6th June 2012
Today opens with yet again the Euro and its problems at the centre of world economic and political debate. Yesterday the G7 nations even had a conference call at midday to discuss the matter. Hopes were of course low because officials and politicians have gone meeting and conference call crazy over this crisis and have in general produced hype and hyperbole only, and frankly those have usually been the better meetings as the rest have made matters worse! However the underlying issue right now is what to do with Spain and her banking industry.
Portugal acts as a forerunner for Spain
Over the long Jubilee bank holiday weekend Portugal moved to bail out three of its banks. She put 6.65 billion Euros of extra capital into BCP SA, BPI SA and Caixa Geral de Depositos SA. In these times of inflated numbers this may not seem a large sum but it is in fact equivalent to 3.8% of Portugal's economic output or Gross Domestic Product for a year. This means that the national debt/GDP ratio for Portugal has risen to 111.6% which is well into the danger zone.
Perhaps even more ominously the European Commission produced a report on Portugal declaring it to be "on track"! For those unaware of the past use of this word it was used time and time again to describe Greece's collapse into economic depression. Perhaps the track that they mean is this one from AC/DC:
"I'm on the highway to hell
On the highway to hell
Highway to hell
I'm on the highway to hell"
Indeed the two sentences below highlight the inconsistencies and fantasies of the European Commission:
"Positive albeit still subdued growth is expected in 2013. However, with domestic demand weak and pressures on firms to reduce high indebtedness, unemployment has increased sharply as part of the adjustment process, and could peak at close to 16 percent in 2013."
They always expect growth next year whatever the circumstances….
Spain thinks about emulating her neighbour
It has not escaped Spain's leaders that Portugal can finance a recapitalisation of her banking sector because she is the recipient of a 78 billion Euro zone/ International Monetary Fund bailout. Her Prime Minister Mr. Rajoy has admitted that Spain is in "extreme difficulties" and her Finance Minister Cristobal Montoro said that Spain "does not have the door to the markets open". Perhaps someone should tell him that Spain plans to issue some 2 billion Euros of debt tomorrow! However it is quite clear that Spain is stepping up the pressure on her partners to help her.
What are the features of this?
The sums discussed will be far too low
Bank bailouts invariably start with estimates which are far too low. The initial estimate of a bank bailout for Spain has been provided by Spanish bankers (no moral hazard there…) at 40 billion Euros. There are two main weaknesses here. Firstly if it was true then Spain could pay it herself. And secondly the planned bailout of Bankia will cost at least 23.5 billion Euros on its own and so we are expected to believe that the rest of Spain's banking sector will only cost 17.5 billion Euros.
All sorts of crazy plans of Euro Area Union will be discussed and then rejected
The leader currently in this theme is talk of a European banking union. The problem with that is that it leads to outcomes which Germany has consistently rejected. This is really a backdoor route to Eurobonds and each time that has raised its head Germany has said nein.
Even a form of joint deposit insurance for Euro area banks has a central flaw. This is simply that it is being proposed ex post rather than ex ante. Insurance works ahead of events when there are a variety of outcomes whereas this scheme is being constructed when the likely outcomes have narrowed considerably. Let me put it another way if you have a healthy person then think of what you would charge for life cover then do the same for someone with a serious possibly terminal illness. Much more? Exactly! There will be a large bill here which is being kicked into the future…
Just when you thought it could not get any worse the head of the IMF Christine Lagarde talked of a "master plan".
Spain's economy continues to weaken
I have argued for some time that Spain is on the verge of an economic depression and sadly we have seen more signs of that today:
"The Industrial Production Index (IPI) experienced an interannual variation of -8.2% in April, more than two points higher than that registered in March."
Okay but one month's figures can be misleading:
"The average for the Industrial Production Index registered a variation of -6.2% in the first four months of 2012, as compared with the same period the previous year."
Indeed the figures adjusted for calendar effects have gone -3.5%,-4.4%,-5.3%,-7.5% and now 8.3% which apart from being a clear trend sets a grim pattern. If we look at the underlying index we see that compared to 2005 as a base it is at 72.4. And if we look at past Aprils we see that this looks the weakest underlying number this century.
Crisis what crisis?
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