Ambrose Evans-Pritchard's Contrition

Spain announces harshest budget reforms

Spain has announced its plan for drastic economic reform, and a tight 2013 budget, where cutting spending rather than lifting taxes will be the focus. The Spanish government is set to pass 43 new laws to reform the economy within the next six months.

RT

28 September, 2012

The new budget entails 58% spending cuts and 42% increased taxes.

Reuters quotes Spain's Deputy Prime Minister Soraya Saenz de Santamaria as saying Spain will set up an independent fiscal authority to help oversee its deficit cutting promises.

Government ministry spending is going to be cut by 8.9%, or about €40bln, according to Luis De Guindos, Spain’s Finance Minister. This shouldn’t hurt “social spending”, with 64% of the total budget going on pensions, benefits, the Finance Minister added.

Budget Minister Cristobal Montoro expects 2013 to be the last year of crisis, with negative GDP growth in the region of – 0.5%.

Meanwhile, European leaders as well as the business community are speculating whether the reforms will result in a request for an international bailout. The final decision should depend on the results of the audit of Spanish banks, with the exact date of the report to become public expected to be announced on Friday. The Government earlier forecast the gap in Spanish banking would stand at about €60bln.

Budget discussions took place at a time when Spain was overwhelmed with street protests and separation sentiment by the Catalan region, which escalated earlier on Wednesday.

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Europe's betrayal of Spain

We discover – yet again, you might say – that Germany, Holland, and Finland will not stand behind their solemn pledge of solidarity when push comes to shove.

Ambrose Evans-Pritchard

The Telegraph

28 September, 2012

Spain’s premier Mariano Rajoy has been betrayed. Nobody should be entirely surprised if he and the Spanish arch-nationalists in his circle offer a condign riposte, and bring down the entire temple on the heads of the creditor powers.

He bit the bullet and agreed to the highly intrusive terms of a €100bn eurozone rescue for the Spanish banking system on a specific understanding: that the ESM bail-out fund would ultimately take over the burden by recapitalising Spain’s banks directly.

This deal has been breached. Can we believe anything that the Chancellor of Germany, the prime minister of Holland, and the prime minister of Finland say from now on? The EMU rescue edifice is built on sand.

You might say Mr Rajoy had no choice. But he did. There were those whispering in his ear that Spain should instead retake control over its own monetary, exchange, and sovereign policy levers, and break out of its debt-deflation trap.

Such a course might or might not be disastrous for Spain, depending on your analysis of EMU’s structural flaws, but it would certainly be disastrous for German and Dutch banks. (Given that it would cause the collapse of monetary union in the worst possible way).

The Spanish bubble was after all a joint venture. Spain was flooded with cheap capital from Germany and Holland that it could not prevent or control under the EMU system. Did the German and Dutch regulators recognise the danger, or try to stop the excesses? Not really. They were complicit.

The ECB’s uber-loose money (to help Germany when it was in slump) led to negative real interest rates for Spain – minus 2pc for years – that fuelled a massive credit boom. Policy was far too lax for a fast-growing Tiger economy.

Did the Spanish make big mistakes? Of course. But the ECB and the European Commission did not make that critique at the relevant moment. They too were smoking weed.

Be that as it may, Mr Rajoy now learns that the AAA trio will not permit direct recapitalisation of the Spain’s "legacy" banks by the ESM, even after the new European bank regulator is up and running.

The burden will fall entirely on Spain, or so it seems. Spain must raise €60bn in fresh debt on the capital markets to plug the hole, or nearer €150bn if City sceptics are right.

The accord signed by EMU leaders in June is crystal clear, as the European Commission remind the Northern powers yesterday. The purpose was to break the "vicious circle" between banks and sovereign states.

EURO AREA SUMMIT STATEMENT

29 June 2012

 

We affirm that it is imperative to break the vicious circle between banks and sovereigns. The Commission will present Proposals on the basis of Article 127(6) for a single supervisory mechanism shortly. We ask the Council to consider these Proposals as a matter of urgency by the end of 2012. When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly. This would rely on appropriate conditionality, including compliance with state aid rules, which should be institution specific, sector-specific or economy-wide and would be formalised in a Memorandum of Understanding. The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme. Similar cases will be treated equally.

 We urge the rapid conclusion of the Memorandum of Understanding attached to the financial support to Spain for recapitalisation of its banking sector. We reaffirm that the financial assistance will be provided by the EFSF until the ESM becomes available, and that it will then be transferred to the ESM, without gaining seniority status.

The Germans, Dutch and Finns (in particular) say they were bounced into this deal. It would not surprise if they were outmanoeuvred by Italy’s Mario Monti, and if too-clever-by-half Council officials tweaked the language at the last minute. But this was the accord.

It was a key foundation of the global market rally of the last two months. The Nordics have now ripped it up. Investors in Asia and the Middle East might justifiably conclude that the Chancellor of Germany is blowing smoke in their eyes, that Germany will not in fact "save the euro". Eurozone rhetoric is a sham.

So we are back to crisis.

I have no idea what Spain will do, but emotions are running high and the country – in the words of Confidencial this morning – risks "disintegrating". We watch and wait to see whether the Basque revolt or the Catalan revolt will detonate first, and whether the Spanish will really use "all means" to hold the union together.

The newspapers ABC and La Razon both called on the government to deploy " the arms of the state" to stop Catalonia holding an independence referendum.

It is as if the Daily Telegraph were to call for coercion to stop Scottish independence. Imagine the response in Scotland.

Mr Rajoy’s authority is collapsing. Some 84pc of Spaniards have lost confidence in his leadership. The current course is becoming hopeless.

Today he will announce a fresh round of austerity measures to meet EU targets that cannot be met, adhering to reactionary strategy of "internal devaluation" imposed by Germany that is destroying his country.

And now he has just been betrayed by the German bloc anyway. Es el colmo. If he were to request full sovereign rescue, he would most likely be shafted again. Who can blame him for dragging his feet?

The temptation to tell the Germans and Dutch to go to Hell – and to pull the pin on their banking systems – must be growing mightily. Desperate men do desperate things.