2014 - 10:01 | 4844287 financialrealist
financialrealist's picture

based on that list, the only option left is to default...deflation, no growth, undergoing repression, not many options left. Just wish this would hurry up, im exhausted watching this slow motion trainwreck...

Wed, 06/11/2014 - 10:02 | 4844291 WTFUD
WTFUD's picture

Fucking unbelievable that the head of that corrupt government is still clinging to power. Shows you what a bunch of CUNTS the WHOLE of Spain are, in that even with the evidence to support/ convict RaJOY he still basks in entitlements.
FUCK SPAIN

Wed, 06/11/2014 - 10:40 | 4844492 Peter Pan
Peter Pan's picture

Europe will not let anything happen to any corrupt individual if he is towing their line.

But I agree wholeheartedly with you that the whole situation is disgusting beyond belief.

Wed, 06/11/2014 - 10:23 | 4844401 Peter Pan
Peter Pan's picture

"Will Spain Default?" is the wrong question.

The correct question is, "will Spain wake up and tell the TROIKA to get f%#@*&"?

Wed, 06/11/2014 - 10:36 | 4844469 madcows
madcows's picture

Nope.  The correct question is, "Will the bankers raid the savers personal bank accounts to bail out the country's national insolvency, a la Greece?"  I think you know the answer.

Wed, 06/11/2014 - 10:39 | 4844481 Peter Pan
Peter Pan's picture

No doubt another haircut Cyprus style approaches but the question then is, "what happends next if there is no more money to strip from depositors.?"

Wed, 06/11/2014 - 10:47 | 4844535 SpanishGoop
SpanishGoop's picture

Correct question "When will Spain default".

 

Wed, 06/11/2014 - 10:51 | 4844561 thurstjo63
thurstjo63's picture

And what's amusing is that you've not even factored in that Spain has guaranteed to make all the companies that have built useless toll roads whole again despite the fact that absolutely no one uses them and all the companies that built them (i.e. Sacyr, Ferrovial, FCC, Acciona, Abertis and OHL) now facing significant losses on their books. That's worth at least another 2 to 3 billion euros. It's not a question of will it default but when it will default!

Wed, 06/11/2014 - 11:02 | 4844635 Ghordius
Ghordius's picture

"fiscal adjustment is simply (as we have seen) too much pain for politicians"

still less pain than default/restructuring

Wed, 06/11/2014 - 11:40 | 4844834 Bunga Bunga
Bunga Bunga's picture

OT: Another haircut in Europe, this time  in Austria, Investores will lose $1.2bln

https://translate.google.com/translate?sl=de&tl=en&js=y&prev=_t&hl=en&ie...

Wed, 06/11/2014 - 14:10 | 4845536 teslaberry
teslaberry's picture

who will be the next franco?

military coup coming up soon. 

Wed, 06/11/2014 - 18:42 | 4846425 Sirius Wonderblast
Sirius Wonderblast's picture

It can only be that the illusion of possible return to credit-and EU-funded "prosperity" is still enough to keep the Spanish hoping against hope as yet. At some point that must wear off. They need a Farage.

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