Friday, September 28, 2012


I have mentioned the dire situation in Spain, which I have visited frequently this year, in a number of my Blogs and interviews.
The complete disconnect between Prime Minister Rajoy’s and his finance minister’s view of the situation and the reality, is tragicomic at best and outright deception at worst.
In the last couple of days we have been told yet again that Spain is so much on top of taking austerity measures that all will now be well. Spanish bond yields even dropped long enough for smart investors to exit and buy Bunds.
Perhaps it is time to infuse this EU/ECB/Spanish mutual admiration society with something rather tedious called the facts.
Egan Jones (“EJ”) a small rating agency downgrades Spain to CC from CC+ (deep junk), with outlook of C. Unlike its larger competitors, Moody’s and S&P, little EJ is not owned by a large multinational, who depend on their revenues from finance sector advertising and related services. Yes, EJ is truly independent and is financed by subscriptions from paying clients, who want the truth and value for money.
EJ’s justification for the downgrade, my comments in (brackets), can be summarized as follows:
Spain on a national level has 25% unemployment (Regionally up to 50%).
Their estimated 2012 decline of GDP of 1.7% (as per Economy minister).
Two regions, Catalonia, Valencia and other regions are seeking $20bn of aid (Catalonia is threatening a vote to secede which has brought a strong menace from the powerful Spanish military).
The flight of deposits from Spanish banks, in particular to Germany and Switzerland, are massive, (and have required equally massive liquidity re-injections from the ECB, USD 332 Billion end June, and rising, to maintain a facade of liquidity).
Social security funds are being robbed to provide cash for current payments (at one time this was only in America and of course Argentina).
From 2008 to 2011, Spain’s debt jumped from EUR 436bn to EUR 735bn. At the same time, GDP declined from EUR 1.09 trillion to EUR 1.07 trillion.
Social benefits are a problem. Over last 3 years, government revenues have increased by only EUR 3bn, while payouts have risen by EUR 45bn. (unemployment benefits etc. definitely not reversible in the short/medium term, unless the government wants anarchy in the streets).
Spain is short about EUR 50bn per year for social payments, EUR 20bn for interest (and rising) and an additional 20bn for other items. Hence the EUR 90bn per annum increase in debt (none of these items is reversible in today’s situation; in fact it will probably continue to get worse).
Tax increases have been announced (further reducing disposable income for job creation and growth).
Spain’s two largest banks have assets exceeding the country’s GDP (much of which is linked to real estate which in a desperate state nationally).
Additional bank loan losses of up to EUR 260bn (however we were told a few short weeks ago that EUR 100 Billion bail out direct to banks was already more than sufficient. My view is bank losses could be even higher).
It is likely that Senior debt holders of weak banks will be forced to take losses; there might be some sharing of losses among all banks
Spain will inevitably be faced with additional payments to support its banking sector and weak provinces, (or risk national disintegration).
In the light of all this and the fact that Spain, before raiding its social security fund for cash had only EUR 20 Billion in liquidity, equivalent to one week’s GDP, with bond maturities to pay in October for approximately twice that amount, we can clearly see that everything is fully under control.
 In order to illustrate the degree of mendacity of the political and financial elites please find below a summary of the true situation in Spain prepared based on figures prepared  some weeks ago by ZeroHedge:

One can pretend that Spain's officially reported debt/GDP ratio is 68.50%, or one can do a full breakdown of all liabilities, including contingent, and add the €100 billion bailout to the total, and get the following rather terrifying ratio: 146.6%

In summary the admitted sovereign debt is USD 732 Billion, to which should be added Spanish regional debt and state guaranteed debt bringing us to USD 1,090 Billion.

Thereafter we include monies owed to the ECB  of USD 332 Billion, currently increasing at USD 50 Billion per month approximately, as funds flood out of Spain, and a further USD 311 Billion of guarantees and liabilities to European institutions.

Adding this together we reach the staggering number of USD 1,858 Billion, or 146.6% of the GDP of USD 1,178 Billion

Even the mainstream media, traditionally responsible for “putting lipstick on the pig” is admitting that the austerity measures are offset by rising interest costs. With a true Debt/GDP of 146.6% how can we possibly blame the investors for wanting a risk adjusted return.

The only possible way out of this situation, assuming Spain stays in the EUR zone, is massive  buying of worthless Spanish bonds by the ECB, which having already bankrupted itself by giving colossal cash advances to the Spanish insolvent banks, which it can never recover,  can now compound the felony and buy Spanish Government bonds.

All this of course will not fix the structural problem of the EUR 100 Billion annual deficit going forward.

 As Hemingway said, when writing during the Spanish civil war, ”no man is an island, each man’s death diminishes me”. I am sure even is his darkest moments he never envisaged the death of a whole nation.

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