Delusion in economists

Spanish Debt Grows by €146 Billion, Largest Ever Recorded; Debt-to-GDP Highest Since 1910

Global Economic Analysis,

17 February, 2013

Proof there is no rebalancing in Europe is easy to find. For example, El Pais reports Spanish Debt Grows by €146 Billion.

What follows is a Mish-modified translation of the above Google-translation.Key Points

• The public debt exceeded €882 billion at the end of 2012
• Debt Grew by €146 Billion in one year
• The increase in the first year of Prime Minister Mariano Rajoy is the largest ever recorded
• Debt-to-GDP is highest since 1910 
• Interest expense is at record high

The Government and the Bank of Spain debt figures are chilling. Government debt broke records in 2012. In the first year of the Government of Mariano Rajoy, debt skyrocketed to €882 billion, a one year increased of €146 Billion. Never in the economic history of Spain's general government debt had increased so much in a single year. In five years, the debt has increased by €500 Billion, Debt is one of the major drags on the recovery of the Spanish economy.

Debt to GDP



The increase in public debt in 2012 is the equivalent of more than 14 percentage points of gross domestic product (GDP). €882 billion is equivalent to between 83.5% and 84% of GDP. The government had forecast a ratio of 79.8% for the 2012 budget last July, but has since revised the figure upwards. In relative terms, debt-to-GDP is at highest debt level in more than a century, particularly since 1910, when the Spanish debt stood at 88% of GDP, according to a historical IMF data.

Despite cuts and tax increases, the government of Mariano Rajoy has been unable to significantly reduce the gap in the public accounts.

Skyrocketing Public Debt






Outstanding liabilities will probably exceed 100% of GDP at the end of the year, and there are more than €100 billion of a government debt in the hands of others (Social Security mainly). The €882 billion figure also does not include about €60 billion of debt owed by public enterprises.

A Troubling Context 

To Emilio Ontiveros, president of Financial Analysts International (AFI), "the main problem is the payment of interest, because it is the most unproductive spending item possible and occurs in a country that has had to cut back in other areas and need to recover growth."

Spain had never spent so much money to pay only the interest on its debt: €38.66 billion. Financial expenses for the first time in history exceeded staff costs. "If you do not grow, you cannot pay your debts," said Ontiveros, who argues that Spain should have requested the bond purchase program prepared by the Bank Central Bank (ECB) to cut interest paid on Spanish debt markets, a mechanism for which the Government should ask before rescue its European partners. "The corollary of this is that Spain needs urgent measures aimed to reduce this expense," he says.

The average interest paid by the state's debt is 4.1% with an average maturity of 6.1 years, but this level of return that investors demand may grow by the economic downturn. Despite the truce that markets have given Spain, political tensions rose in Spain and Italy .

Jose Carlos Diez, chief economist Intermoney, warns that Spain fails in all the variables that serve to stabilize the debt: its economy does not grow, it pays a high interest rate and has primary deficit (prior to payment of interest on the debt). "This dynamic eventually leads to non-payment," he reflects.

End-Transalation 

Note that last comment by Jose Carlos Diez, chief economist Intermoney "This dynamic eventually leads to non-payment."

Indeed!

More on Non-Rebalancing

Many economists see signs of stabilization. I see signs of delusion in economists.

• Germany Rebounds but ... France Economic Implosion Accelerates; Record Decrease in Service Employment in Italy
• German Trade Surplus Hits Five-Year High; Rebalancing the Wrong Way
• Illusions of Stabilization
• Europe à l’Hollandaise; Socialists Who Wrecked France, Demand the Same for Rest of Eurozone
• Wealthy French Eye Belgian Tax Breaks (Everyone in France Should Do the Same)

A Vast Political Espionage

Scandal Is Unfolding In

Spain

Wolf Richter

Testosterone Pit,

17 February, 2013

Spain just can’t catch a break—a horrid economy with dizzying unemployment, collapsing banks, a prime minister and ruling party tarred by corruption....

Now a political espionage scandal has blown up, scattering debris and money laundering allegations far and wide.

Unemployment in Spain was 26% in December, youth unemployment 55%. GDP last quarter dropped for the fifth month in a row (-0.7%), the steepest decline since the financial crisis.

Consumer spending plunged 10% in December from prior year—following a hike in the value-added tax. And the budget deficit target of 6.3% (not counting the billions plowed into bailing out the banks) is skidding out of reach.

This leitmotif is accompanied by an elegantly escalating corruption scandal that broke in early February. A classic cash-for-contracts arrangement, where senior politicians received secret payments from business folks in return for juicy government contracts.

It was documented in handwritten ledgers, involved a €22 million slush fund in Switzerland, and was allegedly run by Luis Bárcenas, the ex-treasurer of the conservative People’s Party (PP), the party of Prime Minister Mariano Rajoy, whose name appears repeatedly and very inconveniently on the ledgers as recipient [which put him and Chancellor Merkel on the corruption hot seat in Berlin.... The Confidence Crisis In Spain Sends Out Shock Waves].

Add a political espionage scandal. The case blew up in a peculiar manner. According to sources—everything in this case is “according to sources”—Método 3, a detective agency in Barcelona, went out of business not long ago. One of its laid-off employees was an ex-cop, in charge of the data department. When Método 3 couldn’t pay him what it owed him, he appropriated the computers, video and audio recordings, and a bunch of sensitive files. And they’ve shown up at the technical division of the police in Barcelona.

Now “sources” are talking about what’s in this treasure-trove. Apparently Método 3 had been commissioned by a long list of clients to spy on Catalan party leaders, politicians of national parties, judges, prosecutors, executives, and other prominent figures, sources told La Vanguardia. One of the recordings was of a lunch meeting at a restaurant in Barcelona in July 2010 between Alicia Sánchez-Camacho, President of the PP in Catalonia, and a woman named María Victoria Álvarez.

Álvarez was desperate and scared. She told Sánchez-Camacho that she’d gone on a road trip to Andorra with her then-boyfriend, Pujol Ferrusola. The trunk was loaded with packets of 500-euro notes, which he deposited in a bank account there.

She outlined how Pujol Ferrusola—son of powerbroker Jordi Pujol, leader of the Democratic Convergence of Catalonia (CDC) from 1974 to 2003 and President of Catalonia from 1980 to 2003—was doing his family’s money laundering. She wanted to report him but feared for her life. So she asked Sánchez-Camacho for help.

The Pujol-Ferrusola family has been fingered in a police report that seeped to the surface in 2012. While Jordi Pujol was in power, companies associated with his sons were awarded lucrative contracts allegedly through false bidding. These cases had been investigated at the time, but nothing happened.... Until the recording of a conversation about a trunk full of euros popped up.

On Thursday, Álvarez finally testified before the High Court about what she’d witnessed.

Also on Thursday, Sánchez-Camacho pressed charges with the police and filed a complaint in court against Método 3. She’d found out by reading the papers that her lunch conversation had been recorded—and that the top official of the Catalan Socialist Party (PSC), José Zaragoza, at the time party secretary, had allegedly commissioned Método 3 to do the dirty work.

Interior Minister Jorge Fernández announced an “exhaustive” investigation. “We have a lot of information,” he said ominously. Zaragoza and others accused of anything whatsoever have denied everything.

Sources have told La Vanguardia that the materials are so massive that the police have formed a special team, supported by police units from Madrid, to investigate them. The lunch episode uncovered a web of “unpredictable scope.” 

The investigation is still in an early stage, sources said, but the client list of Método 3 is long and “delicate,” and includes officials of various political parties and institutions, and the number of people tangled up in it is vast.

“This is about top politicians,” said the sources.

These revelations are driving the political elite ever deeper into a malodorous morass just when that same elite is forcefully tightening the belts of the people. Workers have taken pay cuts, social benefits have been trimmed, families have lost their homes, the VAT, which hits everyone, has been jacked up, all to squeeze the maximum from those who still have any juice left. Yet, Spain’s legal system wasn’t designed to root out corruption; and Rajoy, among others, may be thinking that this too shall pass.

Corruption of spectacular proportions is dogging another Eurozone country waiting for a bailout. Buried deep inside a report on Russia’s booming underground economy and illicit oil money is a gem: the flows and amounts of Russian “black money” into and out of Cyprus. They’re huge. Read.... Cyprus, ‘A Money Laundering Machine For Russian Criminals’.



Spain proposes deep cuts to local government

Mainichi,

16 February, 2013

MADRID (AP) -- The Spanish government has passed a draft bill that aims to make deep cuts to local administration and is expected to save some 7.1 billion euros ($9.5 billion).

Finance Minister Cristobal Montoro said Friday that under the legislation, which will need to pass through parliament, the number of full-time paid local councilors will be reduced to 12,000 from 68,285 over several years.

Wages for city mayors will be limited to approximately 100,000 euros while mayors of towns with less than 1,000 inhabitants will no longer be paid.

Cities will have the number of full-time councilors reduced through 2015 according to population. Towns failing to keep their books in order may be merged into the administration of another town.

Spain is struggling to reduce its deficit amid a recession and 26 percent unemployment.