Tag Archives: Spain

Euro Leaders Ready For Another Vacation.

Europe is on the brink again. The region’s debt crisis flared today, as fears intensified that Spain would be next in line for a government bailout.

 

A recession is deepening in Spain, the fourth-largest economy that uses the euro currency, and a growing number of its regional governments are seeking financial lifelines to make ends meet. The interest rate on Spanish government bonds soared in a sign of waning market confidence in the country’s ability to pay off its debts.

 The prospect of bailing out Spain is worrisome for Europe because the potential cost far exceeds what’s available in existing emergency funds. Financial markets are also growing uneasy about Italy, another major European economy with large debts and a feeble economy.

Stocks today,  fell sharply across Europe and around the world. The euro slipped just below $1.21 against the dollar, its lowest reading since June 2010. The interest rate on its 10-year bond hit 7.56 percent in the morning, its highest level since Spain joined the euro in 1999.

Spain’s central bank said today that the economy shrank by 0.4 percent during the second quarter, compared with the previous three months. The government predicts the economy won’t return to growth until 2014 as new austerity measures hurt consumers and businesses.

On top of that, Spain is facing new costs as a growing number of regional governments ask federal authorities for assistance. The eastern region of Valencia revealed Friday it would need a bailout from the central Madrid government. Over the weekend, the southern region of Murcia said it may also need help.

Spain has already required an emergency loan package of up to €100 billion ($121 billion) to bail out its banks. But that aid hasn’t quelled markets because the government is ultimately liable to repay the money. It had been hoped that responsibility for repayments would shift from the government to the banks. But that shift is a long way off — a pan-European banking authority would have to be created first and that could be years away.

Yet it is far more than Spain’s struggle that has unnerved markets.

Greece is still struggling with a mountain of debt and international creditors will visit the country tomorrow to check on the country’s attempts to reform its economy. There is concern that officials from the European Commission, European Central Bank and the International Monetary Fund will find that Greece is not living up to the terms of its bailouts and could withhold future funds.

Italy has also been caught up in fears that it may be pushed into asking for aid. Italy’s economy is stagnating and markets are worried that it may soon not be able to maintain its debt burden of €1.9 trillion ($2.32 trillion) — the biggest in the Eurozone after Greece. Interest rates on Italy’s government bonds rose steeply Monday while its stock market dropped 2.76 percent.

The collapse in stock prices in Italy and Spain prompted regulators to introduce temporary bans on short-selling — a practice where traders sell stocks they don’t already own in the hope they can make a profit if the stock falls in price.

Pascal Lamy, director of the World Trade Organization, said after a meeting with French President Francois Holland that the situation in Europe is ‘‘difficult, very difficult, very difficult, very difficult.’’

Ireland, Greece and Portugal have already taken bailout loans after they could no longer afford to borrow on bond markets. Yet those countries are tiny compared to Italy and Spain, the third- and fourth-largest economies in the Eurozone. Analysts say a full bailout for both could strain the other Eurozone countries’ financial resources.

Spain has already received a commitment of up to €100 billion from other Eurozone countries to bail out its banks, which suffered heavy losses from bad real estate loans. Eurozone finance ministers signed off on the aid Friday and said €30 billion would be made available right away. But that incremental step cuts little ice with investors. If Spain’s borrowing rates continue to rise, the government may end up being locked out of international markets and be forced to seek a financial rescue.

 ‘‘Events since Friday have been a clear wake-up call to anyone who thought that the Spanish bank rescue package had bought a calm summer for the euro crisis,’’ analyst Carsten Brzeski said.

The Eurozone’s bailout fund, the European Stability Mechanism, has only €500 billion in lending power, with €100 billion potentially committed to Greece. Italy and Spain together have debt burdens of around €2.5 trillion. And the ESM hasn’t yet been ratified by member states plus Eurozone governments have made it clear they won’t put more money into the pot.

 

That once again pushes the European Central Bank into the frontline against the crisis.

On Saturday, Spain’s Foreign Minister José Manuel García Margallo pleaded for help, saying that only the European Central Bank could halt the panic. But the ECB has shown little willingness to restart its program to purchase the government bonds of financially troubled countries. The central bank has already bought more than €200 billion in bonds since May 2010, with little lasting impact on the crisis.

The central bank has also cut its benchmark interest rates to a record low of 0.75 percent in the hope of kick-starting lending. Yet many economists question how much stimulus this provides as the rates are already very low — and no one wants to borrow anyway.

There has been speculation the ECB could eventually have to follow the Bank of England and the U.S. Federal Reserve and embark on a program of ‘‘quantitative easing’’ — buying up financial assets across the Eurozone to increase the supply of money. That could assist governments by driving down borrowing costs as well.

But so-called QE is fraught with potential legal trouble for the ECB — a European treaty forbids it from helping governments borrow.

In the case of Greece, the country is dependent on foreign bailout loans to pay its bills. A cutoff of aid over its inability to meet the loan conditions would leave it without any source of financing — and could push it to exit the euro so it can print its own money to cover its debts. Really?

 

Germany’s economy minister, Phillip Roesler, said the prospect of Greece leaving the euro was now so familiar it had ‘‘lost its horror’’ and that he was skeptical Athens would meet conditions for continuing rescue money.

The deteriorating situation follows a summit June 28-29 that many hoped would convince markets political leaders were getting a handle on things. The summit agreed on easier access to bailout money and to set up a single banking regulator that could take the burden of bank bailouts off national governments. Yet many of those changes will take months or years to introduce — and there has been no increase in bailout money.

It is an echo of a similar summit in July 2011, when leaders agreed on a second bailout and debt reduction for Greece, only to see borrowing costs spike dramatically as leaders headed off for August vacations.

Stephen Lewis, chief economist at Monument Securites Ltd, said that ‘‘events are following a pattern often repeated in the course of the Eurozone’s troubles, in which the powers-that-be hail progress only to see confidence, almost instantaneously, plumb fresh depths.’’

Must be time for another vacation, I guess.

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You Can Run, But You Can’t Hide.

Europe is desperately working to prop up Spain’s wobbling banks, but the European leaders still face a problem that plagues the Continent’s increasingly vulnerable financial institutions; an addiction to borrowed money that provides day-to-day survival financing.

 

Analysts are now saying that one of France’s biggest banks, Crédit Agricole, could face heavy losses in their lending exposure to Greece.

Italy, whose fragile economy is even bigger than Spain’s and whose banks also rely heavily on borrowed money to get by, is in serious trouble as well. In Spain’s case, the flight of foreign money to safer harbors, combined with a portfolio of real estate loans that has deteriorated along with the economy, led to the collapse of the mortgage lender, Bankia. It was their failure that set off the current contagion.

“I think you are lying.”

Europe claims that this latest bailout — worth up to 100 billion euros that will be distributed to Spain’s weakest banks via the government in the form of loans, adding to their long-term debt — can resolve the problem. I think they are either lying or in denial, or both. Heavy emphasis on the lying part.

Investors and analysts worry that highly indebted banks in other weak countries like Italy might face constraints similar to those of Spain in the months ahead.

Last month, the ratings agency Moody’s Investors Service downgraded the credit standing of 26 Italian banks, including two of the country’s largest, UniCredit and Intesa Sanpaolo. Moody’s warned that Italy’s most recent economic slump was creating more failed loans and making it very difficult for banks to replenish their coffers through short-term borrowing.

Because they have yet to experience a colossal real estate bust, Italian banks have long been viewed as healthier than their bailed-out counterparts in Ireland and Spain. And bankers in Italy were quick to argue in recent days that Italian banks should not be compared with those of Spain.

Italy may not have the mortgage exposure that the Spanish banks have, but as economic activity throughout the region came to a near halt, the worry was that bad loans and a possible flight of deposits from Italy would pose a new threat to banks that already were barely getting by on thin cushions of capital. And Italian banks cannot avoid the stigma of the government’s own staggering debt load. Italy’s national debt is 120 percent of its gross domestic product, second only to Greece among euro zone countries.

Also hanging over Europe’s banks are the losses that will hit them when (not if) Greece leaves the euro currency union, throwing most of their euro-denominated loans into a state of default. Banks in France and Germany would be hurt the most, as they have been longstanding lenders to Greece.

For decades, the loans that European banks made to individuals, corporations and their own spendthrift governments far exceeded the deposits they were able to collect — the money that typically serves as a bank’s main source of ready funds. To plug this funding gap, which analysts estimate to be about 1.3 trillion euros, European banks borrowed heavily from foreign banks and money market funds. That is why European banks have an average loan-to-deposit ratio exceeding 110 percent — meaning that on any given day, they owe more money than they have on hand.

This, as you might have guessed, is not a really good thing for a bank.  


European Commission Rearranges Deck Chairs As Europe Burns.

The European Commission proposed what has been characterized as far-reaching powers for regulators to deal with failing banks on Wednesday.

Is this a chilling picture? This tepid proposal, which recommends closer coordination between countries and increased powers to force losses onto bondholders, won’t take effect before 2014, which will be way too late for Greece and Spain, which appears on the brink of being forced to seek a Greek-style bailout, as it is obviously unable to refinance its indebted lenders.

Even if Europe were not on fire at the moment, there are a ton of hurdles to the banking union championed by ECB President Mario Draghi – which is basically a three-pillar plan to establish a central monitoring of banks (gee, I thought that’s what the ECB already did), a fund to wind-down big lenders (we call that a bail-out here in the U.S.) and a pan-European deposit guarantee (good luck getting anything done “pan-European” style.)

Smartly, and true to form, Germany has balked at signing up to a single European scheme that could see it shoulder the costs of a bank collapse in another country (and, why should they?), and Britain fiercely resists any attempt by Brussels to impose EU controls over financial services, which account for almost a tenth of its Wall Street like economy.

At least there are a couple of people who have noticed that Europe is burning:

Nicolas Veron of Brussels think tank Bruegel, says “Everybody’s energy right now should be focused on the current crisis. I’m not sure we can afford the luxury of thinking about a permanent framework when the houses are burning.”

Daniel Gros of the Centre for European Policy Studies think tank said while it was in everyone’s interest to prevent a repeat of the chaos that followed the collapse of U.S. investment bank Lehman Brothers, action was needed now.

“We need immediate decisions”, he said. “We have a crisis on our hands.”

The Commission’s stupid 156-page (draft) legislation, recommends giving supervisors powers to “bail in” or force losses onto bondholders of a failing bank so that taxpayers are kept off the hook, and forge closer links between national back-up funds to wind up cross-border lenders. They can’t even move off of draft.

Are they kidding?

“There was little appetite to create pan-European funds,” he said. “There would be mistrust among states in pursuing such cooperation.”

Translation: Nothing will happen.

Berlin, recognizing the panic in the details and knowing it is firmly in the driver’s seat, is in no hurry. Germany knows that Europe will not make any final decisions on strengthening economic policy coordination between member states until at the earliest, spring of 2013.

The Centre for European Policy Studies’ Gros said only an acceleration of the crisis would prompt German Chancellor Angela Merkel into faster action.

“If it is a slow grind, where the German economy is not visibly affected, it will be hard for her to do that. It has to be so urgent that there is an emergency summit of leaders and that she returns home and says: ‘there was no choice’.”

If you knew that it would come to that, and you were Angela Merkel, what would you do?


Obama Goes All Firefighter.

As much as I would like to write about all of the other crazy things that are going on, the European banking thing is the gift that keeps on giving.

Now of course, the Obama administration is stepping up efforts to push Europe to deal with this debt crisis, so that he won’t have to just 5 months prior to the election. Actually, what he is trying to avoid is dealing with the pressures on the US banking system as they build to a crescendo more like 3 months prior to the election.

If the clowns in the Romney camp had any brains, they would be building a huge media plan focused on “How Obama got us into this mess.”

So, hoping to avoid a similar disaster to 2008, the administration is holding private meetings, urging officials in the 17-nation euro zone to take swifter action to calm markets, reassure depositors about their banks’ health, and prevent some of Europe’s largest countries from suffocating under high borrowing costs and weak economic growth.

They think that the lessons learned from the 2008 financial crisis includes acting quickly and decisively to stabilize the financial system and prevent investor panic.

As an example, the administration wants Europe to use the continent’s rescue fund— now around €700 billion ($866 billion)—to provide assistance to governments struggling with soaring borrowing costs. Allowing the rescue fund to directly recapitalize banks, instead of forcing the struggling governments to borrow first from the rescue fund, would help prevent bank failures and enable the banks to continue lending, which would help support economic growth, the officials believe. Under this approach, the governments wouldn’t have to boost their own debt loads by borrowing from the fund.

How this works, by the way, is that the U.S. yells directly at the International Monetary Fund, in which it is the largest shareholder. The IMF has been urging Europe to use the rescue fund for that purpose, but the idea is opposed by Germany because they rightfully fear they will be left holding a huge bag of defaults.

The administration has also pushed Europe to build a larger rescue fund, or so-called firewall, believing a bigger war chest would ease investors’ concerns about governments beyond long-troubled Greece. But, that won’t work this time as investors are now much more cynical than they were in 2007, and they no longer trust governments to get their bailouts right.

And, to further complicate the situation, (as we have faithfully reported here) risks are rising that the financial turbulence in Spain—Europe’s fourth-largest economy—could deepen even before Greek voters go to the polls in two weeks to decide their fate in the currency union.

On Wednesday, Mr. Obama and leaders from Germany, France and Italy held an hour-long videoconference to discuss the euro-zone crisis, following up on a meeting of the Group of Eight major advanced economies hosted by the White House just one week ago.

These meetings were planned before Spain’s borrowing costs shot up this week. But they underscored the administration’s rising worry about how the euro-zone crisis could drag down the weak U.S. recovery for the third straight spring.

In a Gallup poll released Thursday, 71% of Americans said they are at least somewhat concerned about the effect of the European financial crisis, but only 16% said they understood the danger to the US markets . The data suggested worries could rise as the troubles weighed on U.S. markets and gained more attention in the U.S. Among the 16% of people who said they are paying very close attention to the news about Europe’s financial situation, 95% said they are concerned. Unfortunately, that still means only 15% of the US population is concerned about this very serious and impossibly huge disaster waiting just off-shore.

What those 15% fear is that a cascading crisis across the European banking system, triggered by Spain, or Greece, or another unseen banking revelation, could cross the Atlantic and hit the U.S. financial system. As we said in a prior post, we have a $39 billion KNOWN exposure to the European banks. Almost any result imaginable will translate into less business investment and hiring and less bank lending, triggering yet another, and deeper recession.

I love him, but this one will belong exclusively to Obama. Better act NOW.


The End of the Euro Nears.

As we watch the growing deterioration of the Greek and Spanish banking systems, I thought it might be interesting to take a closer look at the major U.S. banks’ overseas positions and exposures.

Citigroup has the largest net exposure to non-U.S. sovereign governments, with a little more than €14 billion ($17.5 billion) on their balance sheet.  JPMorgan Chase comes in second, with about €8 billion ($10 billion), while Morgan Stanley is third with €5 billion ($6.2 billion), and Goldman Sachs holding the smallest position of the four big banks with €4 billion ($5 billion) in non-U.S. sovereign debt. Remember how Wall Street reacted when JPMorgan lost $2 billon in derivative exposure a couple of weeks ago? Now, imagine a $39 billion loss. As Senator Everett Dirksen famously declared, “A billion here, a billion there, pretty soon it adds up to real money.”

This is an important data point because the U.S. banks are completely exposed to the growing European banking disaster. Europe’s entire banking sector has the potential to collapse completely if the contagion catches and runs completely amok. With the current run on Greek and Spanish banks, the possibility is slowly becoming a probability. Without an EU-wide deposit guarantee, depositors will withdraw all of their funds and move them to their mattresses.

In addition, the bigger of the PIIGS, Spain and Italy, have their debt spread out across Europe, putting them in the unenviable position of causing systemic ignition to just such a contagion.  As one example, French banks (Credit Agricole and Societe Generale) hold a substantial portion of their credit portfolio in Italian sovereign debt. Which we know is worthless.

Europe as a whole is in deep trouble as this latest iteration of the never-ending sovereign debt crisis could finally result in at least a partial breakup of the EU.  The actual likelihood is that Greece, then Spain, followed by Portugal, Italy and Ireland will drop out of the EU.

If that happens, Germany’s most rational choice would be to withdraw as well. After all, why should they continue their exposure to more poorly managed countries who will only default on what remains of their sovereign debt?  France, Sweden, Belgium, the Netherlands and the U.K. would be quick to follow in Germany’s footsteps, leaving behind, a handful of countries like Cyprus, Estonia, and Latvia to sort out the remaining arguments for remaining in the Union and supporting a single currency.

It doesn’t take much of a mental stretch to imagine what would happen next.


European Bank Run Has Started!

In the last 7 days, searches for the phrase “bank run” on Google hit an all-time high, surpassing even the first days following the collapse of Lehman Brothers in 2008.

The analysts’ conclusion is that a bank run is under way in Europe.

The fear of bank runs is deeply ingrained in all economists who know anything about the genesis of the Great Depression in the United States in the early 1930s. Then, the failure of the Bank of United States in December 1930 led to multiple bank runs across the country. Bank failures in the following two years wiped out personal savings and greatly exacerbated the collapse of demand in the economy.

The classic account of the crisis, by Milton Friedman and Anna Schwartz, concluded that the collapse was largely the fault of the Federal Reserve, which failed to provide enough liquidity to keep the banks functioning and thus end the panic.

On Monday, Gavyn Davies, who chairs Fulcrum Asset Management, and is an adviser to the British government, wrote in the Financial Times: “A bank run is now happening within the Eurozone. So far, it has been relatively slow and prolonged, but it is a run nonetheless. And last week, it showed signs of accelerating sharply, in a way which demands an urgent response from policy-makers.”

On Tuesday, a report from Citigroup analyst Matt King who took Greece, Ireland, and Portugal’s documented withdrawal rates and applied them to Spain and Italy, said, In Greece, Ireland, and Portugal, foreign deposits have fallen by an average of 52 percent, and foreign government bond holdings by an average of 33 percent, from their peaks.” Further, he said, “The same move in Spain and Italy, taking into account the fall that has taken place already, would imply a further $272.17 billion and $270.9 billion in capital flight respectively, skewed towards deposits in the case of Spain, and towards government bonds in the case of Italy….Economic deterioration, ratings downgrades and especially a Greek exit would almost certainly, significantly accelerate the timescale and increase the amounts of these outflows.”

Wednesday saw the release of a report from Nomura analysts showing that the exodus of funds wasn’t limited to banks and had been increasing since March: Portfolio investments saw a net outflow of $44.58 billion (compared with February net inflows of $24.2 billion). The main reason behind the negative overall portfolio flows was the activity of Eurozone investors, who bought $76.43 billion of foreign assets, mainly bonds and money market instruments. This is the largest foreign investments in almost 1.5 years.

There was further proof of the capital racing out of most of the EU on Thursday as the Financial Times reported: Some of Europe’s biggest fund managers have confirmed they are dumping euro assets amid rising fears over a possible Greek exit from the Eurozone and single currency turmoil.

And, Friday’s news of Bankia, Spain’s 4th largest bank, suspending its stock and Moody’s downgrade of some Nordic banks which many had assumed safe has only added fuel to the fire. Get ready, folks. If you haven’t already, sell those bank stocks and run  to the nearest exit. 

Because, now, America’s banks are starting to get ready for Mr. Toad’s wild ride! And, it won’t be pretty.


Greece, Followed Closely By Spain.

It appears finally that Greece is about to abandon the euro and drop the charade.

The divide between the supporters of the 130 euro ($168 Billion) EU/IMF bailout and the opponents has resulted in an election that has failed to produce a central government, and a new election is planned. This of course means that the anti-austerity measure supporters won BIG.

Greece is about to run out of money (in June) and there will be no government in place to negotiate the next tranche. Investors are betting that Greece will default and withdraw from the European Union in the next few months. Spanish and Italian bond yields rose as investors fretted the political deadlock meant Greece was on track to become the first country to abandon the euro. Followed closely by Spain and Italy. Germany better start pulling its horns back in.

“We wish Greece will remain in the euro and we hope Greece will remain in the euro … but it must respect its commitments,” European Commission spokeswoman Pia Ahrenkilde Hansen told a regular news briefing.

The prospect of national bankruptcy and a return to the drachma appeared to be slowly sinking in among Greeks, who must now choose between the pain of spending cuts demanded in return for aid and the prospect of even more hardship without the euro.

“We have to stay in the euro. I’ve lived the poverty of the drachma and don’t want to go back. Never! God help us,” said Maria Kampitsi, 70-year old pensioner, who was forced to shut her pharmacy two years ago due to the economic crisis.

“They must cooperate or we’ll be destroyed. It will be chaos. For once, they must care about us and not their own position.”

Polls suggest SYRIZA would come first if elections were held again, netting it a bonus of 50 extra seats in the 300-seat parliament and raising the odds for an anti-bailout coalition taking control of government.

German Finance Minister Wolfgang Schaeuble said Greece was in a “dreadfully difficult situation” but would pay a high price if it left the euro.

It looks grim.

While this is happening in Greece, Spanish students are protesting on Barcelona‘s elegant boulevards, public-sector wages are being cut for the second time in three years and resentment is growing against the central government and beneficiaries of bank bailouts.

Such is the daily fallout from the euro zone‘s debt crisis. Like the rest of Spain, Barcelona is looking at several years of hard grind as the country adjusts to living within its means after the collapse of a debt-financed housing bubble that has brought much of the banking sector to its knees.

Spain is more representative of the generally insidious, demoralizing nature of the crisis: austerity is sapping trust in politicians across the euro zone and fraying the social fabric as the bills for years of economic mismanagement are shared out.

“The problem is social. What are we going to do when we have 25 percent unemployment? It’s dramatic,” said Joan Ramon Rovira, head of economic studies at the Barcelona chamber of commerce.

Even though every fourth Spaniard is unemployed, job protection is being eroded. In Barcelona, capital of the northeastern region of Catalonia, hospital wards are being closed, class sizes are growing and university fees are rising.

The result is a hardening of attitudes as various groups campaign to preserve their entitlements. The crisis has also ratcheted up political tensions with Madrid as supporters of Catalan independence increasingly begrudge helping to bankroll the central government, which they feel treats them with disdain.

“Spain is a backpack that is too heavy for us to keep carrying. It’s costing us our development,” said the spokesman for Catalan President Artur Mas, Joan Maria Pique.

Spanish banks have more than 180 billion euros of sour property assets on their books, and analysts fear there is worse to come as recession triggers more corporate and mortgage defaults. Spanish banks have ignored mortgage defaults and slumping housing prices on their balance sheets, so a reading of their books is highly misleading.

House prices have fallen about 25 percent since 2007 and a Reuters poll published on Friday pointed to a further decline of more than 15 percent in 2012-2013.

Roubini Global Economics sees losses ranging from 130 billion euros to 300 billion euros and attaches a 60 percent probability to the need for a sovereign bailout followed, in 2015, by a restructuring of Spain’s debt.

Conversations in Barcelona suggest that people do understand the need for belt-tightening. Importantly, strong family ties constitute a safety net of sorts for the unemployed. But there is a sense that the sacrifices are not being fairly shared.

Felipe Aranguren, 59, who works when he can as a sociologist, rails against Spain’s “rotten” banks and wants higher taxes on the rich to pay for a “New Deal” public-works program.

Psychology student Celia Nisare Bleda, 19, fears that students from poorer families will bear the brunt of the education cuts. With every second young Spaniard out of work, she suspects that not even a degree will be enough to secure a job in Spain that pays decently.

Lots of students were going abroad in search of a better future. So would she if necessary. “With the salaries we’re likely to get, there’s no possibility of having a good life. We’ll be living all our lives like students.” Nisare Bleda said.


Spain Teeters.


 

Just when you thought the financial crisis in Europe had reached its boiling point as exemplified by the Greek election message earlier this week, Spain has quietly begun to waive its own white flag.

In an attempt to avoid an international rescue like Ireland needed to shore up its financial system, Spain is now asking lenders to increase their bad-debt provision by another 54 Billion Euros (to 166 Billion) which will be enough to cover defaults on about 50% of loans to property developers and construction companies (according to the Bank of Spain).

It does nothing however, to address the $2 Trillion in home loans and corporate debt.

Taking those into account, banks would need to increase provisions by as much as five times what the government says, or 270 billion euros, according to estimates by the Centre for European Policy Studies, a Brussels-based research group. Plugging that hole would increase Spain’s public debt by almost 50 percent or force it to seek a bailout, following in the footsteps of Ireland, Greece and Portugal.

“How can you only talk about one type of real estate lending when more and more loans are going bad everywhere in the economy?” said Patrick Lee, a London-based analyst covering Spanish banks for Royal Bank of Canada. “Ireland managed to turn its situation around after recognizing losses much more aggressively and thus needed a bailout. I don’t see how Spain can do it without outside support.”

Unemployment in Spain today is 24% and investors are talking in sentences that contain the phrase, “too big to fail.” In Ireland and now Spain, loans to real estate developers are now looking to be the most toxic.

If losses reach only 5 percent of mortgages held by Spanish lenders, the cost to those banks will be about 250 billion euros. That’s three times the 86 billion euros that the Irish domestic banks, bailed out by their government, have lost as real estate prices tumbled there.

“Spain is constantly playing catch-up, so it’s always several steps behind,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy, a consulting firm in London specializing in sovereign-credit risk. “They should have gone down the Irish route, bit the bullet and taken on the losses. Every time they announce a small new measure, the goal posts have already moved because of deterioration in the economy.”

Without aggressive writedowns, Spanish banks can’t access market funding and the government can’t convince investors its lenders can survive a contracting economy, said Benjamin Hesse, who manages five financial-stock funds at Fidelity Investments in Boston, which has $1.6 trillion under management.

Spanish banks have “a 1.7 trillion-euro loan book, one of the world’s largest, and they haven’t even started marking it,” Hesse said. “The housing bubble was twice the size of the U.S. in terms of peak prices versus 1990 prices. It’s huge. And there’s no way out for Spain.”

Spain’s home-loan defaults were 2.7 percent in December, according to the Spanish mortgage association. Home prices are propped up and default rates under-reported because banks don’t want to recognize losses, according to Borja Mateo, author of “The Truth About the Spanish Real Estate Market.” Developers are still building new houses around the country, even with 2 million vacant homes.

If Spain keeps up the charade, the banks will lose all credibility and soon, not unlike Ireland who tried to stick banks’ creditors with losses and was overruled by the EU, the IMF will declare again that defaulting on senior debt will raise the specter of contagion and spook investors away from all European banks, and thus dis-allow it.

The EU was protecting German and French banks, among the biggest creditors to Irish lenders, said Marshall Auerback, global portfolio strategist for Madison Street Partners LLC, a Denver-based hedge fund.

“Spain will be the new Ireland,” Auerback said. “Germany is forcing once again the socialization of its banks’ losses in a periphery country and creating sovereign risk, just like it did with Ireland.”

“Spain will have to turn to the EU for funds to solve its banking problem,” said Madison Street’s Auerback. “But there’s little money left after the other bailouts, so what will Spain get? That’s what worries everybody.”

Germany is about to own some really nice Greek islands, and it would probably like to add the Canary Islands to its new tourist book. Germans love the sun.


This Might Freak You Out.

Happy Easter or Passover or whichever holiday you choose to celebrate today.

For those of you who have been following my blog for the past 4 months, you have probably gotten the impression that I am pessimistic about our future, and that I am cynical about the persistence of the human condition. I have harped on the coming financial crisis in Europe and how it will impact the US, and I have bitched about the free ride that banks have gotten from this administration. I constantly remind you all that Greece is headed for a massive loan default, a huge and ugly political uprising and an unstructured and messy departure from the European Union, most probably followed soon thereafter by Spain, Ireland, Portugal and Italy.

You all know how I feel about the disappearance of the middle class in this country and the dangers of such a dramatic consolidation of wealth among a very few and a collateral consolidation of poverty among a growing third, soon to be half of the country. I carp about the Republican platform moving to exacerbate the problem by lowering taxes on the wealthy while rolling back education, health care and social programs. All of this is true, yet I am NOT a pessimist, nor am I cynical about the inevitability of the human response to crisis. I am actually an optimist, and I always have been, preferring to see the glass as half full as opposed to half empty, and instead of simply pointing out the problems, I have always tried to point out the solutions.

One of you asked me, if I am always wringing my hands over the future of America amid an almost complete vacuum of leadership, what practical, workable things I would do differently to change the direction this country is headed, and to prepare for and guard against some of the speed bumps and outright disasters that await us should we stay the current course. OK, since you asked, here it is:

1. Congress. Work a full year. Either vote to make your health care and pension plan law for everyone else, or vote yourselves into private health care plans and a non-matching 401(k). Pay for your own transportation to and from work. Reduce your staff to twenty people, and pay them market wages. Make all Congressional and employee perks competitive to private industry.

Pass the following laws effective immediately: a) Crowdfunding, without SEC restrictions. This will create jobs. b) Banks must within 30 days, re-structure all home  mortgages to real-estate appraised market values, no exceptions. This will be grandfathered as a condition of the earlier bailout. The effect of this law will stabilize the housing market. c) Pass an emergency Banking law that gives homeowners who have been un-employed for 6 months or longer a free ride on their mortgage payments for an additional 12 months, and do not accrue those carry costs onto their existing mortgages; in short, the Banks eat the difference, further stabilizing the housing market. d) All banks who have foreclosed and now own REO properties must keep those properties on their books for a period of 5 years, and will not be allowed to bring those homes to market during that period but must maintain them in sell-able condition, but without sales signs in the yards, and without MLS listings. This shift in mortgage risk will result in the proper distribution among the two parties who have taken the risk of an ever rising housing market, and will completely stabilize the housing market.

e) Pass another emergency Banking law which restricts investment in European banks and Sovereign bonds and requires US banks to withdraw their positions in European banks and Sovereign bonds to 10% of all foreign holdings. This will mitigate the impact of Eurozone failures and defaults on US banks. f) Re-enact a version of the Glass-Steagall Act, restricting US commercial banks from investment banking, and break up the current US banks within a 90 day period, restricting derivative trading to it’s purest form and disallowing exotic contracts to be traded under the guise of derivatives. This is a lot easier to do than it appears and it will greatly reduce volatility in the markets. g) Raise taxes 6% on those earning over $250,000 per year, and 10% on those earning over $1,000,000 per year. h) Reduce the capital gains tax to 10%.

h) Eliminate all subsidies for Oil companies and Industrial farms. i) Repeal the Citizens United ruling. j) Freeze existing lobbyists and restrict lobbying spending to $1,000,000 per firm. k) Pass an emergency job-funding bill that invests $200 Billion in infrastructure construction projects administered by the Federal, not the State government. l) Repeal No Child Left Behind and re-direct that money into teaching, arts, music, science and sports. m) Sponsor a National Program equivalent in funding to putting a man on the moon in today’s dollars, that has a goal of getting America to the number one position in Reading, math and Science across all grade levels within 5 years, and create ridiculous rewards for students and teachers who achieve those goals. n) Reduce the number of Federal cabinets and Agencies to 500, and fully pension all of those people whose jobs will be eliminated.

o) Eliminate the Federal Energy Management Program and create a single Agency whose only goal is to achieve fossil-fuel independence by 2020, and staff it with proven entrepreneurs who are vested in a ridiculous amount of Federal stock options, so that when they achieve that goal, they will be rewarded just like in real life. p) Nationalize all Police and Fire and create a single intelligence agency while eliminating the CIA and the FBI. q) Cease the prosecution of all wars and withdraw combat troops from current theaters of war, while re-building the VA and re-distributing those funds to veterans hospital care and housing, education and job benefits. r) Pass a law that eliminates filibustering, and requires that every bill that is introduced into Congress be written in plain, 8th grade English and posted on the Web for a period of 60 days with automatic response mechanisms that requires the authors and proponents to respond to every citizen query in person, and the attendant dialogue be required to be appended to the bill prior to allowing a vote by Congress. This may eliminate any bill from being enacted by Congress, other than those emergency bills.

s) Shut down unemployment, and instead write a tax-free check  for $100,000 to everyone who was drawing those benefits and give them one year to prove that they could start a successful business and employ at least one other person. If they succeed, they could draw down additional funding to expand their business. Half may fail, but the other half that succeeds would eliminate unemployment, and it would cost only slightly more than the banking bailout of 2008. Think about it: Eliminate Unemployment!

While I am tempted to suggest that we should create a single cabinet post called Really Smart Guys in a Room and require 2 years of national service from people like Warren Buffet, Bill Gates, Paul Allen, Sharon Stone, James Woods, Robert Reich, Bill Clinton, Marc Andreesen, Vinod Khosla, Joichi Ito, Jonathan Ive, Diego Rodriguez, Michael Arrington, Charlene Li, Marc Benioff, Jack Dorsey, Jim Breyer, Reid Hoffman, Andy Rubin, Sebastien Thrun, Sheryl Sandberg and Rich Rubin, I guess that might be going over the top. I left a bunch of really bright people out, but you get the idea. Let them create the kind of wealth, innovation and prosperity they created in Silicon Valley, but instead of a measly $800 million Venture Fund, they would have access to an $800 Billion Venture Fund. Darn. How cool would it be to get these guys together and tell them they can do anything they want, but just make the world a better place, and don’t forget make us money while your doing it.

Imagine.


Is This The End Of Yesterday?

She watched it all crumble away
Is this the end of yesterday?
“Lord, I hope so” is all he said

              – Endgame – “Rise Against”

 

The Next Greek Tragedy

European leaders are falling all over themselves to tell us that the Greek default does not in any way suggest that it is possible for another country to default.

Kiron Sarkar makes the following points, with which I agree, so let’s jump to him:

Spain unilaterally set its 2012 budget deficit at 5.8% of GDP, much higher than the 4.4% previously agreed with the EU. The budget deficit came in at 8.5% last year, once again higher than the target of 6.0%. A ‘discussion’ between Spain and the EU is inevitable, especially as (to date) the EU has insisted that Spain stick to its prior commitment. Quite an interesting development, particularly as it has come on the same day that 25 out of 27 EU countries (excluding the UK and the Czech Republic) signed up to the ‘fiscal compact’ which, once approved by each country’s national Parliament (Ireland will need a referendum), will introduce the German-inspired ‘debt brake’ into their constitutions – basically commits the 25 EU countries to reduce borrowings and, indeed, balance their budget deficits.

“Spanish unemployment rose by a massive +2.4% MoM in February, with youth (under 25) unemployment over 50%, yep that’s 50%. The EU has a tough task. If it offers concessions to Spain, expect Portugal, Ireland, etc., etc. to submit their own ‘requests.’ However, I just can’t see how Spain can meet its prior commitment. Officially, GDP is forecast to be -1.0% to -1.7% this year, though in reality the actual outcome will be closer to (indeed may exceed) the more pessimistic forecasts.”

And the report from Portugal is not much better. This from Lew Rockwell (Feb. 3, 2012):

“Things are also unraveling very quickly in Portugal. Now there is talk that private investors will be required to take a ‘haircut’ on Portuguese debt as well.

“The following is from a recent article in the Telegraph…

“‘A report for the Kiel Institute for the World Economy said Portugal would have to run a primary budget surplus of over 11pct of GDP a year to prevent debt dynamics spiralling out of control, even in a benign scenario of 2pct annual growth.

‘Portugal’s debt is unsustainable. That is the only possible conclusion,’ said David Bencek, the co-author, warning that no country can achieve a primary budget surplus above 5pct for long. ‘We won’t know what the trigger will be, but once there is a decision on Greece, people are going to start looking closely and realize that Portugal is the same position as Greece was a year ago.'”

“Sadly, that article is exactly right. Portugal is marching down the exact same road that Greece went down. The yield on 5-year Portuguese bonds is now up to an all-time record 19.8 percent. A year ago, the yield on those bonds was only about 6 percent. This is the same thing that happened to Greece. A year ago, the yield on 5-year Greek bonds was about 12 percent. Now the yield on those bonds is more than 50 percent.”

The world is facing a debt crisis unlike anything ever seen before, and Europe is right at the center of it.

french strikes1 A massive strike meant to paralyze France

Italy can pull out of its tailspin, but it will need help from the ECB in the form of debt issued at lower than current market rates. But if you give it to Italy, must not you do the same for Spain and Portugal? And while their economies are markedly worse, their government debt-to-GDP ratios are nowhere near as bad. And don’t even get me started about France, which becomes a crisis of biblical proportions by the middle of the decade. Let me note that France is not Greece. It actually is too big to save. France will make a difference when it enters its problem period. And the probable election of Hollande does nothing to alleviate any concerns.

There are only two ways that countries in Europe can get their deficits under control and begin to shrink their debt-to-GDP ratios. They can either grow GDP faster than the growth of their debt, or reduce their debt. How can Spain, with 20% unemployment and a projected 6% deficit, grow enough? Certainly not in the next few years. Portugal has the same problems. Austerity at the levels they will need will soon make growth even less likely, but borrowing more money is going to mean ever higher interest rates, unless the ECB is willing to print or Europe is willing to tax northern European countries to bail out the southerners. Try selling that one in an election campaign, or for that matter, anytime.

Because of the current willingness of European leaders to tap their taxpayers and of the European Central Bank to print money, a crisis has been averted, at least for the moment. For that, the US and the world can be grateful. The probability of a recession this year in the US is falling, as a crisis in the EU could have been the trigger that pushed a slow economy into recession.

But let’s make no mistake. The sovereign debt crisis is not over. Not in Europe, not in Japan, and not in the US. It is in a lull period. And don’t give me that old shibboleth, “The market is telling us that the crisis is over.” The market knows a lot less than many pundits believe. What did the market know in mid-2007? Not very much, although the warning signs were clear, at least to some of us.

Sadly, the focus of the crisis will now move on to other countries in Europe. The economic arithmetic of the peripheral countries is not much better than that of Greece only a few years ago. The pronouncements and assurances from European leaders are about the same as they were a few years ago. Total European debt is at 443%, well above US debt of 350%. European banks are leveraged over 30 to 1, at least double that of US banks, which are nerve-wracking enough.

 

It is the time of the Endgame. There will be contagion.