Monday 5 March 2012

The Spanish Situation

It  is quite interesting to see how quickly the mood music changes in the world markets. Despite some ominous headwinds like Oil staying every pricey - the positive outlook on the world dominates with Markets reaching for highs not seen since the heady days of 2010 when they mistook a dead cat bounce for a recovery.

Indeed, Mario Draghi's money printing has created an even bigger monster of a problem for the Eurozone going forward. Zombie banks have been given a lifeline that will last for years, no white heat of Capitalism to refresh the system and cancel the bad debts. Instead, free money is offered so that the payments can be made to cover the interest on the bad debts. Indeed, the banks are buying up dodgy European Sovereign bonds which high coupon payments to help them offset losses on other parts of their books.

There is no real market for debt; that is dead in the Eurozone. Only the Central bank provides liquidity which makes the Eurozone look remarkably like China in the structure of its capital markets - China still be a communist super-state we should remember.

However, this situation is carefully designed to last for years, the idea being that as the bad loans roll-over or are slowly written off.

Spain, however, is today showing where the crisis will come back though. It's missing its austerity target. Spain too does not fit the mould of the other PIGS, Spain did not run up a large debt - Spain suffered from having interest rates too low which spiked a massive property bubble, the bursting of which has in effect reduced the GDP by 10%.

Worse, a lower exchange rate would soon sell-off all the unwanted property to retiring Northern Europeans; but this can't happen inside the Eurozone.

What can be done then when Spain misses its targets and needs a large bailout for the Germans to sign-off? We will have to wait and see, but for sure the Eurozone crisis will be back at some point this year and the mood of the markets will return to emotional state of late last year.


Budgie said...

I think the markets have crisis-fatigue, and have decided that the eurozone's problems are ongoing so assets are a safer haven than currencies or sovereign bonds. I do not know how long this sentiment will last.

Draghi's sudden Euro 1 trillion injection is a game changer, moving debt from the zombie eurobanks to the ECB. Worse the zombies are apparently buying dodgy sovereigns. And the German taxpayer is being landed with the liabilities, though he has not been told. Even if a catastrophe is avoided the whole mess will all take 20 years to rectify.

Old BE said...

Hopefully the monetisation will give enough oomph to get the European economy going.

Nick Drew said...

I recall when we first met, CU (5 years ago ...) you said Spain would be the one to bring the whole edifice down

CityUnslicker said...

I did ND, I stadn corrected on that - Greece did a far better job of getting things going. And even today Italy is as badly placed as Spain - albeit with a better underlying economy but much worse debt profile.

We first met 7 years've been blogging here long than 5!

Nick Drew said...

hmm, a battle of the failing memories ...

(two bald men fighting over a comb)

Anonymous said...

I knew things were bad last summer when I saw supermarkets selling condoms at 70% off.

Yet, with something like 40% youth unemployment, you still couldn't get an evening meal in a seaside town at less than about 20 euros.


Anonymous said...

Isn't the chap in this picture Ben Bernanke ?