Tuesday 24 July 2012

Spain considering the endgame?

If we remember all the way back to last year, we will find that a European crisis is often very likely to happen in August. Policymakers are sat on a beach somewhere and there is no one to mind the till. Similarly markets have low volumes so any high volume days have a disproportionate effect.

August is a dangerous time, 1914 and 1939 are not propitious either.

And now we have the end game of the euro-crisis, at last, because wow have the politicians managed to string this out and waste billions, maybe even trillions of euro's in the process.

With Germany backing out of its agreement to bail-out Spanish banks, the price of their 10yr bonds has collapsed to well beyond crisis levels.

At 7.5% to borrow, the Spanish are not going to ever balance their budget. No Country could at that level for the kinds of amounts Spain needs. Add that to 24% unemployment and its time for something serious to be done.  Time to really consider leaving the eurozone.

The only decisions really needs to be around timing and stability. Clearly, all the Spanish banks will need recapitalisation and it will be in the interests of the IMF and Eurozone to make sure this happens, also a new currency needs to be stabilised. the traditional way would be a dollar peg and that maybe something to consider - although the argument for letting the peso find its natural spot is a strong one.

What will be interesting over the next few weeks is watching Germany lose its power. From bully to co-operative as the Spain and then Greece decide to take a nuclear option - this means so much pain for Germany and top avoid the worst effects they will have to co-operate.

How all this works out in the political system of the EU is just too hard to forecast. But without Quantitative Easing from the ECB there does not seem a way back for Spain.


Blue Eyes said...

Surely there comes a time (now?!, a year ago?!) when Germany decides that a bit of inflation is better than economic Armageddon?

Barnacle Bill said...

I think the Germans, especially Frau Austerity Merkel, have they Weimar Republic blinkers on.

The fear of a little inflation becoming hyperinflation is too deeply seated in the German makeup for them to consider it before it's too late.

Meanwhile Madrid burns ...

Blue Eyes said...

BB you might be right (I have no particular insight into the German elite's consensus view) but *surely* you don't have to have a crystal ball to realise that without some respite the Spanish and then Italian economies will collapse entirely followed swiftly by a full-blown depression in the rest of Europe and possibly the world. So the Germans might miss out on the inflation but they might not avoid the political slump that inevitably follows the economic one.

Inflation itself did not cause Hitler...

Anonymous said...

"August is a dangerous time, 1914 and 1939 are not propitious either."

Be fair. Back in the day it was all about declaring war after the harvest was in.

Burny said...

Anon: Harvest is already in. ours was washed away and the Eurozone heatwave let them get theirs in early.

Might as well declare Armageddon now.

Bill Quango MP said...

Judging by previous euro calamities and the euro leader's responses I expect we are still several years away from a real end game crisis.

Still plenty of billions and billions of Euros to paper over the cracks with.

The larger cracks can be stuffed with eurobonds when the time comes.

We'll probably have a Labour government by the time our EU crisis response needs deciding on.

Anonymous said...

If it was just currency there would be no problem for Spain as all the notes and coins have Espana on them so they could work within a sort of sterling area but as the banks are involved there is no differentiation but could say holding a balance in a Spanish bank could be devalued but tied to the German Euro

Jim said...

The Germans will be OK in a depression. They still make stuff, real stuff that people need to keep the lights on and the water flowing and the food processed and the trains running. They are engineers. Yes, it would be tough for them, but not as tough as living in countries that make nothing and have to import all the things that make modern life possible/more bearable. They make things needed the world over, not just in Europe.

Put it this way, in a full blown slump I'd rather be German than Spanish, or Greek or Portugese or French or Italian or British for that matter.

Sebastian Weetabix said...

The Germans will not be ok in a depression because the market for their goods will shrink like hell. That's the thing about a depression, it f***s everyone.

Hitler didn't come to power because of hyperinflation. Quite the opposite - he came to power because of the brutal debt deflation cycle Germany experienced from ~1930 onwards, leading to nearly 50% unemployment.

Anonymous said...

Finally, at long last, perhaps we'll see banksters in jail?

Budgie said...

Here we are 18 months after some eurosceptics started saying the euro would bust "imminently", still with the euro.

People in the eurozone do not see it as we do. They see corrupt politicians, and thieving bankers just like in the hated (yes, they really do hate it) anglo-saxon free for all. This is a problem but nothing to do do with their new currency, they think.

Hence they approach it in a different way: the euro is a given; now, how do we solve the debt crisis? Bailouts are not seen as can kicking, and the euro will be with us for some years yet.

andrew said...

What BQ says.
Many - not just here - have been saying 'it will all be over really soon' for a few years now.
I am sure it will be over at some point, just not when you think.

On R4, it was said that many germans want Greece gone because they cannot be trusted, but they have a lot of faith in Spain.

So I predict a greek but not spanish exit.

CityUnslicker said...

sooner of later the naysayers will be right. I agree they have strung things out, at massive cost, beyond what I thought they could do. But abandoning the bailout of Spain is a real signal from Germany.

7.5% is unsustainable - its print or death time.

Anonymous said...

print or death?

But printing is surely just default by devaluation?
Is it not better to do a partial default and restructuring than use money printing to keep the current unsustainable system going even longer?

hovis said...

Budgie, correct it is seen differently by many inside the EZ, but not all. The Euro will destry contries and not just Greece before it goes, that said as naysayer I still expect to be right, just not sure when, so i'm not betting on it :-)

Andrew: The Germans like the EZ leadership like to beleive tehir own propaganda, Spain will go also, if not first they do not have the inferiority complex or threatening neighbours the Greeks have.

Anonymous said...

I agree, money printing is necessary to avoid the Krugman "balance sheet recession" being suffered in Spain and Greece. They are going to realise this soon when they click that Britain is doing rather better than they are despite being in a worse position on paper. If they unite they can take control of money creation in the EU and Germany will either have to leave or accept its loss of power within the EU and eat Latin dirt.

Meanwhile Germany will find its mercantilist tendencies curtailed. The citizens of the world are going to find it increasingly difficult to justify shelling out for over-priced German cars when they can either hold out for a few years before buying or find a cheaper new car option. Even if they like the idea of buying a BMW, they may find it difficult to get credit.

I strongly believe that the tables will be turned on Germany by the end of this year. Seems inevitable. The Latin countries will be forced to ignore Germany and force the ECB to print money (or just find a way to do so without the ECB involved). The German economy will be in the toilet and have its own debt problems, mostly from corporate debt.

Hannah Golanka said...

In a video Q&A with The Financialist, Credit Suisse Strategist Jonathan Wilmot agrees that more uncertainty is ahead, and the debt crisis is not about to end. He says the solution - if there is one - lies with the ECB. Watch: http://www.thefinancialist.com/ecb-holds-key-to-european-debt-fix-jonathan-wilmot-credit-suisse/