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Guest Post: The First Spanish Cut
Submitted by NJB Deflator
The First Cut
And so it begins...Last Friday the Spanish government published a proposal to cut government expenditure and raise taxes to reduce the fiscal deficit by 56.4billion euros by 2015. I have outlined why austerity will not work in Europe, but it looks like this is a lesson Europeans will have to learn for themselves--for a second time. The writing is on the wall in Ireland, who ailed in the same ways that Spain is currently ailing, but what Lord Merkel wants, Lord Merkel gets. The immediate malaise from these austerity measures will be large-scale social unrest, which is already being planned by many of the 50% of the country's unemployed young people. Regardless of one's stance on the economic merit of austerity, what is indisputable is that riots are real and riots do not end well. With nothing to lose, this round of Spanish austerity protesting has the potential to end in catastrophe.
Also part of Spain's austerity measures are the country's plans to sell 100 regional commercial real-estate buildings to private citizens/businesses. This fire-sale is not expected to be met with substantial demand, which is nothing short of obvious. The stance of Spanish business owners is quite clear: with impossibly high and rising interest rates and an ever-climbing unemployment rate, entrepreneurs are not interested in taking on the risk of expanding or starting new businesses amid economic and political uncertainty. The regions' real-estate sales will likely do nothing more than saturate already soggy land prices and contribute to depleted demand driven deflationary forces.
And if the austerity hysteria is not enough, the ECB came out swinging over the weekend and stated that senior bond holders of Spanish bank debt would hold subordinated creditor status to the 100billion euro ECB bailout...First riots in the streets, now riots in the credit markets! As part of the Irish bailout, senior creditors were spared losses; the unprecedented nature of such a shake-up in the Spanish bailout deal will not be taken lightly. Credit default swaps (CDSs) on Spanish banks immediately surged on the news; if this haircut is enacted, many Spanish creditors will pull funding from the capital-stricken country and will even further elevate the country's borrowing rates. For some perspective: Ireland granted senior creditors the same status as the bailout fund in 2010, and it still took them over two years to regain access to the debt market. Spain's subordination of senior debt holders will have similar effects, but these effects may be felt even before the bailout is drawn upon. Needless to say, the Spanish bailout is by no means a sure thing at this point, indicated by Spanish bankers who lamented and were confused by the weekend's news.
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| Top lines: Spanish 5yr bond yield (orange) & Banco Santander 5yr Credit Default Swap (green) -/- Bottom lines: IBEX 35 (yellow) & German 5yr bond yield (salmon) |
In other, equally gloomy news, the latent rolling downgrades and downward growth revisions that I wrote about on the eve of the "Spanish bailout" are coming to fruition: GDP growth forecasts continue to be slashed by global agencies. Over the weekend UK GDP growth was revised to 0% from 0.4% by Ernst & Young Item Club (who uses a model similar to that of the UK Treasury) just days after the Bank of England announced further stimulus measures. Recent attempts at bolstering markets through promises of easing seem to be failing in the UK, and even in the US investors are starting to question whether markets are amenable to quantitative easing.
It was also reported today that London home prices fell by a record 3.6% from June due to excess supply...Good luck with those real-estate sales, Spain. The lynch-pin of the recent pessimism was the IMF's downward revision of global annual GDP growth to 2.3% to 2.4%. Expect negative revisions to continue; they are usually a lagging indicator of economic health. Warren Buffet says to expect municipal bankruptcies to become more frequent. Now that the stigma is gone, he says, more municipalities around the country will admit defeat. We focus a lot on California, but municipalities in Texas, Alabama, Oklahoma, and Nebraska are just as bad, if not worse than those in California.
The single scariest aspect of the financial paradigm is the idea that QE3 will have little effect on markets. The change in attitude towards a third round of easing by the Fed over the past couple weeks is almost palpable, and while most agree that we need it, not as many believe that it will heal all. The fact that we are relying on easing to propel us to new highs is not inspiring, and it puts Bernanke it a difficult spot: don't ease and capital markets collapse; ease and risk hyperinflation. Bernanke will likely engage in a nontraditional form of easing--something other than LSAP. No matter what he chooses, though, the riskiest outcome of any monetary policy is stagflation. There is a non-negligible threat of excess capital working through the economy giving way to inflation as unemployment continues to rise and output remains depressed. This notion is corroborated by today's retail sales numbers which showed that June sales were down 0.5% from the month prior. This is the worst three month streak in retail sales since 2008.
I will be in Spain, the Czech Republic, and Turkey until August...detailed reports to come.
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Munibonds....Threat
Everyone is forgetting the "Our riot is bigger then yours" mentality.
I'm making popcorn for this one.
"why austerity will not work in Europe"
Is this Austerity in terms of ZH's "Austerity is just living within your means" or as in ZH's "Austerity? no one in EU has really tried it"
I have trouble keeping up.
Austerity seems to lead to the lesser of two crashes and so a good thing but depending on which TD speaks because it leads to "A" crash, which is a bad thing.
A bit of consitancy is needed here I think
Good point.
Austerity of course would work if it happened in the context of sytemic change, i. e. letting banks fail, massively cutting back government and government intrusion into the market economy.
Obviously, Merkel austerity will fail, as it is dishonest. Austerity to keep banksters happy is not the right way. I understand and support the rioters. They are young, and the economy is closed for them.
The ZH-defined austerity is something different.
Yes, there is a bit of confusion about austerity, between total budget sum austerity (which is not happening), and one-sided austerity imposed by brutal decree on working and poorer people.
National budgets and debts are not shrinking because banksters and various large entities are getting tax-money 'bailouts' ...
But working-class people in the EU periphery are being ravaged by cuts in their tiny incomes ... destroying their lives as well as sparking the economic death-spiral in Greece, in Spain and ...
This is an EU human rights crime by the Troika, and is a key factor in the EU losing legitimacy in a catastrophic way.
Lack of austerity would be forgiveable if they made sure the lowest sectors were not neglected.
Even the IMF admitted that one of the key factors in the success of Iceland, was actually INCREASING protection of the lowest sectors after the economic collapse.
As Jesus the rebel Jew of Nazareth said, '...For the least of the brethren ...'
"most agree that we need it [QE3]"
Not in this forum.
Yes in this forum!
Without QE3/4/5 etc. how's my stacking gonna pay off?
Your stacking doesn't "pay off"... it fixes the value of that portion of your assets. Whether gold holds steady or shoots to the moon in dollar terms, the gold is the stable asset. QEx just destroys the value of your non-gold holdings.
Think of your stocks/bonds/cash as a sinking ship. Everytime you buy gold, you get a handful of your wealth off the ship to shore. Once the ship sinks, all you're left with is what you've salvaged.
It's really not in your best interest for the ship to sink quickly. But you'll be better off than anyone who left all their possessions on the ship.
If they really effective riots, just put the Basques in charge.
Austerity can not work without a currency depreciation against the DM. People like krugman only give half the story when the complain about austerity - The Euro must and will fail. THe longer the wait, the harder the fall
betting against the EUR is not a good idea. Europe has its problems but there is no lack of confidence in the currency on the ground. Krugman is not a realist
not betting for or against the euro. just pointing out that without currency adjustements austerity can not work. The "currency" of the PIGS needs to depreciate 30-50% vs the currency of the north. The market will not wait 10 years for relative wage/inflation rates to adjust.
Of course there must be confidence on the ground otherwise it would be over already. THe question is whether that confidence is justified.
People from Italy and Spain are telling me they are ready to blow out the euro. Italy I think first.
Many Greeks are still too frightened re Turkey and the psychological bond to the EU, but Italians and Spaniards don't have those qualms.
Even Mediterranean people working in the EU are quietly thinking now, that ending the euro is the lesser of evils. They know the agony back home and they are fed up.
Ambrose Evans-Pritchard in the UK Telegraph on Friday, 'Two steps closer to growth, liberazione, and the Italian lira':
http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100018656/tw...
did you read the article critically?
"Italy already has a primary budget surplus..."; "best" fiscal profile in the G7 bloc..."; "Italy's very high savings rate and private wealth..."; "Italy scores top on the IMF's long-term debt sustainability indicator at 4.1, ahead of Germany 4.6, France 7.9, the UK 13.3, Japan 14.3, and the US 17. It is one of the very few countries that has sorted out its pension crisis."
does it really sound like a country full of people wanting a weaker currency?
Austerity in Europe is just talking about it.....I would bet no one has made the key stroke to cut someones wages 30%....its all on paper but in real life its the status quo.....they throw in the "sell the real estate"...or like Greece..sell the energy company...it looks good on paper...we are going to make billions in sales of things no one will buy...but it never will happen...its like the old "pro forma income" of the 90´s.....it never happens
Austerity can work and it will require banks to take losses, companies to file for bankruptcy, and governments to cut services. Give it time. There are no instantaneous solutions to years and years of overspending by governments. Funny how someone expects a drive through outcome on an economy that has been in a wreck for years.
http://www.youtube.com/watch?v=aBccr-aLu4I
When words have their meanings changed we are all in trouble. Austerity means to be Austere. Austerity is NOT spending every single penny you take in aka balanced budget. Austerity is having money and not spending it. I had an uncle that dressed in dirty t-shirts and jeans, drove a beat up pick up truck, and on trash day stopped on the side of the road to pick up junk to sell at swap meets. That was his hobby and they guy died with millions. He was austere. There isn't a fucking government on the planet being austere and now attempting to have a balanced budget is called austerity.
The new definition of austerity means inciting riots by not paying salaries and pensions.
Have a look back at the 1930's Depression. Salaries and wages (govt) were cut by 50%. Now that's austere (and not new).
I am always bemused by the type of clown that wrote this article.
Austerity isn't an option - it is just the only thing left after you have run out of every other scam, scheme and option. "Austerity won't work..." - Good grief, what a fucking retard.
That sort of statement presupposes there is some way back to the previous condition. The reason we are up to austerity is because the previous condition has failed and there is no going back. The losses must be faced, and we must to return to living within our means.
The fall in GDP/wealth/economic activity is a necessary consequence of existing errors - that which cannot be sustained, wont be. There is no going-back, or saving/stimulating the system. Austerity is a recognition - not a cause. The Bubble has popped.
But apparently it is possible to write articles without having a functioning brain.
in the land of the blind, the one-eyed is king. of course is austerity a relative term. but please note that balancing the budget is something that has not been achieved since quite a long time, by many households, public and private.
Our Defining Moment
http://shutupnsing.wordpress.com/2012/07/17/precious-time/
Can't cut spending today because it might cause riots? Print More! Yeah, like continued printing won't result in even worse conditions and more rioting later on down the road. Then again, in the end we're all dead. :-O
A couple of questions:
1) If "austerity won't work in Europe" where does the money come from to continue govt spending?
The economy is already in recession so tax increases would probably produce less revenue, not more (see Laffer Curve). No one is willing to lend money to Spain (because they won't pay it back!).
SO... WHERE DOES THE MONEY FOR CONTINUED GOVT SPENDING COME FROM?
(Answer: Austerity is not a choice, it is a neccessity, and not just in Spain but throughout the developed world. You can only live on credit cards until the creditors figure out you aren't going to pay them back. Western socialist govts---including the US---are there or close. The only other possible answer is unlimited money printing which leads, in a short time, to societal collapse.)
2) If bond holders shouldn't suffer losses, who should?
The only alternative is for taxpayers to make up the losses. That is the rent seekers demand. PRIVATIZE PROFITS, SOCIALIZE LOSSES.
(Answer: Bond holders have to suffer losses because they made bad investment decisions. Similarly, banks must go under if they are insolvent and not be keep half-alive on the back of taxpayers. Japan has tried 20 years of "zombie" banks and are still in a slow motion collapse.)
The only way out is for western societies to face facts. Our standard of living has to decrease because we cannot afford it. We lived too well on borrowed money for many years and the money HAS RUN OUT. We need to allow poorly run businesses to collapse, people that won't work to suffer, and govts that overspend to collapse. We have to learn to live within our means and that is going to be PAINFUL.
Complaining about reality does not change the facts. We in the West are broke and we are going to have to suck it up and adjust our way of life to what we can afford. The cradle to grave socialist model is broke and done for. Better get ready to work harder and have less. It won't kill us unless we fight among ourselves (as the Spainish rioters are doing) trying to force an outcome that is not possible anyway.
I would however argue that before we get too carried away complaining about the cradle to the grave socialist model, we take a good hard look at socialism for the rich.
* Limited-liability/tax write-offs/bailouts, to banks and corporations.
* Tax breaks and sweetheart deals for business.
* Farm and agricultural subsidies.
* the military/industrial complex
* Excess govt bureaucracy
* Mega government depts - Health/education
* Multi layers of government - Local/National/transnational
* Businesses/consultants required for compliance with govt regulation.
How's this for an outcome - lets kill all the above first, then worry about individuals on benefits.
We have run out of money all right, because it is being massively syphoned into the pockets of the already wealthy. The biggest bludgers are the "Rich".
Certainly, the corporate socialism that is so prevalent in the US and Europe has to end. Obama has given billions to his rich donors (including unions) and the entire TARP was welfare for the rich and the govt class.
The US military has to shrink. Europe don't really have militaries so there is no money to be saved there and in fact you could argue that Europe needs to spend more on their own defense but I don't expect they will.
The US (and this is equally true of Europe) has to shrink its bloated bureaucracy (at all levels). This is really welfare for the middle class to provide high paying jobs doing little of benefit.
The supra-national bureaucracy has to be gutted. Let the UN die since its only purpose is to increase corruption.
Etc. Etc. Bascially, all your points are correct.
However, to put it in the terms of the RICH versus the POOR is to fall into a trap set by big govt. Govt should not be shoveling money to its corrupt cronies but neither should it be shoveling money to the corrupt unions or the professional welfare class.
We have to face that everyone will take a hit as we try to survive this crisis. There is not enough money for a huge military, a huge government or for all the social programs we are addicted too.
It is not RICH vs. POOR. It is GOVERNMENT vs. FREEDOM.
However, the bottom line is that we have to live within our means and that is going to require both the fat cats and the little guys to get less from Uncle Sugar.
europe is finally waking up. the bondholders of the banks will be sacrificed. can only be a good thing
Don't live above your means. Don't acquire stuff just because you think you have a right to them. The acquired stuff then becomes you and your personal relationships with people then will become economic relationships.
For the rest, Spain just needs to put in jail/hang all their corrupt and incompetent government administrators and greedy bankers.Perhaps austerity measures are not the right thing, dunno. But a social/political/economical reform which gets rid of the old guard is necessary.
"I will be in Spain, the Czech Republic, and Turkey until August...detailed reports to come."
How am I surving the six weeks w/o your reports, Graham??
Now it's time to panic...
They should use Pamplona bulls to charge anti-riot police
The most important type of austerity needed is massive tax increases for the rich. Remember the top tax rate in the U.S. was 91% on the top tax bracket of $200,000 in the 1950s during the Eisenhower administration--and the United States dominated the world economy then.
http://en.wikipedia.org/wiki/Income_tax_in_the_United_States#History_of_...
Except that nobody paid the 91% tax... that just moved the money to Switzerland.
P.S.
July is historically riot season in Europe. So, right on trend.
Riots are real, but so is running out of money and hyperinflation when the presses are turned on.
Who the Hell would lend to Spain in this environment? Only a fool. Why should the Germans work their asses off to save the Spanish? or the Greeks or the Italians? or Whomever?
End the nightmare: let the Germans and the fiscally solvent Finns, Dutch and Danes leave the Euro to its fate.