Spain Reminds Us What The Main Problem With Blank Checks Is: Says Q2 GDP Will Be Worse Than Q1
Even as Spain, Italy and soon France are scrambling to break the link between sovereigns and banks, an unpopular move that until recently Germany was very much against as it permitted the culture of endless unsupervised bank bailouts on taxpayer dimes to continue, we get a fresh reminder of why any unconditional aid, entitlement, or backstop guarantees funded by "other people's money" is always inevitably a bad idea. Case in point: Spain, which just said that its economy will contract in Q2 even more than in Q1. This reminds us why any claims of "austerity" are a total mockery: only Keynesian priests seem unable to grasp that countries gain much more upside from pushing their economies to the brink only to be bailed out, than from engaging in real economic viability and sustainability programs: i.e., living within your means (something we proved empirically before). Finally, this is also a stark reminder that when one removes out all the bailout noise and the daily high-beta gyrations of sovereign debt, the real reason why sovereign bondholders should be buying Spanish debt - an actual improvement in its economy- continues to not only be absent, but by the very nature of endless now-monthly bailouts, becomes impossible as debt never fixed more debt.
Here is the latest steaming pile of reality just served from from Spain, via Bloomberg:
- Data for 2Q show contraction was “slightly superior” to that of 1Q, Spain’s economy minister said today during a conference in Navacerrada, near Madrid.
- The deterioration is "not very significant" says Guindos
- Spain is “totally committed” to austerity: Guindos
- Says EU summit “intensified” European project, sent message of solidarity
- Says Spain must show public finances, services are sustainable
No they're not. It's ok though: the government did not cut more spending than necessary
in order to live within its means, because it knows that if things get
bad enough, and yields on debt soar, someone, somewhere will step in and make the price of debt, so critical to plug the ever grown deficit hole, sustainable for just a little longer, even as deficits accumulate to a level that is simply ridiculous, at least until the next risk flaring crisis.
This is precisely what Monti and Rajoy showed at last week's Eurosummit: every time things get worse, someone who has done the right thing, has to fold to keep the party going for all the crack addicts.
The problem with this approach, and it applies to the US entitlement state underfunded by about $100 trillion just as much as it does to Europe, is that at the end of the day only math matters. One can push for artificially lower yields to keep the game of musical chairs going longer, but not even naive children believe that there could be a happy ending to a farce in which one time bailouts continue to enable self-destructive behavior, which in turn becomes a Mutually Assured Destruction gambit to the worst offenders.
In the mean time Spain's already deep recession is about to become even worse, to be followed by Italy, France, and soon, Germany too, now that it has decided to spread the wealth.