Spain gets closer to the brink

July 25th, 2012 at 12:00 pm by David Farrar

The Daily Telegraph reports:

The yields on closely-watched two-year debt surged by 78 basis points to a modern-era high of 6.42pc, leaving it unclear how long the country can continue funding itself. ’s two-year yields vaulted to 4.6pc.

“We can’t keep going like this for another 15 days,” said Prof Miguel Angel Bernal from Madrid’s Institute of Market Studies. “The European Central Bank has to bring out its heavy artillery.”

Andrew Roberts, credit chief at Royal Bank of Scotland, said the dramatic spike in short-term borrowing costs marked a key inflexion point in the crisis, replicating the pattern seen in Greece, Ireland and Portugal as they lost access to market finance. “We are fast approaching the endgame,” he said.

A collapse for would be huge. For Italy, the consequences beyond belief.

El Confidencial said the Rajoy team was thinking of “putting on the table” a possible withdrawal from the euro, a dramatic escalation in the game of brinkmanship between the eurozone’s Latin bloc and German-led creditor core.

“We would have our own currency again and restore competitiveness. It would have some disastrous consequences at first, but we would regain control over our own policies and we would escape from the crisis sooner,” a government source reportedly said.

I think they should leave the Euro. It is clear you can not have monetary union without fiscal union – or at least hard fiscal barriers all keep within.

Gary Jenkins from Swordfish said the may be able to “rustle up” just enough money to finance an -IMF Troika rescue for Spain – probably around €400bn – but Italy is too big to handle.

The existing EU bail-out fund (EFSF) is down to about €160bn after covering the needs of Greece, Ireland, Portugal, Cyprus and the Spanish banks. The new permanent fund (ESM) will have €500bn, but is facing a challenge in the German constitutional court. It is far from clear whether these funds can raise large sums on the open market at viable cost.

Mr Jenkins said the fire must be contained before it reached the next big country, either by massive ECB intervention or full fiscal union. Germany is still blocking both. “The battle for Spain is already lost. The battle for Italy has begun,” he said.

If this happens, we will not be immune. Forget surplus in 2014/15 – in fact our big challenge may just be to avoid a structural deficit.

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27 Responses to “Spain gets closer to the brink”

  1. alex Masterley (1,491 comments) says:

    The Telegraph also notes that Greece runs out of money on or about the 20th of August when some its loans fall due for payment.

    That may start the dominos falling.

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  2. tvb (4,210 comments) says:

    Moodys has put Germany on negative credit watch with a view of striping it of its aaa rating. I think the euro on its present form is finished. Maybe Germany should leave and go back to the DM which will be a hard currency. The euro can be a soft currency for the PIGS.

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  3. hmmokrightitis (1,514 comments) says:

    Its like train wreck TV – its both fascinating and appalling to watch in equal measure. The economist in me (trained a very long time ago) is fascinated by all the goings on, but when it happens – not if – and a breakdown starts around the existing structure of the EU, thats going to be bloody scary. And if both Spain and Italy go tits up, bloody hell, where will it end?

    In 30 years time being able to look back on all of this will be remarkable. Those next 30 years might make us look back on the Great Depression of the 30′s with great fondness…

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  4. wikiriwhis business (3,883 comments) says:

    “If this happens, we will not be immune. Forget surplus in 2014/15 – in fact our big challenge may just be to avoid a structural deficit.”

    and this is what Bill English knew when he boasted of nil deficit. It was empty rhetoric he’ll never have to support

    Remember Jim Bolger said the same thing with sale of forestry…no-one concurred.

    And I never saw anyone concurring with English

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  5. krazykiwi (9,189 comments) says:

    Those next 30 years might make us look back on the Great Depression of the 30′s with great fondness…

    Yes, but as we huddle in the dark, unemployed and hungry we’ll be able to thank the foresight our of erstwhile leaders for saved snails, fixing climate change with the ETS, euthanasia (granny costs too much to feed anyhow), gay adoption and the other blessed social engineering of the early 21st century.

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  6. Cunningham (821 comments) says:

    It is a massive worry. I hate to say it but I think the recession is going to get much worse then it has in the previous couple of years. I hope I am wrong. BTW this article outlines Spain’s issues really well: http://www.stuff.co.nz/business/world/7344571/Five-reasons-to-worry-about-Spain. Quite scary.

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  7. krazykiwi (9,189 comments) says:

    As hmmo said, there’s a sense of inevitability about this. Sovereigns spending money they don’t have works until the credit dries up. If the problem is a closed tap there are political tools to get it opened up. But if the resovior is empty then the metdown is pretty much assured.

    I wonder how much planning has been done for the potential for civil violence? Having millions suddenly left without income could be a worse national disaster than loosing millions in a natural calamity.

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  8. ross69 (3,652 comments) says:

    > It was empty rhetoric he’ll never have to support

    Of course, and it makes the government’s decision to sell off assets even dumber than the original decision was. But to change course now would, in the PM’s eyes, be a sign of failure. Far better to let the next government deal with the ensuing mess.

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  9. RRM (9,475 comments) says:

    Anyone know how much we export to Spain/Italy?

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  10. hj (6,373 comments) says:

    It all makes you wonder about New Zealand’s plan: 1. Grow the population to achieve economies of scale. That way we can do what we are good at: manufacturing.
    2. Roll back town planners, the RMA, reduce developer contributions so the smart people (“creative class”) can afford to live here and do what we do best: manufacturing.
    3. ?

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  11. YesWeDid (1,029 comments) says:

    ‘Anyone know how much we export to Spain/Italy?’

    In 2009 Spain was $243M & Italy $461M, from here:
    http://www.chinafta.govt.nz/3-Progressing-the-FTA/1-Why-China/Key-economic-statistics/0-nz-total-exports.php

    To put that in perspective our total exports were $40B (in 2010) so Spain & Italy are less than 2% of that total.

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  12. hj (6,373 comments) says:

    During the depression, people on farms did better than townies, but in those days townies had gardens, they probably didn’t lock their doors and didn’t have mobile phones, internet connections etc.

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  13. hj (6,373 comments) says:

    Tourism is in the dumps these days, except for the Chinese market which has grown (off a low base) by 26%. This has been a boon for the local Chinese community who drive the buses etc, etc

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  14. YesWeDid (1,029 comments) says:

    Come on hj – that’s hardly aspirational, we’ve got one of the best business brains in the world running the country, we’ll be alright.

    The Olympics is starting next week, a few pictures of John Key with his arm around our gold medal winners and all will be forgotten.

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  15. Cunningham (821 comments) says:

    ross69 (597) ‘Of course, and it makes the government’s decision to sell off assets even dumber than the original decision was’ yeah because borrowing more money is a fucking brilliant idea in a situation like this isn’t it??

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  16. KevinH (1,132 comments) says:

    Arguments against the EU dating from 2001 have come back to haunt member nations:

    A national currency is essential for every democratic independent State because it enables its government to influence or control its rate of interest and its exchange rate in a manner that serves the interests of its citizens. The rate of interest is the domestic price of a currency, governing the cost of credit, borrowing, investment and the amount of money in an economy. It is a key policy instrument for advancing the people’s welfare.

    The exchange rate is the price of a currency for citizens of other countries. It governs the terms on which a country exchanges goods and services with its trading partners. By altering its currency exchange rate a country can affect the competitiveness of its trade with others. If a country has an unsuitable exchange rate for a long period, it can suffer a permanent competitive disadvantage, resulting in low economic growth, unemployment and emigration.

    Without the safety valve of either the interest rate or exchange rate, national economies are also more vulnerable to economic shocks that may affect them more than others, such as an energy crisis, changes particularly affecting countries significantly dependent on agriculture, or possessing a housing system heavily reliant on variable rather than fixed interest rate mortages.

    It does not make economic sense to have the same money, and hence the same interest rate and exchange rate, for the economies of the 12 EU countries, some of whom are significantly different from others. The largest EU economies, Germany and France, are currently in recession and need low interest rates to stimulate them. Others such as Ireland have a boom, and need higher interest rates to prevent inflation.

    European Central Bank policy is geared to what suits Germany and France. This means that its one-size-fits-all interest rate encourages inflation and soaring house and asset prices in Ireland. Tension between countries that require different economic policy responses, but have the same policy imposed on them by the ECB, is likely to grow over time and eventually shatter the euro-zone system.

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  17. wikiriwhis business (3,883 comments) says:

    Bernanke takes an interesting position:

    Congress gave the power of currency control to the Fed and therefore he, Bernanke and his fellow Fed members, have the power to do whatever they want in that all important area.

    Bernanke also want to be able to continue to do what he does in secrecy, even when that manipulation includes $15 trillion worth of transactions taken to “stabilize the system” in 2008.

    Amazing when you consider that, in fact, the Fed is not a government agency (look it up.) Instead, it is a privately owned corporation whose shareholders are the same banks that get its handouts.

    No one in Congress questions any of this. Well maybe one person: Ron Paul, but he doesn’t go far enough.

    Interestingly, Bernanke in this exchange, invites Congress to take its power back. I didn’t read about any of them taking him up on it.

    http://www.realecontv.com/videos/central-banks/auditing-the-fed.html

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  18. wreck1080 (3,734 comments) says:

    can’t wait — oddly enough, a euro collapse is good news for me.

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  19. JeffW (320 comments) says:

    It would be easy to get back into surplus – all we need to do is stop wasting vast sums; government should only do what only government can do (and is necessary to ensure the smooth running of the economy). If they only did this, not only could we be in surplus, we could have lower taxes as well.

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  20. Other_Andy (2,310 comments) says:

    A lot will be riding on the US elections.
    Another term for Obama, who has borrowed a trillion US every year, will have consequences for both Europe and the rest of the world.
    Keep an eye on France where Hollande will either not implement austerity reforms or will be bullied by the unions to ignore calls to reign in spending.
    On the other side of the Tasman the Greens and Labour have been trying their hardest to strangle the economy and if it wasn’t for the mining sector, Australia would be in trouble. The economic downturn in China will cause some problems for Australia and also New Zealand.
    Another few months and we will see how bad it will get.

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  21. adam2314 (377 comments) says:

    Which country will be first to withdraw from the EU ???

    Germany or Greece ??

    Greece is not keeping to the agreed ” Austerity ” plan. In fact has not yet placed the wage cuts for the state run systems….

    Germany does not want to end up paying for everything..

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  22. Mr_Blobby (109 comments) says:

    Interesting it is like watching the inevitable sinking of a ship, slow but sure.

    One thing to remember the fiat currency has no real backing, only public confidence, consider that only 10% is paper the other 90% is electronic.

    One answer might be to do what you do with a slow computer reboot it. Look at the virtual money supply and monetize the debt by printing/creating more. Yes, devalue the Euro. Another might be to monetize assets namely Gold, go back to a gold standard.
    The real losers will be savers or people with money on deposit. The real winners will be people with loans that in real terms become less, and therefore easier to pay off.
    Inflation does something similar but slower. Ask anyone with money on deposit at say 4.5% less TAX and inflation at 3%
    How about a good old fashion dose of hyperinflation.

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  23. adam2314 (377 comments) says:

    ” The real winners will be people with loans that in real terms become less, and therefore easier to pay off. ”

    Well there you have the answer Mr. Blobby..

    Majority rules as usual.. More are in net debt than in net surplus..

    No more reason to save eh !!..

    Where is that advertisement for re-furnishing the house ??.. Nothing to deposit… No repayments for 5 years..

    Choice eh !!!..

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  24. UpandComer (506 comments) says:

    Excellent. My still outstanding student loan is going to get smaller in real terms.

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  25. krazykiwi (9,189 comments) says:

    Upandcomer – only if your vote is not seen as purchasable.

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  26. Mark (1,366 comments) says:

    If you look at the asset alocation of Eurpean pension plans they have always tended towards a high weighting in Bonds rather than equities, unlike the UK and US fund managers. It is becuase of this exposure to the sovereign bond market that the northern European states are still bailing out the PIIGS. It is not a soimple matter of letting them fall becuase the impact at home is simply too great at home.

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  27. Paulus (2,503 comments) says:

    US is as deep in the poo as the euro zone.
    All they do is print money, which the Chinese, Arabs, African and Russian Oligarchs lap up into tax havens.
    For example the perceived wealth of Mugabe is into US$billions, as is Saddam Hussain’s family and the Arafat family.
    They are not the only ones – look at the present South African leaders.

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