Spain Slides

By Delusional Economics, a regular blogger at MacroBusiness and a consulting editor at the Macro Investor newsletter. He is horrified at the state of economic commentary in Australia and is determined to cleanse the daily flow of vested interests propaganda to produce a balanced counterpoint

It was an all round horrible night for Spain, starting with a bond auction that went a little wrong:

Spain’s government just sold a bunch of short-term debt this morning. But, demand was way down and borrowing costs were much higher than in an auction for similar debt a month ago.

2-year bonds sold for 5.3%, up from 4.48% last month. 5-year bonds sold for 6.54%, up from 6.19% last month. 7-year bonds sold fo 6.798%, up from 6.19% last month.

After the auction, the Spanish 10 year bond shot up above 7% where it stayed. Although, as I mentioned last week, my expectations are for the Spanish economy to get even worse over the coming year, so higher yields are likely, this particular auction probably wasn’t helped by some pre-bailout vote rhetoric from the Germans:

German deputy finance minister Steffen Kampeter on Thursday reiterated that the Spanish state is liable for the 100 billion euros ($123 billion) in aid that other euro zone countries are injecting into the country’s ailing banking sector and that the aid does not amount to a blank check.

“There is no direct infusion into the Spanish banking system. The European partners have a memorandum of understanding with the state of Spain and money is delivered to the state of Spain and guaranteed by the state,”

Wolfgang Schauble repeated those words in his address to the Bundestag last night. So this just re-affirms my analysis of both the MoU and Eurogroup statement that for all the fanfare this is little more than a standard European bailout with all the usual strings attached.

The master financial assistance facility documentation ( available below – page 70 ) was contained in the reference material given to members of the Bundestag before last night’s vote on the matter. The document gives details of how the facility will function:

To utilise the EFSF Debt Securities received under the Bank Recapitalisation Facility only for the purpose of financing the recapitalisation of financial institutions in Spain by providing financing to FROB to subscribe Bank Capital Instruments issued by the financial institutions specified in the MoU in accordance with this Agreement and the MoU and not to sell, transfer, grant security over or otherwise deal with these EFSF Debt Securities other than in accordance with this Agreement and the MoU provided that prior to funds being disbursed to FROB or contributed to FROB by the Beneficiary Member State, EFSF shall have confirmed that it is satisfied in relation to the legal instruments and documentation between the Beneficiary Member State and FROB setting out the legal basis of such contribution of funds to FROB by the Beneficiary Member State;

And in case you were still in any doubt about who is on the hook if this deal doesn’t go according to plan:

Without prejudice to the terms of Clause 9, if the Beneficiary Member State fails to pay any sum payable under a Facility on its due date, the Beneficiary Member State shall pay in addition default interest on such sum (or, as the case may be, the amount thereof for the time being due and unpaid) to EFSF from the due date to the date of actual payment in full, calculated by reference to successive interest periods (each of such length as EFSF may from time to time select, the first period beginning on the relevant due date and, wherever possible, the length of such period shall be that of one week) at a rate per annum on such overdue amount which is equal to the rate which is 200 basis points per annum over the higher of (a) the EURIBOR rate applicable to the relevant period selected by EFSF and (b) the Interest Rate which would have been payable if the overdue amount had, during the period of non-payment, constituted Financial Assistance under the relevant Facility (if any). So long as the failure to pay continues, such rate shall be refixed in accordance with the provisions of this Clause 6(3) on the last day of each such interest period and unpaid interest under this Clause concerning previous interest periods shall be added to the amount of interest due at the end of each such interest period. The default interest is immediately due and payable.

And in the case of default for any reason:

The Beneficiary Member State shall reimburse all costs, expenses, fees and Loss of Interest incurred and payable by EFSF as a consequence of an early repayment of any Financial Assistance under this Clause at the times and in the manner set out in this Agreement or the applicable Facility Specific Terms. In addition, the Beneficiary Member State shall pay default interest, as provided in Clause 6(3) above, which shall accrue as from the date when the outstanding principal amount in respect of such Financial Assistance has been declared immediately due and payable, until the date of actual payment in full.

The “Beneficiary Member State” is of course the “Kingdom of Spain” or more correctly the Spanish tax payer. So once again you’ve got to ask exactly what was meant by the June 29 EU Summit statement which begins:

We affirm that it is imperative to break the vicious circle between banks and sovereigns

It was also a busy night for voting. Aside from the German parliament, that voted and approved the terms of the Spanish bailout, the Italian parliament also approved the ESM and fiscal compact. Meanwhile in Spain Mariano Rajoy pushed through his austerity package as thousands of people took to the streets in protest:

Tens of thousands of public employees, trade union members and other Spaniards are marching in 80 Spanish cities to protest the latest batch of austerity measures approved by the government.

The ruling conservative Popular Party used its majority in parliament to push through the measures on Thursday. They include a rise in sales taxes and a wage cut for civil servants.

As dusk fell, marchers in Madrid carried Spanish flags bearing black bows for mourning and banners saying, “No to the cuts” and “You have ruined us”.

Late Thursday, the government also published details of the $122.9bn financial assistance agreement between Spain and the Eurogroup aimed at shoring up the country’s struggling banks.

Bundestag Spain

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  1. Maju

    Incidentally in the Spanish media, even the critical one, that auction was seen as “good” because the sale value was 20% under that of the secondary market (risk prime, evaluated daily at stock markets). Commenters actually rushed to downplay the relevance of the risk prime after that, go figure!

    1. Bobito

      I would just like to reaffirm what Maju says. The Spanish media universally reported the bond sale as a positive event.

      To my mind this reflects one of the fundamental aspects of the current crisis (in all of Europe) – people – on the street and in the government – simply do not believe things are as bad as they are – and hide from themselves how bad things are. They still think that in another year or two the situation will take care of itself.

      1. F Libertarians!

        I agree. For the past few years, I have been warning all of my friends, acquaintances, and co-workers about how bad things are and how bad things are going to get when Europe collapses. Unfortunately, no one really cares or understands the sad reality since they all as of now still have jobs (even though their pay and benefits suck). They don’t know that, in the next crisis, they may be the ones next to face the dole. Since I always fall on deaf ears, I don’t even bother saying anything anymore.

    2. Capo Regime

      Indeed. El Pais is when you get down to it a pretty business/conservative publication.

      Recently visited relatives outside madrid near el escorial and relative to U.S. people the spaniards are engaged and pretty awake to reality. One wonders if and when the populace in the U.S. will ever wake up and realise that they are getting screwed. Say what you will, Spanish situational awareness is far greater than among the U.S. population…

      1. Alan H

        Capo: I find your comment surprising. I spend more than a month in Spain each year, My friendships there, built over 31 years, include IT people, bankers, professionals, laborers, and senior political types. I have found them to be completely deluded for three years about the debts of the township, autonomous region, and government. They completely misunderstand Germany and its finances, government. I love these people but they keep grasping at straws, think the benefits are affordable, and think Spain is the subject of foreign plots rather than over-spending and domestic corruption. They built the houses before the factories and that does not work. They made ugly condos available to every Spaniard near the beaches, which has devalued the tourist sector permanently, though it generated vast township bribes and one-time fees.

        1. Capo Regime

          alan, agree. Such was the case over the course of the bubble. They are awake now though–see protests in cities, small towns and even fire fighters baring all. Yes the were suckered in by the classic something for nothing but now wide awake from the hokum dreams. Key point I did not make clearly–folks in U.S. not waking up!

        2. Eric

          not surprisingly, Krugman is a kind of hero in Spain. They really (want to) believe more debt funded spending will save Spain.

          1. Nathanael

            Money-printing, transferred directly to the poor, would save Spain; Spain is *not* actually particularly short on factories.

            But money-printing has been ruled out by the banker elites

  2. psychohistorian

    This is more like inspecting the entrails of a Shock Doctrine event……in slow motion.

    And all the while the question of who all that debt is owed to, nor their relative right to its payment, is never discussed. Why not?

    1. Austin F

      Why not…? Because Spain’s ruling elite are now running what Marx once waggishly referred to as a ‘pro-slavery rebellion.’ After all, if the working class simply stopped insisting on housing, wages, legal rights and food then wouldn’t all be well, and the crisis abated? Unfotunately there will always be those vulgar atheists whose lack of patriotism and absence of religous sentiment leads them to demand a full stomach as well as fair pay for a days work! The scandal, the outrage, the shame!

  3. Max424

    “Tens of thousands of public employees, trade union members and other Spaniards are marching …”

    Tens of thousands? Mostly unionistas and other leftist types? That’s a manageable number and demographic. No cause for concern. Unless it’s bullshit.

    What if the true number is hundreds of thousands? That would mean there are more than just easily ignored commies in the streets.

    From the article.

    “The cabinet on Thursday approved a parliamentary motion categorizing “urban violence” as a specific crime, which could empower police to detain suspects preventively before being charged with the offence.”

    Spain, how sad. Going the way of the United States. Next thing you know, formerly democratic Spain will be assassinating their undesirables.

    1. Capo Regime

      At least in Spain they are marching. We may get a waddle or two or a nice formation that breaks up as the batteries on the scootter chairs run out in the U.S. there will be no marhes in the U.S. This is a sort of tell. Of what–I do not know…..But at least they are not sitting on their butt munching on prozac and waiting to be saved by Obama or Romney.

    2. Nathanael

      In Spain, they recognize that the current Rajoy government follows in the footsteps of Franco (who wasn’t that long ago), and will view its fascist laws through that lens.

      Major difference: the current Rajoy government is less populist than Franco.

  4. Hugh

    What is important to recognize here is that the Germans, even after they loaded the last Eurogroup agreement with poison pills, reneged on the central new tenet of that agreement the severing of the liability of the sovereign for the debts of the banks. When the Germans break agreements, as here or when they violate the budget spending caps they accuse everyone else of breaching, no one bats an eye, but when any other country does, especially those of the Southern tier, it becomes a question of national character, or rather the lack of it. But if the Germans can so easily break their word and bond, and if a populist government takes hold in any of these other countries, unlikely as that now seems, wouldn’t these actions by German leaders make defaulting on debt owed principally to the Germans that much easier? I mean if the Germans renege, why can’t any other European sovereign?

    Note too how the payment clauses cited only reference the EFSF. That’s because the Germans still haven’t approved the ESM. If you can’t see a pattern of bad faith on the part of the German leadership, it can only be because you aren’t looking. And no, this is not a case of German bashing. The German 1% are setting up the German 99% as much as they are the Spanish 99%.

    And if we continue with the 1% versus 99% perspective, what we are seeing in Europe is a putsch by the Euro 1% effected by the European political and financial elites they own. Short of revolution, there is simply no dynamic that can short circuit the kleptocratic process that now has Europe (and the other great economic blocks) in its grip.

    1. rotter

      In Europe at this point Revolution would be the people of the member states of the EU taking control of thier own govts again and exiting the union and going back onto thier national currencies. That appears to be the only possible just way forward. The EU machinery, obviously, only exists as an extractive/enforcement engine for the international oligarchy. Its an economic abbatoir, or human strip mining operation. Any honset beneficial role it might have had is completely hypothetical and subsumed under the actual daily funtions of banking and political racketeering. In retrospect it was probably always a bad idea, its completely unsalvageable now.

      1. Jessica

        The EU has the predatory side, yes.
        But it has another side. There are many Europeans who live lives now that can only be described as European. Working in a different European country from where they grew up. With friends and lovers and spouses also from another country. Such Europeans are far from the majority but they are often the ones most aware of things.
        And they like being European and see being forced to contain their lives within one nation as confining and suffocating.
        They would not miss all the pain the Euro has created but they will not want the EU itself dismantled.
        I am not saying this strata is nearly powerful enough to decide the direction of things, but having them with or against any attempt to dismantle the Euro will make a large difference in the ability of some new force to coalesce to offer an alternative to the current elite.

    2. Jim

      Hugh, what’s worse, the German pols breaking their promise to the Spanish, or the German pols breaking their promise to the German voter with respect to Germany never backstopping the peripher.

      Personally, until the German voter explicilty approves it via a referendum, I say that the German state should not backstop the periphery.

    3. Eric

      you’re comparing apples and oranges
      when the Germans broke the rules, it didn’t cost the Southern taxpayers anything. Add to this that the Southern countries didn’t want the rules in the first place so they didn’t care.
      But now the Southern countries are in trouble, and continue to break the rules, they want Germany and other Northern states to share in their debt. Not surprisingly, German taxpayers say no thank you.

      1. Maju

        That’s not true: when Germany (the state, not “Germans”: the 100 million people one by one) broke the rules it gave them (and France, who also broke them) undue advantage. Also by not paying the fine they set horrible example.

        Anyhow, while I really hate Spain for so many reasosn, you must admit that Spain has been one of the best performers with the Eurozone rules… until right now. Italy and Greece are different matters altogether, with a long history of budgetary deficits, but Spain is a case similar to Ireland or Iceland (but has “chosen” the suicidal and subservient path of the latter instead of keeping some control and dignity, like Iceland did).

        Spain is also (warning for travelers) a case quite similar in some aspects to the USA and Great Britain, whose economic model imitated in extremist ways, feeding a real state bubble and bankster deregulation and impunity… There are some differences but also many similitudes, beware!

        But what Spain is not is a case of systemic budgetary deficit, like Greece or Italy. Not at all: it used to be an exemplary case instead.

      2. Hugh

        Again the real game here is that Northern governments are trying to recapitalize their own banks and their 1% bondholders for their bad loans and sticking Southern governments and Southern taxpayers with the bill.

        Feed that back into your model of when Germany breaks the rules it hurts no one. What you espouse is nothing more than German exceptionalism. When the German government breaks the rules, it’s OK, and even when it isn’t, you simply make up a justification to make it OK.

        1. Eric

          I didn’t claim it was ok to break the rules, it clearly was a mistake. I only said Germany didn’t expect Southern countries to share in its debts.
          But the fight is now about who pays the bill of the debt binge. Sure, Northern banks are exposed to Southern debt, but Southern banks even more.
          Northern taxpayers are not against some kind of controlled debt restructuring of banks, as they understand the banks took too much risk. I am stating the obvious when I say that bailing out banks is not popular with voters.
          But reforming the banks and debt restructuring of failed banks is not what governments in Spain and Italy want most. Spain has been dragging it’s feet with restructuring it’s banks for years now. What Spain and Italy want is the ECB buying their debt or debt pooling with the Northern countries (eurobonds).
          Northern taxpayers do not want this, for one because this means they will have to make transfer payments to the South forever. It’s pointless to talk about who is most to blame, the key issue is that the North and South have different views on how to run the eurozone.

          1. Maju

            I think that in the Spanish and Irish cases, the clear solution was in the line of Iceland: letting the banks fall and only nationalizing them after due bankruptcy in order to minimize the impact for the small saver and the like.

            However this would have triggered a domino effect in global finances. So for saving the golbal and specially European finances, Irish citizens (first) and Spanish citizens (later) are being punished instead of supported by THEIR central bank.

            Something is just ALL KINDS OF WRONG with this.

  5. Maju

    Incidentally today the main Spanish stock index, the IBEX, fell more than 5%, the biggest fall since 2010, with not a single company performing well (the best figure I spotted was under -3%), while the secondary debt market reached levels that approach those of Ireland (and clearly surpass Portugal already).

    This, I fear, can spiral pretty fast into disaster, not just for Spain (of course) but for all Europe and the whole World. If Spain and Italy fall (and they have effectivelly fallen already most likely). The GDP of Spain is similar to that of Canada or Russia, while Italy is more like India or Brazil – and the implications for all EU are brutal in any case.

    I believe that Germany will have to repent of blocking the only possible solution, which was that the European Central Bank acted as a normal central bank, buying debt and competitively devaluing the euro. Even if they would yield now, it’s probably too late already.

    1. Maju

      Correction: not above Portugal’s risk prime, not at all. I overheard that on TV but it’s not true now I check.

      But I forgot to comment that the scandalously corrupt Valencian Autonomous Community has asked Madrid for a bail out… because it can’t face debt obligations etsimated in €3.4 billion, including €500 million to pharmacies.

      The exact figure of the collapse of the IBEX index was 5.82% just today.

    2. Jim

      Maju, there is no United States of Europe. Therefore, the ECB can not act as a normal Central Bank.

      Why should the German voter, who was EXPLICITLY promised that his tax dollars would never backstop other countries, acquiesce to the ECB becoming a lender of last resort?

      Moreover, Maju, why not admit the obvious – that the vision you are promoting must inevitably lead to a United States of Europe, comprised of 17 states, headquarted in Berlin with German as the official language. Why not admit that, with a US of Europe, six years from today, the US of Europe soccer team will be comprised of players from Germany playing alongside Spaniards and Portuguese, and that you, as a Spaniard, will no longer have a “national” team?

      You can’t have it both ways. Either you want (i) a US of Europe, with everything it entails, or (ii) the Dissolution of the Eurozone.

      1. Hugh

        The real question is why should Spanish and German 99%s bail out Spanish and German 1%s. That is what this is all about.

        Also while at the national level, the euro operates as a de facto gold standard, on the European level, it is a fiat currency. The ECB if it were properly constituted and not a tool of European kleptocrats could backstop all comers without issuing new debt. It doesn’t because the current system is much more amenable to the looters, that is the 1%s.

      2. Maju

        Of course there is no “United States of Europe”, nor there is a “Union of Soviet Socialist Republics of Europe” yet either.

        But the real matter is what did God create the central banks for? I could not care less if there is a USE a USSRE or a People’s Republic of E. What I care is that the BCE lends to the same banks at 1% interest, and then those banks buy Spanish debt at 5%, what is an almost automatic benefit.

        I also want that kind of treatment as private citizen (citizen of the European Union first and foremost) like banksters have: I also want cheap credit so I can buy Spanish or Irish debt and make huge profits out of it just because. And if the “investment” fails, then I also want the same treatment as the banks: I want my bail out.

        The problem is the united states of banksters, European or not. Sharpen the pitchforks!

        “the vision you are promoting must inevitably lead to a United States of Europe, comprised of 17 states, headquarted in Berlin with German as the official language”.

        I am 100% for European union not of 17 but of 200+ states (chop-chop!). However German has the same chance of becoming single official language as Albanian. Let’s be realistic: nobody cares about German language, English rules (and would it be replaced it’d be by Chinese or Arabic: the European Age is over).

        “You can’t have it both ways”.

        I want a communist Europe, let’s be clear. But meanwhile, within Capitalist conditions, I want that the public services are not dismantled overnight while some hysterical cynic tory speculator and minister cries us a river of “ther is no money”. And that’s why God created central banks for.

        What God? No God, of course… just a metaphor.

    3. Nathanael

      Maju, we’re replaying the Great Depression. 2008 was merely 1929. So this is 1933 without FDR.

      Consider what was happening to countries in Europe in 1933 — in the broad scheme of things. People were ready for ANY alternative to the incompetent and abusive governments they had… but most of them couldn’t find a decent alternative.

      1. Maju

        We are not anymore in the Fordist socio-economic paradigm of that time but in a very different Toyotist one in which all “leaders” are nothing but fools or, at best, able administrators. Stalins, Hitlers, Mussolinis, De Gaulles… are not anymore possible. Similarly classical fascism is not possible either.

        Also I doubt we are in a repetition of the Great Depression of the 1930s. At the very least we are there but what really compares well is the long deep depression of the late 18th century, when the Ancien Régime met its limits and simply collapsed.

        On that time the USA was born but the more critical process happening then was the French Revolution: the revolution by definition (only the Russian revolution really compares).

        Just like now France faced a major problem: the state needed money desperately, the commoners were squeezed to the last drop and the oligarchs were almost exempt from paying taxes. Some months later royal and aristocratic heads were rolling one after the other. A new era had begun.

        I rather expect bloody revolutions than fascist coups, sincerely. There is no viable project within the capitalism paradigm anymore.

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