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


 
 

Dear readers, we are greatly honored by your readership and sincerely hope that our special mixture of entertainment and education continues to add a little value to your lives. As you can probably guess, our blog is not really a giant commercial enterprise, for that its readership is too exclusive and small. Nevertheless, running it involves not only time and effort, but also monetary costs. We are therefore starting another fundraising drive. You can help us reach our funding goal by either donating directly via Paypal or via Bitcoin.

 

Thank you for your support!

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

 
 

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • HelloThe Stock Market in Trouble - How Bad Can it Get?
      A Look at the Broader Market's Internals We have previously discussed the stock market's deteriorating internals, and in light of recent market weakness want to take a brief look at the broader market in the form if the NYSE Index (NYA). First it has to be noted that a majority of the stocks in the NYA are already in bearish trends. The chart below shows the NYA and the percentage of stocks above their 200 day and 50 day moving averages, which is 39.16% and 33.77% respectively. When...
  • mineGold Stocks at an Interesting Juncture
      A Fascinating Parallel We have recently discussed the sentiment and positioning backdrop in gold on two separate occasion, as it has once again reached rarely encountered extremes (see “Gold Panic” and “Gold and the Grave Dancers” for details).   Image via bullionstreet.com   Not much has changed on that front, except for the fact that small speculators have increased their net short position in COMEX gold futures to the highest level in nearly three decades last...
  • drop-water-gold-power-40854578Gold Stocks: A Playable Rally May Be Beginning as Junk Bonds Crater
      Gold Stocks Jump and Retrace 50% Last week we discussed the potential for a rally in the gold sector (see: “Gold Stocks at an Interesting Juncture” for details). Gold stocks jumped early in the week and then retraced almost precisely 50% of the initial move higher, in the process closing a gap that was left behind on Wednesday.   Image credit: dreamstime.com   Interestingly, for the first time in many months, there were three up days in a row prior to the...
  • gold rush copyA new Multi-Year High in Buying by Gold Sector Insiders
      Latest Data from INK Show A Huge Surge in Insider Buying As our friends at INK Research in Canada have pointed out to us, insiders at gold companies have made use of the recent sell-off in the sector to load up on shares to an extent not seen in many years.   Image source: bidness etc   The INK insider buy/sell indicator for gold stocks has peaked just one day after China's initial devaluation announcement at nearly 1,200%:   INK's gold insider sentiment...
  • 110570_Panem-et-circensesThe Trump Phenomenon
      Surprising Success We were wondering a while if there was anything we could say about the highly entertaining real estate mogul who has successfully hijacked the Republican nomination process – apart from the fact that he is sporting a haircut that looks a bit like a helicopter landing pad, endowing him with instant recognizability:   Teflon-Donald Trump, the unlikely front-runner with the interesting haircut Photo credit: Dominick Reuter / Reuters   Of course...
  • oil_3136994bIs Crude Oil Close to a Low?
      Panicky Headlines Everybody knows that there is a never-ending glut in crude oil, right? Who knew about it a year ago? Not everybody, that much is certain. The problem with what everybody knows is of course that it is often not worth knowing.   Photo credit: Alamy   Today a friend pointed two articles out to us that have been published yesterday and today. Their headlines say it all. The Wall Street Journal writes “No End in Sight for Oil Glut” - and proceeds to...
  • panic-buttonThe Stock Market's Panic Potential
      The Odds Favor a “Warning Shot” Scenario - but there is a “But” As regular readers have probably noticed, we have upped the frequency of our “caution is advised” posts on the stock market in recent weeks in light of the market's increasingly deteriorating internals. Although one never knows when exactly such warning signs may begin to matter, it is always a good bet that they eventually will. Last week the market delivered a little wake-up call to the hitherto rather...
  • USDCNY(Daily)The Donald and China, or The Fallacy of Protectionism
      Not Every Populist Topic is Worth Exploiting For reasons that will forever remain a mystery to us, mercantilism and protectionism actually hold enormous popular appeal. The best explanation we can come up with for this phenomenon is that the support for such policies is based on a mixture of economic ignorance and relentless propaganda by vested interests over the past, say, four centuries. Still, it is almost comical that people are so vociferously clamoring for policies that can actually...
  • rotoThe Economy is in Liquidation Mode
      Capital Consumption If you’re an American over a certain age, you remember roller skating rinks (I have no idea if it caught on in other countries). This industry boomed in the 1970’s disco era. However, by the mid 1980’s, the fad was fading. Imagine running a rink company at the end of the craze. You know it is not going to survive for long. How do you operate your business?   The birthplace of roller disco turned out to be edible, sort of Photo via...
  • gold closeupMonetary Metals Supply and Demand Report 9 August, 2015
      Withdrawing the Gold Bid Last week, we left off with this:   “Something is happening with gold…”   It began in Dec 2008. To understand it, it is necessary to understand two principles. The first is that gold is money and the dollar is credit, which currently has nontrivial value. A dollar is worth 28.4mg gold. To understand the second, let’s look at how markets work at the mechanical level.   An assortment of well-known bullion coins and bars from all...

Support Acting Man

Archive

Own physical gold and silver outside a bank

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