SPAIN GOING DOWN THE DRAIN
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.
