No Leeway from the Punishment Union

As it has recently filtered through that Spain is likely to produce a bigger deficit this year than originally planned, the new European Punishment Union has let it be known that there will be no compromise: Spain is in for a whupping.

As CNBC reports:

 

“Spain will get no leeway on its budget targets before May, Spanish Economy Minister Luis De Guindos said on Thursday, but Madrid could opt for defiance when it presents the backbone of its 2012 plan on Friday.

Spain has hovered on the fringes of the euro zone crisis as investors worry that its economy, enfeebled by the bursting of a property bubble, puts it at risk of following Greece, Ireland and neighbouring Portugal in seeking a bailout.

Prime Minister Mariano Rajoy, elected last year on a pledge to slash spending, has been lobbying Brussels for leniency, arguing the country's shrinking economy makes it impossible to cut enough this year to achieve a deficit target agreed with Brussels of 4.4 percent of gross domestic product.

 

Officials in Brussels insist Spain must present a budget based on the 4.4 percent target and that there will be no room for discussions on relaxing it until May.

But a government source said the spending limit Spain would present in Madrid on Friday would be based on a deficit target of 5.3 percent to 5.5 percent, thus breaching the path to cut the deficit agreed with the Commission in 2009.

Spain's Economy Minister Luis De Guindos conceded no resolution was likely before May. "The process has been initiated … In May, we'll have a final decision," he told journalists after talks with euro zone finance ministers in Brussels, where European leaders also meet on Thursday and Friday.

He insisted Spain would keep cutting its deficit, but that toughened economic conditions would make impossible to meet the 4.4 percent target at the end of 2012. "They understand perfectly that the circumstances that led to 4.4 (percent) are not the same any more and that obviously this requires a change," he said.

Spain has restructured its ailing banks, reformed its labour market laws to make it cheaper for companies to hire and fire and threatened sanctions on overspending local governments to try to reassure its bond investors.

On Thursday the European Central Bank's latest handout of cheap 3-year loans to banks encouraged them to buy at a Spanish debt auction, enabling Madrid to borrow 4.5 billion euros at relatively low cost. But in the latest sign that Spain is entering a recession, a survey showed its manufacturing sector shrank for the tenth straight month in February.


(emphasis added)

So not even the old target was met, which should surprise exactly no-one. As we have pointed out about a year ago already, Spain's former government simply shifted the deficit to the regions, which has predictably brought several of the regions close to insolvency. The process is now going into reverse.

 

'Defiant' Spain

Moreover, Spain has the same problem every other government in the EU now faces: its economy is tanking, and tax revenues are sinking right with it.

The below chart via the WSJ shows the situation:

 


 

Spain – the budget gap yawns, while unemployment has reached depression-like levels  (an unemployment rate close to 24%).

 


 

The Wall Street Journal has formulated it more bluntly: 'Spain Defies EU on Deficit':

 

Spain Friday went back on its 2012 budget-reduction commitment to the European Union, highlighting the difficulties of the EU's efforts to tighten control over the finances of its member states. Spanish Prime Minister Mariano Rajoy said his government, which came to power at the end of 2011, will prepare a 2012 budget that aims to reduce its deficit to 5.8% of gross domestic product, far in excess of the 4.4% target his predecessor, José Luis Rodríguez Zapatero, had committed to. Mr. Rajoy said a rapidly deteriorating economic situation and a large 2011 budget overrun made the wide deviation necessary. Earlier this week, the government said Spain's 2011 budget deficit stood at 8.51% of GDP, compared with a target of 6%.

Mr. Rajoy said he hadn't announced Spain's new budget target at a meeting in Brussels Thursday and Friday where EU leaders signed off on new fiscal rules. "This is a sovereign decision made by Spain, that I am announcing now, to you," he said at a press conference.

The Spanish leader, however, said his country is maintaining its commitment of reducing its budget deficit to the 3%-of-GDP limit for EU countries by 2013.”

The new fiscal rules, most of which were agreed to in January, give the European Commission, the EU's executive arm, more power to force governments to adhere to deficit targets. Since Spain has exceeded the 3%-of-GDP limit, the Commission now has considerable discretion whether to seek penalties against the government.

A Commission spokesman suggested Spain shouldn't expect leniency. "Meeting fiscal consolidation targets in vulnerable countries has been and remains one of the cornerstones of EU's comprehensive response to the crisis," said spokesman Amadeu Altafaj Tardio. "It is key to reinforce confidence."

 

(emphasis added)

Again, we ask what are they going to do? The reality of the situation is that 'paper is patient', as the German saying goes. No matter what agreements are signed and what additional powers the EU now has – on paper – to 'punish' recalcitrant member states, in the end there is no truly viable enforcement mechanism. If the threat of penalties were working, it would have already worked with the old 'Growth and Stability Pact', which has so spectacularly failed.

This problem is almost certain to crop up more often as time passes. All is well while the economy booms, egged on by an expansion of credit and money. Alas, things become dicey once a bust is underway. At the moment, only a precious few of the euro area member nations are actually adhering to the deficit and public debt targets of the Maastricht treaty. It is noteworthy in this context that not even Germany has been able to stock to the rules, in spite of being the country that is now pushing for even stricter fiscal limits.

 

Credit Market Charts

Below is our customary collection of charts,  updating the usual suspects: CDS on various sovereign debtors and banks, bond yields, euro basis swaps and a few other charts. Charts and price scales are color coded (readers should keep the different scales in mind when assessing 4-in-1 charts). Prices are as of Friday's close.

As the case of CDS on Greece heads back to ISDA's ruling committee for a renewed determination whether or not a credit event nee3ds to be declared, the CDS have soared even further, closing last week at nearly 24,100 basis points. CDS on Greece look like the macro-trade of the decade so far, in spite of the fact that there is considerable uncertainty whether in the end, they'll be worth anything at all.

There has also been a blip higher in CDS on Spain, no doubt as a result of the above mentioned altercation with the EU over its deficit target. Otherwise the recent downtrends seem largely intact for now.

 


 

5 year CDS on Portugal, Italy, Greece and Spain – click for better resolution.

 


 

5 year CDS on France, Belgium, Ireland and Japan – click for better resolution.

 


 

5 year CDS on Bulgaria, Croatia, Hungary and Austria – click for better resolution.

 


 

5 year CDS on Latvia, Lithuania, Slovenia and Slovakia – click for better resolution.

 


 

5 year CDS on Romania, Poland,  Ukraine and Estonia – click for better resolution.

 


 

5 year CDS on Bahrain, Saudi Arabia, Morocco and Turkey – click for better resolution.

 


 

5 year CDS on Germany, the US and the Markit SovX index of CDS on 19 Western European sovereigns – the SovX continues to hold up, as the sharp increase in CDS on Greece outweighs small declines elsewhere – click for better resolution.

 


 

Three month, one year, three year and five year euro basis swaps – a small dip on Friday. The euro-land banks are not out of the woods with regards to dollar funding problems – click for better resolution.

 


 

Our proprietary unweighted index of 5 year CDS on eight major European banks (BBVA, Banca Monte dei Paschi di Siena, Societe Generale, BNP Paribas, Deutsche Bank, UBS, Intesa Sanpaolo and Unicredito) – a  tad higher on Friday – click for better resolution.

 


 

5 year CDS on two big Austrian banks, Erste Bank and Raiffeisen Bank – click for better resolution.

 


 

10 year government bond yields of Italy, Greece, Portugal and Spain – Greek and Portuguese yields continue to levitate, while Italy has seen a major improvement in long term yields last week – click for better resolution.

 


 

UK gilts, Austria's 10 year government bond yield, Ireland's 9 year government bond yield and the Greek 2 year note. Austria is back in the market's good graces for now – click for better resolution.

 


 

5 year CDS on Australia's 'Big Four' banks – dipping further – click for better resolution.

 


 

 

 

Charts by : Bloomberg, The Wall Street Journal


 
 

Emigrate While You Can... Learn More

 
 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • India: The World’s Fastest Growing Large Economy?
    Popular Narrative India has been the world’s favorite country for the last three years. It is believed to have superseded China as the world’s fastest growing large economy. India is expected to grow at 7.5%. Compare that to the mere 6.3% growth that China has “fallen” to.   India's quarterly annualized GDP growth rate since 2008, according to MOSPI (statistics ministry) - click to enlarge.   The IMF, the World Bank, and the international media have celebrated...
  • Don’t Blame Trump When the World Ends
    Alien Economics There was, indeed, a time when clear thinking and lucid communication via the written word were held in high regard. As far as we can tell, this wonderful epoch concluded in 1936. Everything since has been tortured with varying degrees of gobbledygook.   One should probably not be overly surprised that the abominable statist rag Time Magazine is fulsomely praising Keynes' nigh unreadable tome. We too suspect that this book has actually lowered the planet-wide IQ –...
  • Gold Sector Update – What Stance is Appropriate?
      The Technical Picture - a Comparison of Antecedents We wanted to post an update to our late December post on the gold sector for some time now (see “Gold – Ready to Spring Another Surprise?” for the details). Perhaps it was a good thing that some time has passed, as the current juncture seems particularly interesting. We received quite a few mails from friends and readers recently, expressing concern about the inability of gold stocks to lead, or even confirm strength in gold of...
  • What is the Best Time to Buy Stocks?
      Chasing Entry Points Something similar to the following has probably happened to you at some point: you want to buy a stock on a certain day and in order to time your entry, you start watching how it trades. Alas, the price rises and rises, and your patience begins to wear thin. Shouldn't a correction set in soon and provide you with a more favorable buying opportunity?   Apple-Spotting – a five minute intraday chart showing the action in AAPL on February 1, 2017 - an...
  • Incrementum Advisory Board Meeting, Q1 2017 and Some Additional Reflections
      Looming Currency and Liquidity Problems The quarterly meeting of the Incrementum Advisory Board was held on January 11, approximately one month ago. A download link to a PDF document containing the full transcript including charts an be found at the end of this post. As always, a broad range of topics was discussed; although some time has passed since the meeting, all these issues remain relevant. Our comments below are taking developments that have taken place since then into...
  • Gold and Silver Divergence – Precious Metals Supply and Demand
      Gold and Silver Divergence – Precious Metals Supply and Demand Last week, the prices of the metals went up, with the gold price rising every day and the silver price stalling out after rising 42 cents on Tuesday. The gold-silver ratio went up a bit this week, an unusual occurrence when prices are rising. Everyone knows that the price of silver is supposed to outperform — the way Pavlov’s Dogs know that food comes after the bell. Speculators usually make it...
  • Trump and the Draining of the Swamp
      Swamp Critters BALTIMORE – The Dow is back above the 20,000-point mark. Federal debt, as officially tallied, is up to nearly $20 trillion. The two go together, egging each other on. The Dow is up 20 times since 1980. So is the U.S. national debt. Debt feeds the stock market and the swamp. What’s not up so much is real output, as measured by GDP. It’s up only 6.4 times over the same period. Debt and asset prices have been rising three times as fast as GDP for 36 years! Best...
  • Making America Great Again – How to Judge Policy
      A Simple Formula MIAMI – How do we know if new programs will make the economy better... or worse? Here’s a simple formula:   W = rv (w-w – w-l)   That is, wealth is equal to the real value of win-win exchanges minus the loss from win-lose exchanges. Yes, dear reader, it’s as simple as that. Like a whittler working on a piece of wood, we’ve shaved so much off, there is nothing left of it... except the essential heartwood.   When devising a win-win,...
  • When Trumponomics Meets Abenomics
      Thirty Year Retread What will President Trump and Japanese Prime Minister Shinzo Abe talk about when they meet later today? Will they gab about what fishing holes the big belly bass are biting at? Will they share insider secrets on what watering holes are serving up the stiffest drinks? [ed. note: when we edited this article for Acting Man, the meeting was already underway]   Japan's prime minister Shinzo Abe, a dyed-in-the-wool Keynesian and militarist, meets America's...
  • The Great Wailing
      Regret and Suffering BALTIMORE – Victoribus spolia... So far, the most satisfying thing about the Trump win has been the howls and whines coming from the establishment. Each appointment – some good, some bad from our perspective – has brought forth such heavy lamentations.   Oh no! Alaric the Visigoth is here! Hide the women and children! And don't forget the vestal virgins, if you can find any...   You’d think Washington had been invaded by Goths, now...
  • Receive a One Percent Gift When Buying or Selling a Home
      How to Save Money When Buying or Make More When Selling a Home In your professional capacity and perhaps also in your private life, you may be closely involved with financial and commodity markets. Trading in stocks, bonds or futures is part of your daily routine.  Occasionally you probably have to deal with real estate as well though – if you e.g. want to purchase an apartment or a house, or if own a home you wish to sell.   The people who took this photograph probably want to...
  • Silver Futures Market Assistance – Precious Metals Supply and Demand
      Silver Is Pushed Up Again This week, the prices of the metals moved up on Monday. Then the gold price went sideways for the rest of the week, but the silver price jumped on Friday.   Taking off for real or not? Photo credit: NASA   Is this the rocket ship to $50? Will Trump’s stimulus plan push up the price of silver? Or just push silver speculators to push up the price, at their own expense, again? This will again be a brief Report this week, as we are busy...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com