spain

Brace Yourself , Europe Central Bank Goes Italian and Just How Bad Will the S&P Downgrade Be?

Just when you think you've had enough, here comes Italy. The European Central Bank is buying Italian and Spanish government bonds on a massive scale. From the ECB press statement:

  1. The Governing Council of the European Central Bank (ECB) welcomes the announcements made by the governments of Italy and Spain concerning new measures and reforms in the areas of fiscal and structural policies. The Governing Council considers a decisive and swift implementation by both governments as essential in order to substantially enhance the competitiveness and flexibility of their economies, and to rapidly reduce public deficits.
  2. The Governing Council underlines the importance of the commitment of all Heads of State or Government to adhere strictly to the agreed fiscal targets, as reaffirmed at the euro area summit of 21 July 2011. A key element is also the enhancement of the growth potential of the economy.
  3. The Governing Council considers essential the prompt implementation of all the decisions taken at the euro area summit. In this perspective, the Governing Council welcomes the joint commitment expressed by Germany and France today.
  4. The Governing Council attaches decisive importance to the declaration of the Heads of State or Government of the euro area in the inflexible determination to fully honour their own individual sovereign signature as a key element in ensuring financial stability in the euro area as a whole.

A Credit Rating Downgrade for France?

Bloomberg is reporting Moody's will downgrade France:

France risks losing its top AAA grade as Europe’s debt crisis prompts a wave of downgrades that threatens to engulf the region’s highest-rated borrowers, with Belgium also facing a possible cut, analysts and investors said.

Ireland earlier was downgraded 5 credit rating levels to Baa1.

Spanish banks staring down the barrel of insolvency

Last week a source reported that Spain was effectively cut off from the capital markets. This would put Spain in the same boat that Greece currently resides.
But was the report true? Today's news virtually confirms it.

Spanish banks have been lobbying the European Central Bank to act to ease the systemic fallout from the expiry of a €442bn ($542bn) funding programme this week, accusing the central bank of “absurd” behaviour in not renewing the scheme.
On Thursday, the clock runs out on the ECB financing programme – the largest amount ever lent in a single liquidity operation by the central bank – under the terms of the one-year special liquidity facility launched last summer.
One senior bank executive said: “Any central bank has to have the obligation to supply liquidity. But this is not the policy of the ECB. We are fighting them every day on this. It’s absurd.”
Banks across the eurozone, but in Spain in particular, have found it hard in recent weeks to secure liquid funding in the commercial markets, with inter-bank funding virtually non-existent.
“The system is just not working,” agrees Simon Samuels, banks analyst at Barclays Capital in London. “We’re approaching the third year of liquidity support and still the market cannot survive unaided.”

This story contains two nuggets of information:

Spanish Bank Fails, here comes the IMF

Over the weekend a Spanish bank, Cajasur, was seized. This is a large Spanish bank with $23.9 billion or 0.6% of Spain's assets.

Now the IMF is gunning for Spain and it looks like they are after.....their pension system and wages. From the IMF press release:

A dysfunctional labor market, the deflating property bubble, a large fiscal deficit, heavy private sector and external indebtedness, anemic productivity growth, weak competitiveness, and a banking sector with pockets of weakness. Ambitious fiscal consolidation is underway, recently reinforced and front-loaded. This needs to be complemented with growth-enhancing structural reforms, building on the progress made on product markets and the housing sector, especially overhauling the labor market. A bold pension reform, along the lines proposed by the government, should be quickly adopted. Consolidation and reform of the banking system needs to be accelerated.

The EU is also calling for Spain to modify it's pension system by raising the retirement age and scaling the benefits. The IMF is zeroing in on Spain's labor markets. So why exactly are they doing this and why are workers supposed to be stuck with the housing bubble and derivatives bill as sovereign nations become mired in debt?

European Contagion

The terminology is beginning to change in Europe. The fact that Spain's finance minister felt it necessary to say this speaks volumes about how the markets view Europe.

“Spain’s situation is not like that of Greece, not in terms of public debt nor in terms of economic strength,” Ms. Salgado said in an interview with La Cope radio.

Yields on Spanish bonds jumped today as the market demanded higher returns on the debt risk. Why did that happen?

Spain sinks into Depression

Spain is no longer in a recession. They've gone straight into Depression with levels of distress not seen since shortly after the end of their civil war.
The primary source of Spain's economic problems is a housing bubble that, on a relative scale, was even bigger than America's.

The Madrid research group RR de Acuña & Asociados said the collapse of Spain's building industry will cause the economy to contract for the next three years, with a peak to trough loss of over 11pc of GDP....
RR de Acuña said the overhang of unsold properties on the market, or still being built, has reached 1,623,000 . This dwarfs annual demand of 218,000, and will take six or seven years to clear. The group said Spain's unemployment will peak at around 25pc, comparable to the worst chapter of the Great Depression.

Youth unemployment is at 38%.

A tale of two continents - Europe Helps Workers, U.S. Squeezes Workers

From Open Left, one commentator put it succinctly:

A tale of two continents
In Europe, state aid is contingent on the firms preserving jobs. In the US, state aid is contingent on the firms cutting their workers wages and benefits.

The story is about government expenditures being used for the benefit of it's citizens, their workers.

WSJ:

France unveiled a plan on Monday to give €6 billion ($7.8 billion) in low-interest loans to Renault SA and PSA Peugeot-Citroën in exchange for promises that they won't close factories in France or lay off workers for the duration of the loans. The government also will offer €500 million in loans to auto-sector firms with operations in France.