Cold Rain in Spain

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machinehead's picture
machinehead
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Cold Rain in Spain

From the Telegraph:

It is proving hard to shake off persistent market fears about Spain, which, if it needed a lifeline, would swallow up a large part of the €750m emergency fund. Worryingly for the EU, the doubts about Spain – whether real or driven by speculation – are eerily similar to the gradual seeping away of confidence that sent Greece into a financial death spiral in March and April. The Spanish government's cost of borrowing hit a new record yesterday. The interest rate gap, or spread, between 10-year Spanish bonds and their German equivalents, rose by more than 0.10 of a point to 2.23 percentage points.

A senior Spanish banker, Francisco Gonzalez, chairman of the BBVA financial services group, confirmed that foreign private banks were now refusing to provide liquidity to their Spanish counterparts. "Financial markets have withdrawn their confidence in our country," he said. "For most Spanish companies and entities, international capital markets are closed."

As a result, the European Central Bank is said to have provided record amounts of liquidity to Spanish banks in recent days. The closure of bank-to-bank credit to Spanish institutions recalls to some market commentators the ripple of crisis through the global financial system after the fall of Lehman Brothers in the Autumn of 2008.

http://www.independent.co.uk/news/world/europe/spain-the-new-crisis-in-euroland-2002676.html

Southern Europe is caught in a debt trap. Austerity programs will shrink their economies, causing social spending to rise, even as government revenue falls further. Thus the effect of budget cuts is nullified, as 'Keynesianism in reverse' [not to mention 'fractional reserve banking in reverse'] produces a vicious circle of chasing one's own tail in an accelerating swirl down the drain.

The market is saying that the current program of emergency borrowing plus austerity cannot work. Most private commentators say the same. Something will give -- probably in the political realm. Existing European governments may be replaced by more populist ones, willing to consider measures such as debt restructuring and currency devaluation [e.g. restoring the peseta, in Spain's case].

After all, it's only ego which keeps governments in their current state of denial. Rich western countries aren't supposed to default -- it's undignified. And of course, the politicians in charge will be expelled, just as in a corporate bankruptcy. Thus one of the perverse incentives of democracy's short-term election horizon is to defend the undefendable, until the hot potato can be handed off to the next incoming government. Meanwhile, the authorities will change policy only when force majeure puts their lights out. 

Europeans sometimes perceive such drastic analyses as chauvinistic, when they come from overseas sources. My view is that Europe's plight is not unique. All of the western world is a huddled sheep herd; the impersonal Big Bad Wolf of compound interest is picking off the weaklings, the halt and the lame, first. But there are bigger dominoes to fall.

Planet Japan, for instance -- a strange, economically ice-bound, no-growth world first discovered by the British Columbian cyberpunk neuroastronomer William Gibson in the 1980s. Its inhabitants subsist on a bizarre diet of sushi, rice, dyed pickles, and crushing debt yielding fractional interest rates. But should those miniscule interest rates rise (as eventually they must), Planet Japan's unique lifeforms will find themselves in dire jeopardy.

The last and largest domino, the United Snakes of America, probably can survive until the next recession, which I have penciled in for 2013-2014. But there isn't enough money on earth to TARP our way out of that one. When a $100 billion Treasury auction unexpectedly fails one fine Monday morning, the buyer of last resort is named 'Weimar Ben' Bernanke -- for a very good reason. 

Money mouth GOT GOLD? Money mouth

Lemonyellowschwin's picture
Lemonyellowschwin
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Re: Cold Rain in Spain
machinehead wrote:

Planet Japan, for instance -- a strange, economically ice-bound, no-growth world first discovered by the British Columbian cyberpunk neuroastronomer William Gibson in the 1980s. Its inhabitants subsist on a bizarre diet of sushi, rice, dyed pickles, and crushing debt yielding fractional interest rates.

HA HA HA HA HA HA HA!!!!!!!!!!!

HA HA HA HA HA HA HA!!!!!!!!!!!

HA HA HA HA HA HA HA!!!!!!!!!!!

SagerXX's picture
SagerXX
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Re: Cold Rain in Spain

Great Scott, MH, it's good to see you again!

agitating prop's picture
agitating prop
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Re: Cold Rain in Spain

Ahhh....but the herd is getting restless, Mhead. They're in a bad mooood. If Bernanke does go totally Weimer on the bovine masses I think the "United Snakes", will have to be renamed, "The Excited Steaks", don't you?Wink Fantastic post, btw. Gives us all something to chew over, while tickling us at the same time!

 

machinehead's picture
machinehead
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Posts: 1077
Re: Cold Rain in Spain

Ambrose Evans-Pritchard, writing in the Telegraph, cites a letter published in the Italian business daily Il Sole by 100 Italian economists. They warn (as I do) that austerity policies will push Europe into a self-feeding downward spiral. Some translated excerpts from i cento economisti:

"This is the deeper reason why market traders are betting on a collapse of the eurozone. They can see that as the crisis drags on this will cause tax revenues to fall, making it ever harder to repay debts, whether public or private. Some countries will progressively be pushed out of the eurozone, others will decide to break away to free themselves from a deflationary spiral… It is the risk of widespread defaults and the reconversion of debts into national currencies that is really motivating bets by speculators."

The economists denounced the “obstinacy” with which the EU authorities and governments are pursuing “depressionary policies”, and called on the European Central Bank to abandon its policy of “sterilizing” purchases of Greek, Portuguese, and Spanish bonds, and move to fully-fledged quantitative easing to boost the money supply.

“We must have an immediate debate on the extremely grave errors in economic policies now being committed."

Evans-Pritchard adds:

My objection with the EU’s mix of policies is that extreme fiscal austerity is being imposed on a string of countries without offsetting monetary stimulus. Ireland, Spain, and Portugal have already tipped into outright deflation. Ireland’s nominal GDP has contracted 18.6pc since the peak. They are falling deeper into an Irving Fisher debt-deflation trap.

This is reactionary folly. ... As for Germany, frankly it is hard to know what to say. It is astonishing that Chancellor Merkel should unveil an €80bn package of fiscal retrenchment without consulting with the rest of Europe. 

EMU has become an infernal machine. This will not be the last letter by angry economists.

http://blogs.telegraph.co.uk/finance/ambroseevans-pritchard/100006271/the-euro-mutiny-begins/

Why won't governments recognize the obvious -- that excessive debt must be restructured? The simple reason is that the French and German governments, in particular, are doing the bidding of their large banks which are stuffed with PIGS debt.

Letting bankster cartels manage the money supply has been an ongoing disaster. Now to let the banksters dictate a liquidationist fiscal policy is even more nuts. To paraphrase Herbert Hoover's Treasury Secretary Andrew Mellon, speaking in 1931:

"Liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate, liquidate Club Med … it will purge the rottenness out of the EU. High costs of living and high living will come down. Southern Europeans will work harder, live a more moral life. Values will be adjusted, and enterprising nations will pick up the wrecks from less competent people."

Mwa ha ha ha ... Andrew, you rock, you crazy old coot! A spectre is haunting Europe ... 

 

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