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.
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.
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."
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 happy to report that we have reached our turn-of-the-year funding goal and want to extend a special thank you to all of you who have chipped in. We are very grateful for your support! As a general remark, according to usually well informed circles, exercising the donation button in between funding drives is definitely legal and highly appreciated as well.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
Most read in the last 20 days:
- A Historic Rally in Gold Stocks – and Most Investors Missed It
Buy Low, Sell High? It is an old truism and everybody has surely heard it more than once. If you want to make money in the stock market, you're supposed to buy low and sell high. Simple, right? Successful stock market investing in two simple steps Photo via slideshare.net As Bill Bonner once related, this is how a stock market advisor in Germany explained the process to him: Thirty years ago, at an investment conference, there was a scalawag analyst...
- Gold Stocks Break Out
No Correction Yet Late last week the HUI Index broke out to new highs for the move, and so did the XAU (albeit barely, so it did not really confirm the HUI's breakout as of Friday). Given that gold itself has not yet broken out to a new high for the move, it would normally be expected to do so, as Jordan Roy-Byrne argues here. Photo via Museo del Oro / Bogota The chart below shows the situation as of Friday (HUI, HUI-gold ratio and gold): The HUI and...
- Why is the Stock Market so Strong?
Dismal Earnings, Extreme Valuations The current earnings season hasn't been very good so far. Companies continue to “beat expectations” of course, but this is just a silly game. The stock market's valuation is already between the highest and third highest in history depending on how it is measured. Photo credit: Kjetil Ree Corporate earnings are clearly weakening, and yet, the market keeps climbing. The rally is a bit of a “all of worry” type of...
- Weekly Resistance Levels in the HUI
Options Expiration Ante Portas - Just as a Resistance Level is Reached After we had penned our little missive on the breakout in gold stocks on Monday, it dawned on us that an options expiration takes place this week. Normally, gold stocks decline into the expiration date. Don't hold us to this, but the last time we remember call writers being forced to delta-hedge their way out of trouble in gold and silver stocks right at the end of an expiration week was sometime in 2006. Given...
- Cultural Marxism and the Birth of Modern Thought-Crime
What the Establishment Wants, the Establishment Gets If a person has no philosophical thoughts, certain questions will never cross his mind. As a young man, there were many issues and ideas that never concerned me as they do today. There is one question, however, which has intrigued me for the longest time, and it still fascinates me as intensely as it did back then: Does spirit precede matter or is it the other way around? In other words, does human consciousness create what we...
- China – A Reversal of Urbanization?
Economic and Demographic Changes We have discussed China's debt and malinvestment problems in these pages extensively in the past (most recently we have looked at various efforts to keep the yuan propped up). In a way, China is like the proverbial “watched pot” that never boils though. Its problems are all well known, and we have little doubt that they will increasingly find expression. China's credit bubble is one of the many dangers hanging over the global economy's head, so to...
- State of Fear - Corruption in High Places
Mr. X and his Mysterious Benefactors As the Australian Broadcasting Corporation (ABC) reports, a money-laundering alarm was triggered at AmBank in Malaysia, a bank part-owned by one of Australia's “big four” banks, ANZ. What had triggered the alarm? Money had poured into the personal account of one of the bank's customers, a certain Mr. X, in truly staggering amounts. A recent photograph of Mr. X. Photo credit; Peter Foley / Bloomberg via Getty...
- Why All Central Planning Is Doomed to Fail
Positivist Delusions [ed. note: this article was originally published on March 5 2013 – Bill Bonner was on his way to his ranch in Argentina, so here is a classic from the archives] We’re still thinking about how so many smart people came to believe things that aren’t true. Krugman, Stiglitz, Friedman, Summers, Bernanke, Yellen – all seem to have a simpleton’s view of how the world works. A bunch of famous people with a simpleton view of how the...
- Gold and Negative Interest Rates
The Inflation Illusion We hear more and more talk about the possibility of imposing negative interest rates in the US. In a recent article former Fed chairman Ben Bernanke asks what tools the Fed has left to support the economy and inter alia discusses the use of negative rates. We first have to define what we mean by negative interest rates. For nominal rates it’s simple. When the interest rate charged goes negative we have negative nominal rates. To get the real rate of...
- Russian Aggression Unmasked (Sort Of)
Provocative Fighter Jocks Back in 2014, a Russian jet made headlines when it passed several times close to the USS Donald Cook in the Black Sea. As CBS reported at the time: “A Pentagon spokesperson told CBS Radio that a Russian SU-24 fighter jet made several low altitude, close passes in the vicinity of the USS Donald Cook in international waters of the western Black Sea on April 12. While the jet did not overfly the deck, Col. Steve Warren called the action "provocative and...
- US Economy – Ongoing Distortions
Business under Pressure A recent post by Mish points to the fact that many of the business-related data that have been released in recent months continue to point to growing weakness in many parts of the business sector. We show a few charts illustrating the situation below: A long term chart of total business sales. The recent decline seems congruent with a recession, but many other indicators are not yet confirming a recession - click to enlarge. Wholesale...
- Argentina – The Times, They Are A-Changing
Our Argentine “Ranch Rebellion” Is Over… for Now… BUENOS AIRES, Argentina – Not much action on Wall Street yesterday. The Dow sold off slightly. Gold and oil were up a bit. How about here in Argentina? “Everything has changed. Everything.” Mauricio Macri shortly after his election – indicating that he actually has a plan. Photo credit: Enrique Marcarian / Reuters One of the analysts in our Buenos Aires office explained how the recent...