Spain: Problem Solved. Post author By Stephen Kinsella Post date June 11, 2012 Ahem. Categories In Uncategorized 87 Comments on Spain: Problem Solved. By Stephen Kinsella Senior Lecturer in Economics at the University of Limerick. View Archive → ← Ireland and Spain: Twins? → The possible shape of a second bailout for Ireland 87 replies on “Spain: Problem Solved.” Spain has succeeded in drawing a red line, albeit a faint red line (unlike Eichengreen’s bright red line) between the sovereign and the banks. Spain is in a far better position when the euro hits the fan, as it will surely do. Spain can simply brighten up the red line with a fresh coat of paint. The euro of course is a lot closer to the fan today than it was on Friday. Personally I consider that a good thing. The sooner the coming catharsis arrives the better it will be for the younger generation. That was quick. Bank debt wins over sov debt every time. @Joseph Ryan, I fear that faint red line you see may be a symptom of rising blood-pressure. AFAICT no actual line exists. Like Ireland, Spain can’t avoid being dragged down by its banks as long as they depend on the ECB as LOLR. What an amazing success for the German led crusade against Keynesian economics and inflation. (Krugman is already on this.) There is a plan at Leinster house for escaping the collapse of the Euro, right? Right? Perhaps the correct comparison is with what the yield would have been without the €100bn funding? Perhaps the correct comparison is with what the yield would have been without the €100bn funding? You’d have to ask the people buying Spanish government bonds, but my guess is they’ll be a lot less likely to put money up now that the banks and the ECB have jumped the queue ahead of them. Ciaran O hagan from Soc gen posted this 2 years ago http://www.irisheconomy.ie/index.php/2010/08/25/sp-downgrade-irish-debt-put-on-negative-watch/#comment-67542 http://v3.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_127080 a Moody’s report on European sovereigns. The key warning is: “Those countries that are facing persistently strong deleveraging could experience renewed negative pressure on their ratings in the future, depending on how long the process lasts” (p5). The glum views are based in part on pages 6/7: “Fiscal consolidation – the impact on growth is likely to be negative. Of greater importance from a rating agency perspective is whether the fiscal stance will continue to be a drag on economic growth for years to come”. And Moody’s argues that it will, especially as professional advice is being ignored. Quick and full adjustments to lower levels of income and wealth are needed (page 8). But governments are dragging their feet I think it sums up the last 2 years in the piigsty quite well . All the Spaniards have to do is go back to 1926 wage levels and the banks will be grand. On a technical note, beware thesse are ‘bid yields’ so if and when liquidity in the market reduces and spreads widen the bid yield will spike higher than the middle price would imply @OMF Really? I suspect the yield would be considerably higher now if Spain was expected to raise €60bn-€100bn in private debt markets this year to recapitalize its banks. I wonder how good and up to date the loan data of the Spanish banks is, especially the cajas and those other than the big 2 . If it’s anything like the estimates AIB and co had the Spanish sov is on for a lot more than 100b. n @John Maynard Keynes Perhaps the correct comparison is with what the yield would have been without the €100bn funding? Let me help you out there: http://www.bloomberg.com/quote/GSPG10YR:IND The yields were lower on Friday before the bailout was announced. The day is not over yet but no one is convinced that the failed policies advocated by Germany and the ECB have been changed. Looking at the chart it is hard not to view the narrative as one where investors gradually come to accept that the German solution for the Eurozone is a decade long period of character building recession and the ECBs sole goal is saving as much of the core banking system as it can. The states in EU enforced bail outs of one kind or another are to cannibalized by their own banks until Germany and client states have divested themselves of as much exposure to the periphery as they possibly can. I suspect the yield would be considerably higher now if Spain was expected to raise €60bn-€100bn in private debt markets this year to recapitalize its banks. I suspect you haven’t a clue what you’re talking about. Two months after renewing the bank guarantee in 2010, Ireland was in an EU/IMF bailout programme. Taking on the debts of national banks is a kiss of death for the sovereign. Spain will be locked out of the bond market within 6 months. @OMF It is because of people like you this blog is going downhill fast. Stick to the topic and leave your abuse at home If Spain had announced today that it would have to raise €100bn in markets today the yield would 10%+. My point is that Spain is already locked out of the bond market, so judging the €100bn against today’s movement in the bond yield is a flawed analysis. @Shay “until Germany and client states have divested themselves of as much exposure to the periphery as they possibly can” You are spot on. All I see happening in financial services companies (not just banks) from core countries is getting shot of exposure to peripheral countries as fast as they possibly can (and hey, if you can give Spanish banks a load of cheap 1% LTRO to take some Spanish sovereign off your hands then who’s gonna argue with that?). I like your phrase: “character building recession ” – can I steal it and use it sometime? It is because of people like you this blog is going downhill fast. Stick to the topic and leave your abuse at home Abuse? Calling nonsense nonsense is not abuse. It is a necessary action in any rational discourse. If ridiculous conclusions are tolerated for the sake of politeness, the whole discourse descends into farce, with poor points driving out the good. I make no apologies for the defence of reasoned debate. If Spain had announced today that it would have to raise €100bn in markets today the yield would 10%+. My point is that Spain is already locked out of the bond market, so judging the €100bn against today’s movement in the bond yield is a flawed analysis. This is more of it. When was Spain locked out of the bond markets? Last Thursday? When they sold over €2 billion in bonds? Did it happen between then and Saturday? Did you get a memo the rest of us didn’t? There are people here with actually informed and rational opinions. Some I agree with, some I don’t. But if you’re going to come in here waving around figures and conclusions that you’ve plucked from the airs over your head, no-one is obliged to suffer them without complaint. 1. Spain was not locked out of the bond markets 2. Spain’s bond interest rates were lower _before_ they decided to back their banks with this deal. 3. Spain’s bond yields are now rising as “the markets” digest and analyse the deal for what it is. Based on these observations, and past evidence from Ireland, I conclude that this decision by Spain to take banking debts onto the state books will be the decision that drives Spain out of the bond market and into an IMF programme. In particular, I assert that buyers of Spanish bonds will be adverse to their debt being made junior to that of banks and the ECB as has happened in Ireland, and as a result will refuse to purchase any more such. I further conjecture, based on evidence from Iceland, that had Spain elected instead to simply liquidate bankrupt banks, they would have eventually reached the road to recovery by a swifter, surer, though albeit sharper route. I await your reasoned response. @OMF Simple question. If Spain had announced this morning it was planning to raise €60bn in bond markets this year what do you think the yield today be? also, perhaps you could tell me how you “simply” liquidate bankrupt banks If Spain had announced this morning it was planning to raise €60bn in bond markets this year what do you think the yield today be? Less than it is. also, perhaps you could tell me how you “simply” liquidate bankrupt banks http://en.wikipedia.org/wiki/2008%E2%80%932012_Icelandic_financial_crisis#Bank_restructuring A deceased Chairman of the National Mutual Life Insurance Company and Board member of the Bank of England asks how you liquidate banks. The Spanish deal is not just fine but welcomed apparently. Sometimes saying nothing is the better course of action but what politician can resist a microphone even if what comes out is an ass’s bray? Again I ask: is it the ESFS/ESM for the big players, and the IMF for the children. If this continues it is not beyond the bounds of possibility the Ireland, Portugal and Greece could find themselves having to go outside the the euro with their own currency. Thank goodness the vote Yes campaign was successful. Imagine what might have happened to Ireland if it had voted No… None of this is new http://www.stockton.edu/~kinsellt/litresources/ayr/mouse.html But Mousie, thou are no thy-lane, In proving foresight may be vain: The best laid schemes o’ Mice an’ Men, Gang aft agley, An’ lea’e us nought but grief an’ pain, For promis’d joy! Still, thou art blest, compar’d wi’ me! The present only toucheth thee: But Och! I backward cast my e’e, On prospects drear! An’ forward, tho’ I canna see, I guess an’ fear! “Less than it is”. Ha Now you’re really having a laugh. that’s clealy nonsense. well your nothing if not entertaining. I think we’ll just have to disagree on my view that if Spain had announced this morning it was planning to raise €60bn in bond markets the yield would have been well above 7%, probably in double digits If you think Spain’s banks in EMU can be “simply” liquidised you’re wildly optimistic. Without an independent exchange rate capital flows will quickly lead to a run on the entire banking system, so the comparison with Iceland is completely inappropriate. @PR Guy I like your phrase: “character building recession ” – can I steal it and use it sometime? Was it Confucious who first said “There is nothing new but that which has been forgotten” or was he just repeating something he heard at a party? I doubt the phrase “character building recession” is mine to begin with, Kevin Donoghue might even have said it on these very pages and everyone from Krugman on down has been talking in at first amused tones, then bemused ones and now simply appalled ones on the idea of the moral necessity of austerity. It seems the EU version of the much trumpeted creative destruction of modern capitalism comes without the creative bit. This is commenter “FROMMADRID” on a Spailout thread in the The Economist: “The UE is wasting his money. The 100 billions loan will go directly to fund the next issues: 1. Seventeen useless automous regions with his presidents, regional ministers, regional parlaments, regional official cars, assistants, advisors, supporting staff and regional corruption. 2. Unions and political parties that make billions in grants. 3. Unnecessary pharaonic ongoing infrastructures as high speed trains to remote villages as Cuenca or Albacete or airports without passengers in the middle of nowhere as Huesca, Castellon or Ciudad Real. 4. Over three million of unnecessary public servants (more than USA or Japan) that have almost two months of vacations per year and make “siesta” everyday. 5. More than one billion is funding directly the soccer teams (with tax exemptions) that’s why Spain can afford the best players in the world. 6. The best free health care system in the world (paradoxically in the most ruined country of Europe) 7. Over 200 regional embassies that regional governments mantain in many countries (e.g. Catalonian embassy in New York is based in the Rockefeller Center building, the most expensive rent in NYC) 8. 8000 town halls (4 times than Germany, albeit Spain has half population) 9. 5000 ruined public companies (created only to give a job to the relatives and friends of the politicians) 10. Over twenty ruined public TVs, but controled by central and regional governments as propaganda centers. 11. Over three years of umemployment coverage (highest in Europe) 12. The PER (rural unemployment system that in Andalusia pay for one year if you work for two months) 13. And of course 450.000 politicians. As a result the UE is only funding the corruption and incompetence of Spanish political class. The worse problem in Spain is not a financial problem, the core problem is an economical problem, What kind of goods or services is going to produce Spain to pay back the 100 billion European loan and also mantain his oversized welfare state? None talk about this point because none has a realistic plan to overcome Spanish crisis. Meanwhile Spain has added to his current European unemployment record of 25%, the banks bailout world record with an astonishing 100 billions. Which will be the next record?” Irish bailout format a ‘mistake’. Strangely enough, I like many thousands of other people, small businesses and taxpayers, formed the same judgement the morning after it was announced. How many years ago? Of course, like the rest of us who railed against the guarantee were ‘mistaken’ at the time according the the minsters of the day. No Problem! 6.5% for Spain 6.1% for Italy The ‘path of virtue’ as Herr Shaeuble puts it in ‘character building’ Fitch downgrades a rake of Spanish banks Finland doesn’t want dosh to go to ‘unhealthy’ banks Irish ‘dead’ banks a ‘buy’ according to a matrixsQuid note Technical discussions continue with the Troika – irish gov note Hollande and Rajoy were lauded as heroes for standing up to Germany back in Feb/March. Do people still think that?? Eoin, How is the EFSF/ESM going to raise 100bn to fund Spain. I heard this morning that they might issue bonds to the FROB and the FROB takes them to the ECB window, receives cash and invests them as equity in the banks. Talk about borrow short to buy long duration. Is that possible? The EFSF is like a situation where someone leaves a wad of cash behind a bar and says drinks for everyone all night. And it’s fine at the start with 5 people in the round. But it’s 9 o’clock now and there’s no sign of anyone leaving and a busload of Spaniards has just turned up. And there are rumours of the party being crashed by a load of Belgian dentists. Kevin Donoghue re: “I fear that faint red line you see may be a symptom of rising blood-pressure” Touché. I must get it checked. Are there good physicians in Frankfurt! Nevertheless working on the theory that it will all go bellyup, Spain has managed to at least keep an imaginary red line between the banks and the sovereign. In Ireland’s the banks are the sovereign. They took over on Sept 30th 2008 and are still ruling the roost with loads of help from our ‘partners’ in Frankfurt. North American perspective. BOH http://video.pbs.org/video/2243919524/ “Reuters reports that eurozone finance ministers have discussed imposing capital controls in a “worst-case plan” for a Grexit. This would also involve temporary stringent border controls and a limit for cash machine withdrawals. But sources were keen to stress that it was contingency planning, not planning for an expected event…” @JR If you think it’s going belly up you could buy some Swiss 10yr at 0.51% and avoid the capital controls. Might lose a few bob in the process but……. @CP re:”If you think it’s going belly up you could buy some Swiss 10yr at 0.51% …” Thank you for the advice. However the paucity of funds I would have to win or lose would not, I assure you, make any discernible difference whatsoever to either the bank or indeed to myself. But on a general note, is it not extraordinary, that ‘stringent’ border controls will in all likelihood be imposed on the minnows, while multinational banks etc have been shifting billions, and will continue to shift billions on a daily basis, cosseted, assured, and protected to a degree unknown to citizen or sovereign. The more I see of this ongoing crisis, the more I believe that it is indeed one of moral hazard. It is in fact a crisis of morality, whereby old ideas, such as they were, of equality of citizenship or equality of treatment have been thrown out the window, in favour of selected and invariably wealthy and influential investors. I hope in my lifetime to see the pendulum swing back. It will not bother me too much at this point, if that swing is not a peaceful one. @ All FYI http://online.wsj.com/article/SB10001424052702303296604577452274058662032.html?mod=googlenews_wsj DOCM, the problem is that the pols are still behaving as if they have time on their side when in fact they don’t. The attention span of the markets to any policy response is now minutes. This morning’s reaction just proves it. Moreover, the solution was so cock-eyed as to make the situation first. You load more debt on to a sovereign and make it senior to existing bonds results only in selling. It seems to me that the most likely outcome now is the end of the Euro and the break-up of the EU. @ TMD I don’t think so! It is impossible to unscramble the EA – indeed EU – banking omelette. http://www.tagesspiegel.de/wirtschaft/euro-krise-wie-viel-geld-deutscher-banken-steckt-in-spanien/6737382.html As the WSJ – and other – coverage illustrates, the incompetent leaders of Europe are scrambling towards the emergency cord which has been there all the time; the ECB cannot manage the monetary policy of the EA/EU without also having supervisory control of its banks. Grumpy linked to this earlier : http://ftalphaville.ft.com/blog/2012/06/11/1036501/irish-banks-future-losses-and-awkward-timing/ Say BoI needs another EUR 10bn How would the public react ? The current situation is fine assuming nothing changes from today on. But that seems fanciful the way things are going. I’m just wondering how they are going to impose border controls here. They can’t stop diesel, cigs and other contraband goods, so how do they stop currency. @ seafóid If someone is not stirring the pot, no one is making money! Rajoy is not a talented man. He even makes a certain other leader look good. http://www.youtube.com/watch?v=kn481KcjvMo Not up to standard of Raglan Road! DOCM, It will probably explode rather than be unscrambled. History is littered with the breakup of empires which lost legitimacy. If BofI required 10bn in a liquidation , which is what NWL is referring to, depositors would be burned. @Seafoid. How would the Irish public react? How would poor old Wilbur react… Dr aherne.. “Dr Ahearne said at current interest rates Spain would not be able to borrow from the markets. “They are crossing their fingers and hoping that something improves, that sentiment changes over the next few weeks and months,” he said. Dr Ahearne compared the Spanish situation with Ireland in autumn 2010 when borrowing costs soared. He said investors had been reluctant to invest in Irish sovereign bonds because the Irish State was linked to the banking system, whose debt could not be quantified. “These investors don’t like buying risks in banks,” he said. “Spain has exactly the same issue now.” So even if we don’t assume the worst, the Spanish banking system will likely need a lot more cash than currently estimated. Anyone know who the two consultants are that they hired? So first there is talk of rowing back the schengen agreement with its much abused provision for movement of people. Now there is talk of capital controls in some circumstances. These are some fairly substantive row backs on what were till recently bedrocks of the EU. It would appear the attempt to create whats imagined to be a social europe (in reality a Europe built to push profit and not support its respective nations) is starting to unwind. People cant afford childcare but at the same time hundreds of billions can be used to support banks and many billions to support the insiders. Thats a social europe alright. Must be the shortest rally recently….Dow off 143. So Asia will follow suit and then Europe tomorrow. @ Tull Yep, it’s a re-run of the Greek bank deal apparently. There’s no way the EFSF can term cash fund 100bn this side of mid-2013. It also somewhat fits in somewhat indirectly with the OMF/JMK pishing match above – neither Spain nor the EFSF could hope to borrow a fresh 100bn on the markets this year without pushing yields through the roof. EB, So it is a another money printing scheme by the ECB, like our PNs. For lads that don’t do QE , they are doing a fair bit. I presume 100bn is just the opener. A full bail out would go to half a trillion.? George Lee, ‘Ireland Outside the Euro’ – A nice bit of propoganda from a govt. who have been working to dissolve the State for the past decade, and have mandated RTE and Prodigal George with Normalizing the process. At least it was admitted that ‘the government haven’t been honest that this [dissoloution of the State] is definitely on the cards’. Sinful. Wow, that was quick. I thought kicking the can would have giving us another couple of months at least, yet this latest kicking lasted for about a day. Exactly how much human misery must be caused before we follow Keynes and start focusing on bringing up demand? Surely we don’t have to repeat all the mistakes of the 1930s and 40s before we cop on? Say BoI needs another EUR 10bn How would the public react ? They would splutter, stutter, swear, stare wide-eyed, clutch their pensions close, jut out their jaws and defiantly declare; “Sure, we’ve no other choice!!”. Those expected to pay will not be consulted for their opinion. Yanis Varoufakis seems to be in deep depression going by his last paragraph. It doe not get bleaker than that. Rather sad. yanisvaroufakis.eu/2012/06/10/spains-blood-wedding-irelands-muted-rage-europes-tragedy/ This is one of those Jerry Springer type threads – – a bone thrown to eager antagonists. It would be easy if Germany was to open the money floodgates without strings as there appears to be little enthusiasm for any conditions. Some see the SPD-GP as a possible salvation but Wolfgang Schäuble is almost Dr. Charm compared with his SPD predecessor. Gideon Rachman warns in the FT today of a risk of stoking a resurgence of the right in Germany and he cites a senior Dutch politician who shares the German view: “We cannot push through a banking union when the French have just cut their retirement age to 60 and we have raised ours to 67.” From the Dutch and German point of view, it is unfair for their citizens to underwrite the banks of countries using their own money to pay social benefits that are more generous than those on offer in Germany or the Netherlands. This is an interesting point because the French financial position and its almost zero interest in reform puts it nearer the periphery than the core. France’s GDP per capita has slipped to 11in the pre-2004 EU15. It has a skills shortage, a poor educational system and youth employment double the Dutch level. At the other end of the labour market, the 55-to 64’s, the participation rate is 42.5% compared with 74.6% in Sweden. This comes at a cost in pensions and health spending. France’s social spending budget is the highest in the 34 member mainly developed OECD countries. In 2007, the average was 19% of GDP and France was at 28%. The level in 2010 was 32%. Jobs growth has been mainly in the public and health sectors since the 1970s. It has relied on big public service staff additions since the 1970s until the past decade when the numbers fell by 41,000. The French economy added 1.5m net public jobs (ex-health) in 1970-1990 and the health sector (public and private) added 1.3m in the same period and a further 490,000 in the last decade. The private sector (including self-employed) added 450,000 net jobs in the period 1970-1990 and 510,000 in 2001-2010, while the self -employed sector grew for the first time in forty years. France has run a budget deficit every year since 1975 and a trade deficit every year since 2002. Its debt has risen from 22% in 1975 to 90% of GDP in 2012. Meanwhile, the temporary work market expands. So, it’s delusional to believe that Germany can have a big impact on France’s fortunes unless it first addresses the big problems itself. @MH re: “From the Dutch and German point of view, it is unfair for their citizens to underwrite the banks..” Is that what is happening? There have been a few dominant policy themes throughout this crisis. 1. No senior bondholder gets burned. A policy that favours creditors nations, particularly Germany. 2. No EZ wide deposit insurance and the active prevention of same. Meantime the deposits of the EZ flow towards Germany. Deposit flight is very beneficial when you are the recipient of the flight. 3. No bank to fail. A policy that favours creditor nations and weakens other states to the point of bankruptcy. 4. A focus on fiscal solutions to correct a banking crisis. Again this suits creditor nations to buy time while funds are repatriated. The bottom line is that this crisis has been and still is good for Germany. Germany proceeds to bring home her savings and as a ‘safe haven’ continues to collect the wealth of the continent. German strategy throughout this crisis has been a master strategy from a German point of view. It has been accompanied by a master class in propaganda. A propaganda believed almost 100% by the German public. @ All FYI http://www.ft.com/intl/cms/s/0/ccb2fda0-b3cd-11e1-8b03-00144feabdc0.html#axzz1xYqFF8jf Barroso is correct in everything that he says. Unfortunately, it is a bit late and raises the question as to why the Commission, via the Commissioner from France, Barnier, tabled such a feeble proposal last week. The route he sketches out is the only one, IMHO, now open. Respect for the institutional integrity of the EU is all that can hold it together. Recognition of this has been sadly lacking. As to the behaviour of Germany, I am surprised that many express surprise that the country has acted in its own interest, in the matter of protecting her banks in particular. But Germany was not alone in this respect. And there is a limit to what can be done nationally. This has clearly now been reached as demonstrated by market reaction to the bailout of Spain. There are competing centres of power in Germany, a result of the form of government established on the insistence of the victors of WWII. The two most respected are the Bundesbank and the Constitutional Court. Neither has been of any great help, and the latter a positive hindrance, in allowing Germany to play a more constructive role. But as matters stand, the country faces an enormous contingent liability if the euro collapses and unavoidable banking losses. Merkel is now caught between a rock and a hard place. She must overcome deep-rooted opposition – especially from her own regulatory authority Bafin – if the scenario sketched out by Barroso is to come to pass. The underlying fundamental problem is that identified by MH. However, the Socialists have a clear memory of what happened to Mitterand when he attempted to go it alone with a failed expansionary policy. @Mark “George Lee, ‘Ireland Outside the Euro’” What an awful programme. TINA but to be good boys and pay all our debts and it was all our fault in the first place and the consequences of doing other than we’re told will be terrible and we must only do what’s good for banks/creditors and and and……. it put the fear of God up Mrs PR Guy though. She wanted to know if we can send our savings outside of the EZ. She got a bit of a surprise when I told her we already had! Ah yes darling, I’ve been meaning to mention that but I’ve been a tad busy on the so-called ‘glide path’ to the end of June and departing. @ DOCM “Rajoy is not a talented man. He even makes a certain other leader look good” This dissing the pols is pointless. Spain has been doing austeridad for the last 2 years. The sov can’t absorb the losses of the banks . End of. As Kevin Lyda says above the problem is demand. Plan A can’t continue for another 2 years. Something has to give. As for Spain http://www.youtube.com/watch?v=Y_Rg6AAig8g Who would you have in charge anyway ? El Caudillo is dead. As is El Cid. @ DOCM “The underlying fundamental problem is that identified by MH”. That is one of the problems. The FT referred on Saturday to “Europe’s sovereign debt crisis”. It’s a banking crisis that morphed into a sov debt crisis. And of course we can’t forged that the neoliberal paradigm is on the floor. But nuance is too difficult, innit. So Martin Wolf is now at least airing an idea that has been doing the rounds here since the referendum campaign. Namely, that the only way the crisis will be solved is if Germany is brought to the brink and one way of doing this is for the periphery to make a EZ collapse look credible. http://blogs.ft.com/martin-wolf-exchange/2012/06/11/soros-warning-on-the-euro/ I admit it is risky but the middle ground between collapse and definitive resolution that Germany is trying to navigate is arguably worse for Ireland than a EZ collapse – it will involve a lost generation of debt servitude that will make Latin America in the 80s look like a picnic. And, there will be a tremedous loss of sovereignty which the Latin Americans did not have to endure. Of course those at the end of their careers with juicy pensions to look forward to won’t care too much at all this. @ seafóid Unfortunately, it is the fundamental problem! The euro was a Franco-German idea based on the assumption that the two economies – 50% of the EA – would converge when, in fact, they have done the opposite. The splurge of spending funded by debt in France and other EA countries can only be corrected by dealing with the structural faults in their economies. As to the politicians, again unfortunately, they are the ones doing the deciding, not commentators or economists, no matter how distinguished. It seems to me that a little more attention should be paid to these players – including those appointed to fill essentially political roles i.e. nor “mere civil servants” – and less to those shouting from the benches. When the deserve to be dissed, they should be. That is the democratic way. @ DOCM I respectfully disagree http://www.guardian.co.uk/commentisfree/2012/jun/11/euro-crisis-happening-britain-too Discussions of the euro crisis usually treat it as though it’s all happening Over There. But places such as Kirkby remind us that what’s collapsed isn’t a handful of countries, but an entire model of economic development: one driven by debt and speculation, and which ignored the need for productive industry. Mr Angel Gurrier from the OECD http://www.haaretz.com/news/features/oecd-to-israel-put-on-your-raincoats-and-tie-yourself-to-the-mast.premium-1.435504 We’ve lost a lot of opportunities and time takes its toll. Time is expensive. That’s why you have the concept of interest: to account for time. The losses that we have accrued in the stock markets, in the commodities market, in the labor market, in the growth of countries, in the uncertainty, in the deferral of a number of investments – they’re a multiple of the totality of the Greek debt, for example. “We could have dispersed the Greek debt two years ago and say we’ll share the debt among the different countries of Europe and that would have been it. You only lose once, and not even lose. But right now you’ve lost so many times. We could have already started the recovery phase and avoided the contagion. But we didn’t do that, we said we should not restructure, we should not touch. ‘Barroso is correct in everything that he says.’ Barroso is a madman. He reenacted and refilmed a portion of an altercation he had with Joe Higgins when he lost his temper (the subject – that the EU and ECB were the cause of the financial disaster in Ireland). He has several times endeavoured to turn the crisis into an attempt to fast-track the federalisation project, more than once saying that democratic procedures should not be allowed to hinder these goals. re- PR Guy. It was devious, even by RTE standards (feign impartiality, lead every avenue advocating even openness to euro-exit into a pre-arranged rebuttal – constructed into an actual promo-piece for the continuance of the project). We have the National broadcaster expounding on the legitimacy of dissembling the State & surrendering self-determination in the interests of a foreign, financial class taakeover. ‘We must persevere for europe and the euro,’ etc. And if that doesn’t inspire the audience we’ll tell them ‘no more foreign holidays’ (apt enough, I suppose, since the only way they passed Maastricht was on the convenience of it all for holidaymakers). Other gems: ‘This is the building of a country, like when you got rid of the Brits [from a ‘brit’]’ – No it’s not – this is the destruction of a Nation, not the creation of one. If there is a comparison to be made between the early days of the state and today, it is that the rebuilding of the coutry outside the attempted takeover and the euro will require a similar determination. How the man thought he could get away with comparing the extricating of a people from a foreign empire with the surrendering to another foreign empire, I don’t know. A clumsy pattern that was repeated throughout the propoganda-piece: pre-empt assault of the project by taking possession of and subverting criticism: Another: Everyone opposed to the EU is suspect, possibly violent and probably right wing. Failure of the the project inevitably will lead to the rise of fascism. There are far more left-wing groups opposed to the attempted political union than right-wingers. And racial ideologies are peripheral to fascism – the EU was parented by the Berlin/Vichy collaboration. The cultural Neuter it adopted post-WWII has every bit as much dangerous potency as it’s forebear. As I said, at least it was half admitted that politicians here never admitted what was in fact happening (openly denied it, in fact – anybody pointing it out was called a lunatic). This illegitimises the european treaties, without a doubt. We either follow the path the UK are taking, and remove ourselves from it, or the country will face a division far greater than that which occurred in the twenties. One thing is for certain – the political union they are calling for will never be accepted here. The protection and endurance of National self-determination, at whatever real or phantom costs, is paramount. @PR Guy I was thinking about how the crisis has slowly crushed reputations everywhere. the rating agencies- who believes them now? Schäuble- how much is a statement from him worth? Barroso – who takes him seriously. What use is a Honohan assurance now ? A Spanish bank bailout intended to reassure the markets by dint of its sheer scale convinces the markets for 4 hours . And so on. There is only one person in the world to whom even the bankers defer, who is capable of shifting markets on a whim, whose word is definitive http://www.wine-pages.com/resources/vintage.shtml @ seafóid There are no simple causes of this crisis and while over-deregulation in finance and a middle class with falling incomes dependent on housing equity for spending and retirement, were factors in the US, the French excess public spending for decades puts it in a position now that it has no flexibility to spend its way — in the short term — out of its problems. A HSBC Bank report says investment in education and R&D is transforming Asia’s skills base. The model where the West did the development work and the East took care of low value production is dead. In future, forward looking businesses will take advantage of the growing skills of Asian workers. Prof Michael Spence said last year that: “Between 1990 and 2008, the number of employed workers in the United States grew from about 122m to about 149m. Of the roughly 27m jobs created during that period, 98% were in the so-called nontradeable sector of the economy, the sector that produces goods and services that must be consumed domestically. The largest employers in the US nontradeable sector were the government (with 22m jobs in 2008) and the health-care industry (with 16m jobs in 2008). Together, the two industries created ten million new jobs between 1990 and 2008, or just under 40% of total additions. (The retail, construction, and hotel and restaurant industries also contributed significantly to job growth.) Meanwhile, employment barely grew in the tradeable sector of the US economy, the sector that produces goods and services that can be consumed anywhere, such as manufactured products, engineering, and consulting services. That sector, which accounted for more than 34m jobs in 1990, grew by a negligible 600,000 jobs between 1990 and 2008.” Richard Bruton in response to a parliamentary question from Sinn Féin’s Martin Ferris, admitted that IDA-supported companies had lost 10,000 jobs between 2008 and 2011 – – in effect as I have stated previously, the housing bubble masked a serious problem as there were no net jobs added in the internationally traded goods and services sectors in teh period 2000-2007. Re- Michael Hennigan The IDA were during Mary Harney’s tenure awarding grants to companies in default of paying employees PAYE. @ MH It’s pointless to say the problem is government spending alone. The financial sector has more or less collapsed. Economic growth has ground to a halt. Private money is being hoarded. Demand is being suffocated. Spending reform has to be part of the mix but not the only part. @bazza Thanks for link to Martin Wolf article. Human psychology will damn us. It is not only people’s lack of ability to see matters from the other person’s side but also people’s lack of willingness to disagree and cause problems that is locking us into our spiral. My own psychological balance is moving away from rubber-necking more towards fear and despair. My only hope is that Spain will give use the €100b to actually restructure its banks and “burn the bejaysus bondholders” as our own Mario might put it. The downgrading of Spanish banks on fears that the new funds will be given seniority is welcome. @Michael Hennigan Is it time to rethink globalisation? Sometimes the things we think will helop us actually harm us. The Euro has turned out to be a gold standard on steroids which threatens the fabric of European political union. Globalisation has also turned out to have qualities which its promoters did not originally expect. Foremost amongst there is Krugman’s admission that he didn’t anticipate the degree to which production and the provision of services could be deconstructed with the result that it is possible to outsource much more than was originally expected. The euro is beginning to look like an emerging market currency http://ftalphaville.ft.com/blog/2012/06/11/1037631/the-euro-as-em-currency/ I don’t know if readers are familiar with the state of Meath football but the PTB seem to bear a strong resemblence competence and results wise to Banty. @seafoid @ MH It’s pointless to say the problem is government spending alone Never mind pointless – it is both not true and a convenient lie for the market fundamentalists and conservative demagogues who helped us into this mess. EMU has obviously been a disaster but the real problem remains an out of control financial sector and a flavour of globalized capitalism which rewards a race to the bottom for workers wages while simultaneously creating a rootless plutocracy whose interests are completely misaligned with the general population. Capital sloshes hither and thither with local tax payers expected to pick up the bill when speculative bubbles collapse. This is a crisis of capitalism and financial capitalism in particular. Europe’s hare brained rush to EMU, the EU’s institutional neoliberal bias and an unconstrained and conservative Germany has made our portion of the global financial crisis much worse, but it is just a variation on a theme. @Shay Monthly Review is the best place for an overview of the whole mess , I think They have no vested interests to protect http://monthlyreview.org/2007/04/01/the-financialization-of-capitalism “Changes in capitalism over the last three decades have been commonly characterized using a trio of terms: neoliberalism, globalization, and financialization. Although a lot has been written on the first two of these, much less attention has been given to the third.1 Yet, financialization is now increasingly seen as the dominant force in this triad. The financialization of capitalism—the shift in gravity of economic activity from production (and even from much of the growing service sector) to finance—is thus one of the key issues of our time. More than any other phenomenon it raises the question: has capitalism entered a new stage? I will argue that although the system has changed as a result of financialization, this falls short of a whole new stage of capitalism, since the basic problem of accumulation within production remains the same. Instead, financialization has resulted in a new hybrid phase of the monopoly stage of capitalism that might be termed “monopoly-finance capital.”2 Rather than advancing in a fundamental way, capital is trapped in a seemingly endless cycle of stagnation and financial explosion. These new economic relations of monopoly-finance capital have their epicenter in the United States, still the dominant capitalist economy, but have increasingly penetrated the global system.” But obviously the problem has to be public spending 😉 @seafoid rightly rejects the hurlers on the ditch refusing to “get real”, tow the line and regain our national dignity by doing whatever we are told to. But obviously the problem has to be public spending Of course, of course. No sensible or serious person could deny that the latest crisis is actually one of state socialism where the expensive coddling (or bailing out, if you will) of the undeserving poor, together with excessive democracy – sorry, I mean populism, combined to pollute our essential competitive fluids leaving us too weak to be good globalized capitalists. I mean who could disagree that Europe’s problem is not too little forceful and determined policy making by Europe’s de facto leaders and too much charity for the lower social cohorts and weaker nations? Not Angela Merkel, not Olli Rehn, not Jorg Asmussen, not any senior banker. In fact no one of importance. Why are we even having this discussion? The Monthly Review is great, I should remember to fit it in. It is like reading history in advance of the events. @seafóid “There is only one person in the world to whom even the bankers defer, who is capable of shifting markets on a whim, whose word is definitive” I couldn’t get access to that link from where I’m sitting today but it looked pertinent to my interests (something to do with vintage wine?). Or has Soros started telling people to diversify into 2009 Bordeaux? He’s a bit late if he is. If you want something for good drinking rather than investment that is almost as good but nowhere near the price, get hold of a 2009 Minervois from the ‘expensive’ end of the offerings (i.e. about 20-40 Euros) and lay it down for another 3-5 years. Wonderful stuff. Particularly the Villerambert Julien (go there and taste in their lovely chapel tasting room). http://www.villerambert-julien.com/joinus.php p.s. El Cid may be dead but can’t we stick him on a horse and make it look like he is still alive, as in the film? Or is it the Euro we need to stick on the horse to make it look like it’s still alive? @Mark “Barroso is a madman” +1 He’s part of the USE/federalist clique that has seized the agenda in the EU and who say stupid things like, “you can’t make an omelette without cracking a few eggs”, “there are an acceptable amount of casualites in a project of this kind”, etc. That Greek guy swinging from a tree or with a gun in his mouth doesn’t even register with the clique. Your comments on George Lee’s programme….. I only just remembered half an hour ago (why I was going “WTF?” every 60 seconds throughout the programme), George is of course a FG man. Duh! I’m slowing down in my old age. on the George Lee show – Blair Horne told us it would be “catastrophic” for ireland if we left the Euro….need i say more… also, whats with the dramatic music and George wandering through cities at sundown. What mood were these images supposed to invoke – a post -apocalyptic outcome a la “I am Legend”….george scouring the street looking for somewhere that is still open to buy a pint…or a loaf even. TV3 would have been proud of this ridiculous piece of work. He travels to Brussels to meet Professer van Gauwe ….we are told ‘one of the great authorities on the euro’….he proceeded to tell us that the peripheral countries began spending a lot of money when the cheap credit afforded them by the euro and the germans don’t like that they can’t pay it back……SWEET JESUS! ….I couldn’t watch it all but was the issue of public service pay in Germany vis-a-vis the periphery ever raised once? Don’t mind telling us what one German family run business does in terms of “investing in the good times and tightening the belt in the bad times”….give us the big picture on german v Irish teachers, doctors, civil servants etc…not some isolated family business. It was the SME sectors fault in any shape or form what happened in ireland. @V Barrett “I am Legend” I’m afraid that George is only a legend in his own lunchtime. …. and I notice he kept the zombies well out of sight… …. and other scary things like, “debt forgiveness.” @ PR Guy Parker I was passing a wine shop today and saw a bottle for 30 CHF that scored 92 Parker points. That seems to be the only index left with any sort of credibility. @ seafóid It is the fundamental problem as far as the introduction of the euro is concerned. I should have made this clearer. The UK experience is useful in underlining a broader point; everything that has happened is not the fault of th euro. (Nobody takes Osborne’s most recent line on this seriously). I see Paul Hunt blaming everything on the public sector again. While there’s no doubt that the Spanish have an “interesting” approach to governance the fact remains that their overall levels of public debt/ deficit are pretty manageable, even within the rigidities of the euro. The story is if private sector debt( and like this is pretty well known). When you’ve a hammer everything looks like a nail . Ps the monthly review looks great, can’t wait to crack into it. Here would England be if they had joined the euro though ? Probably next on the chopping block afaic. @ seafoid I avoid suggesting that there was one reason for any complicated economic issue. There never is one simple explanation. France has several problems that are not directly linked with public spending but a country that has never balanced its annual finances in any year in 36 tends to run out of road eventually. France also shows that the current crisis is more than a banking crisis and did not need a banking crisis to trigger problems. Italy had virtually no growth over a decade but high private savings but with a high pubic debt and a joke government, it was bound to have problems in a recession. @ zhou_enlai For some decades, Ireland availed of CAP, Europe’s biggest socialist enterprise, and globalisation, set in train by tariff cuts by the US and Europe from the 1950s. For Ireland, both are heading for their end dates. The days of big FDI projects are over, partly because web service type operations do not employ very many people compared with manufacturing but also because a company operating in Ireland does not have to have a minimum staff to assist massive tax evasion. Most of the big companies in tech and pharma have Irish operations. Up to 65% of Asia’s trade is still ‘intermediate’ and the Apple iPhone which has an international price of at least $400 (including in low income countries) earns China only about $8 per unit. That will change and for example Chinese firms have a big share of the mobile telephony market in Africa. New Chinese cars have also knocked out the market for French s/h cars. The main threat to globalisation is income inequality in the US. Wages as a share of GDP are at a 50-year low. Bill Gross, the trillion dollar bond fund manager said: “Even conservatives must acknowledge that return on capital investment, and the liquid stocks and bonds that mimic it, are ultimately dependent on returns to labor in the form of jobs and real wage gains. If Main Street is unemployed and undercompensated, capital can only travel so far down Prosperity Road.” In 2009 the median full-time male worker aged 25-64 brought home $48,000 – – roughly the same as in 1969 after adjusting for inflation. The median level is the point where half of the workers earn less and the other half earns more. When economists at the Brookings Institution examined the experience of all men (rather than just the changing group of men able to find full-time work), the stagnation story has a different ending. The median wage of the American male has dipped by almost $13,000 after adjusting for inflation in the four decades since 1969 – – a reduction of 28%! Household income hasn’t collapsed because of a rise in women in the workforce. @mh, surely the prospects for globalisation are dim then. I don’t see much prospect of either of the two parties of American plutocracy doing anything to reverse the inequality trends. @ MH “The main threat to globalisation is income inequality in the US. Wages as a share of GDP are at a 50-year low. Bill Gross, the trillion dollar bond fund manager said: “Even conservatives must acknowledge that return on capital investment, and the liquid stocks and bonds that mimic it, are ultimately dependent on returns to labor in the form of jobs and real wage gains. If Main Street is unemployed and undercompensated, capital can only travel so far down Prosperity Road.”” Good stuff. The rise of the plutocrats is a huge part of this http://monthlyreview.org/2010/10/01/the-financialization-of-accumulation 58% of all income growth in the US between the 1976 and 2007 went to the top 1% of the population. http://www.howtospendit.com/# @DOCM The EURO is like one of those ghost estate houses that never got finished. The design was poor. The stampede to individual sovereign risk is proof that the floorboards were never nailed down. Mr Gurria says it well “We could have dispersed the Greek debt two years ago and say we’ll share the debt among the different countries of Europe and that would have been it. You only lose once, and not even lose. But right now you’ve lost so many times. We could have already started the recovery phase and avoided the contagion. But we didn’t do that, we said we should not restructure, we should not touch. ” Maybe the Euro could have avoided this if it had been stress tested in the good times. There is a real danger that the whole thing falls apart and destroys the pensions industry upon which millions of people’s futures depend. There is far more to it than France’s spending I’m afraid. @zhou_enlai It seems to me (I am not an expert on anything) that the debt bubble, not free trade, was the main culprit: that the US’ manufacturing industry etc. would not have declined to anything like the same extent if the flood of cheap credit hadn’t made it possible for the US to live on borrowed money instead of supporting itself from what it produced for itself or for export. Globalisation was necessary for the bubble to get as large as it did, but it’s not necessary for debt bubbles to arise at all (you’d likely just have had smaller and differently-shaped debt bubbles) and also, I think, not sufficient for them to arise: the US could have enjoyed a much healthier relationship with free trade if it had not permitted credit to rocket out of proportion to GDP. Krugman, however, is still (imo) in denial about the role of credit growth in the crisis, so it suits him better to put the blame on free trade. @seafóid 92 points for CHF30? I’d buy it. In fact, I’d buy two or three at current pegged exchange rate. @anonym/zhou Is the real culprit in all this mess at a very basic level the inability of risk takers to take a loss? Or more correctly the fear by the politicians that loss taking by risk takers would be such a monumental leap of faith that it dare not consider the aftermath hence the guarantees, the bailouts and the buck passing. The truth is however that economic history tells us time and time again that cleansing the undergrowth is exactly the medicine required. In not allowing the natural losers to lose we have screwed up a system that had worked, not well by any reasonable measure, but it had still worked to ensure the fittest survived and the badly conceived models failed. No explanation or excuse I’ve read over the past 5 years explains the crisis any better i.e. let the market do its job and stop the interference until such time that the dust has settled and seek to redesign it better. Simple. @anonym Considering Krugman was a big promoter of globalisation and still considers his small contribution to bringing wealth to poor people around the world to be his greatest achievement, it is unlikely that he will see scapegoating globalisation or free-trade as convenient. Also, his admissions as to his mistakes pre-date the currrent crisis. @Yields The losers are the West. We opened up trade, could not compete and then lived off credit to cover up our lack of productivity. We have now lost. America is reneging on the deal with a certain amount of quantative easing. They are not willing to lose as much asn they make the rules (for the moment). Europe on the other hand is determined to suffer its losses and to reduce its citizenry to levels of penury comparable with the developing world. We will then be “competitive”. It is hard to know if Charlie Sheen will still be “winning” at that stage. Moody’s doing more Spanish downgrades http://www.irishtimes.com/newspaper/breaking/2012/0613/breaking71.html Comments are closed.