Posts
European
Contagion Turns Into Domino
20
July, 2012
One
day after the EU finally sanctioned the €100 billion bailout for
Spain's banking system, for which the sovereign will remain on the
hook, according to German finance minister Schäuble, who said there
was no way the banks would be bailed out directly, developments were
fast and furious.
A
second remark by Schäuble may yet come back to haunt him.
"There
is absolutely no reason to speculate, beyond this (bank aid)
application, about a comprehensive aid program for Spain,"
German Finance Minister Wolfgang Schaeuble was quoted as telling the
daily Rheinische Post. "Spain really does not need that,"
he added.
First
off, Madrid announced a bailout of its own: a €12-18 billion fund
(€6 billion will come from a loan taken out by the national
lottery) to help its regions. Which, finance minister Luis de Guindos
swore, would not make sovereign debt any higher. Does that mean Spain
still has cash lying around somewhere? And if so, why the bank
bailout? Or is de Guindos simply telling another hopeful lie and are
additional bond issues on the horizon?
The
region of Valencia didn't waste any time in claiming it will seek
money from the regional fund. It won't be the last. In fact, it's
hard to see how the fund could be large enough. The regions need to
rollover some €15 billion in existing debt in Q2 2012 alone. And
they have zero access to international markets left.
Next,
Madrid revised a bunch of numbers downward. Angeline Benoit and
Charles Penty for Bloomberg:
Gross
domestic product will fall 0.5% in 2013 instead of rising 0.2% as the
government predicted April 27, Budget Minister Cristobal Montoro said
after the Cabinet met today in Madrid. The government will spend €9.1
billion ($11 billion) more paying interest than in 2012, he said.
[..]
“I
don’t want to send too soothing a message, everyone has to comply,”
Montoro said even as he denied Valencia has called for an
intervention. Montoro said the central government is reviewing
regions’ budget plans after announcing last week that several
aren’t on track to meet this year’s deficit target.
The
economy returned to recession last year and unemployment is surging
after the collapse of the real-estate boom. The economic outlook is
worsening as the government implements 110 billion euros of measures
over three years to cut budgets, raise taxes, shrink public wages and
charge more for education and health care. [..]
Unemployment
will be 24.6% in 2012 instead of 24.3%, the government’s forecasts
showed today, and 24.3% in 2013 instead of 24.2%. It revised the
forecast for this year’s contraction to 1.5% from 1.7%. Exports
will continue to drive the economy, rising 6% next year, as domestic
demand continues to contract.
The
spending limit for 2013 will be €126.8 billion, 9.2% higher than a
year earlier, Montoro said. Stripping out the interest costs and
contributions to the welfare system, the spending ceiling will fall
6.6% from 2012, he said.
Expect
lots of protests. From AFP:
Spanish
police fired rubber bullets and charged protestors in central Madrid
early Friday at the end of a huge demonstration against economic
crisis measures.
The
protest was one of over 80 demonstrations called by unions across the
county against civil servant pay cuts and tax hikes which drew tens
of thousands of people, including police and firefighters wearing
their helmets. "Hands up, this is a robbery!" protesters
bellowed as they marched through the streets of the Spanish capital.
At
the end of the peaceful protest dozens of protestors lingered at the
Puerta del Sol, a large square in the heart of Madrid where the
demonstration wound up late on Thursday. Some threw bottles at police
and set up barriers made up of plastic bins and cardboard boxes in
the middle of side streets leading to the square and set them on
fire, sending plumes of thick smoke into the air.
Riot
police then charged some of the protestors, striking them with batons
when they tried to reach the heavily-guarded parliament building. The
approach of the riot police sent protestors running through the
streets of the Spanish capital as tourists sitting on outdoor patios
looked on.
The
protests held Thursday were the latest and biggest in an almost daily
series of demonstrations that erupted last week when Prime Minister
Mariano Rajoy announced measures to save 65-billion euros
($80-billion) and slash the public deficit. Among the steps is a cut
to the Christmas bonus paid to civil servants, equivalent to a
seven-percent reduction in annual pay. This came on top of a pay cut
in 2010, which was followed by a salary freeze.
"There's
nothing we can do but take to the street. We have lost between 10 and
15 percent of our pay in the past four years," said Sara Alvera,
51, a worker in the justice sector, demonstrating in Madrid. "These
measures won't help end the crisis."
The
Madrid stock exchange fell 5.82% today. Its 10-year yields are at
7.20%. Nice numbers to go into the weekend. Spain will need a bailout
real soon, or default. So will Italy, with a 4.38% stock exchange
drop and a 6.13% 10-year yield closing out this Friday. And yes,
we've seen similar things before, and things still look sort of
normal, familiar.
But
it gets real hard now to see what else Europe can do amidst all its
self-enforced constraints on both financial and legal issues. The
markets are not letting go, if anything they're tightening their
squeeze. Spain managed to sell bonds this week, but it did so at
rates it can't afford. Nor can Italy afford to pay over 6%. Both
countries will increasingly try to sell shorter term debt, but
there's no hosanna in that either.
The
hands-down quote of the day comes
from Italian PM Mario Monti:
"It’s
difficult to say to what extent the contagion comes or came from
Greece, or from Portugal, or from Ireland, or from the situation of
the Spanish banks, or of the one apparently emerging from the streets
and the squares of Madrid," Monti told reporters. "Obviously,
without the problems in those countries, Italy’s interest rates
would be lower."
That
is priceless. It's the others. L’enfer, c’est les autres.
Brilliant, when you think about it; it's right up there with Schäuble
claiming Spain doesn't need a sovereign bailout. Denial right up
until you hit the wall. Or it hits you. Whichever comes first.
Does
Europe still have weapons left? Well, it can lower its interest rates
to minus 1-2%. It can lower ECB reserve rates into negative
territory, so banks won't park their money there anymore. But they
won't put it back into the economy instead, as would be the hope,
they're not certified nuts yet; they'll move it to the US or
Switzerland or something.
The
battleship Europa is very close to being shattered on the cliffs. And
we need to seriously wonder how much longer the Euro has to live, let
alone the eurozone.
And
the consequences for the rest of the world? This graph from Lance
Roberts,
which compares S&P 2011 with S&P 2012, provides a solid clue.
And it could be just the beginning.
Expect
Spain to restructure its debt. And contagion to turn into domino.
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