The financial credibility of Spain
is close to zero. Fiscal credibility is zero. Political credibility is zero.
The new government of Mariano Rajoy has squandered the advantages of its
absolute majority in a matter of months, and completely lost the confidence
of Europe's institutions.
That is the verdict of unnamed EU officials and sources in Brussels cited by El
Pais, following the twin crash of the Madrid bourse and the Spanish bond
market on `Black Friday'.
The claims are self-serving spin by Europe’s incompetent policy elite. Once
again, they are blaming the victim for the consequences of their own
scorched-earth monetary, fiscal, and regulatory policies.
The European Central Bank caused the Spanish money supply to collapse last
year by tightening policy. Real M1 money was falling at double digit rates
by mid-2011. The economic damage we are seeing now was baked into the pie.
Fiscal policy has since become maniacal. The latest EU-imposed cuts, passed by
the Cortes on Thursday as a condition for Spain's €100bn bank rescue, entail
further tightening of 6.7 pc of GDP over three years. It is a ruinous for an
economy already contracting, with unemployment of 24.3pc, in the grip of
ferocious deleveraging by firms and households.
On top of it all, the EU has foolishly forced banks to raise their core Tier 1 capital ratios to 9pc in the middle of a slump and at breakneck speed, causing an even sharper cut-back in lending than would have occurred otherwise.
Eurozone banks have cut their balance sheets by €4 trillion since late 2008. They have done this by pulling their money out of foreign ventures, especially southern Europe. Spain is the victim of a "sudden stop" in capital flows, just like Germany in 1928 when Wall Street cut off loans.
We can argue about the deeper causes of Spain's crisis. It had little to do with fiscal policy. Spain ran budget surplus of 2pc of GDP in 2006 and 1.9pc in 2007. Public debt fell to 42pc of GDP.
What destabilized Spain was a private credit boom. The country was flooded with cheap capital from North Europe. Interest rates were minus 2pc in real terms for Spain for year after year. The ECB poured petrol on the fire by gunning the Euro zone M3 money supply at twice its target rate.
We all agree that it was folly to build 750,000 homes each year at the top of the boom - La Burbuja - for a market of 250,000. Spain should have copied Hong Kong and others with a long experience of fixed exchange rates in forcing down the loan-to-value ceilings on mortgages to 70pc, 60pc, 50pc , etc, to choke the boom.
While that is obvious in hindsight, it is not what the EU authorities told Spain at the time. The EU was complicit in the Spanish bubble, and so were German banks. This is a collective failure.
Mariano Rajoy has doubtless made a mess of the crisis since taking power, but that is a detail in this greater drama. He is right to claim that Spain has "done its part" in cutting to the bone, even if he is tragically misinformed in thinking that this is what global markets want. What investors really want is a way out of the deflationary impasse.
The reason why Spain’s €100bn bank rescue has failed to stem the crisis is because the EU summit deal in late June has proved to be a sham. It did not break the deadly link between banks and sovereigns, as originally claimed.
Germany now says it never agreed to such a deal. The law passed by the Bundestag last week states clearly that the Spanish sovereign state is solely responsible for the extra debt. Spain's public debt will gallop up to 90pc of GDP this year, just at the moment when international investors are fleeing, and deposit flight from Spanish banks has reached €50bn a month.
Spain's foreign minister José Manuel García-Margallo accused the ECB of "doing nothing to put out the fire". The ECB's Mario Draghi retorted that it is not the job of his institution to sort out the finances of EMU states. Its task is to ensure "price stability".
Actually, the ECB is currently in breach of Article 127 (clause 5) of the Lisbon Treaty obliging it to contribute to "the stability of the financial system". The first duty of every central bank is to avert disaster.
It is time for Spain and the victim states to seize the initiative. They cannot force Germany, Holland, Finland, and Austria to swallow eurobonds, debt-pooling and fiscal union, and nor should they try since such a move implies the evisceration of their own democracies.
What they can to do is use their majority votes on the ECB's Governing Council to force a change in monetary policy. Germany has two votes out of 23, with a hardcore of seven or eight at most. The Greco-Latin bloc can force a showdown. If Germany storms out of monetary union in protest, that would be an excellent solution.
The Latins would keep the euro - until the storm had passed - allowing them to uphold their euro debt contracts. There would be less risk of sovereign defaults since these countries would enjoy a pro-growth shock from monetary stimulus and a weaker Latin euro against the Chinese yuan, the D-Mark, and the Guilder.
The currency misalignment eating away at EMU would be cured instantly. There might even be a stock market rally once the boil was lanced. It would certainly be a better outcome than the current course of deflationary Troika regimes and loan packages for economies trapped with the wrong exchange rate, destined to end with one country after another being thrown out of EMU in a chain reaction.
For Germany it would entail a revaluation shock and stiff losses for German banks and insurers with large holdings of Club Med debt.
If Germany wished to soften the blow, it could do exactly what Switzerland is now doing by holding the Swiss franc to CHF 1.2 against the euro by unlimited intervention. It could fix the D-Mark rate against the Latin euro at whatever was deemed bearable, for as long as needed.
Is Mr Rajoy willing to entertain such heresies? Or Italy's Mario Monti, after a life committed to the euro Project? Or France's Francois Hollande, still in thrall to Quai d'Orsay orthodoxies and the strategic primacy of the Franco-German alliance -- now just a mask for German hegemony?
Yet a full fledged "rescue" of Spain is already on the cards. It will cost €400bn, bringing matters to a head swiftly. Contagion to Italy seems inevitable, with knock-on effects for French banks with €600bn of bank exposure to the Italian debt of different kinds. The EU bail-out machinery becomes irrelevant in such a conflagration.
The Latin Bloc are all too aware of this awful prospect, even if the latest safe-haven flows into France may tempt some in Paris to misjudge the dangers.
They dallied with revolt in June, only to be rebuffed by Berlin. It is time to sharpen swords for a real fight.
On top of it all, the EU has foolishly forced banks to raise their core Tier 1 capital ratios to 9pc in the middle of a slump and at breakneck speed, causing an even sharper cut-back in lending than would have occurred otherwise.
Eurozone banks have cut their balance sheets by €4 trillion since late 2008. They have done this by pulling their money out of foreign ventures, especially southern Europe. Spain is the victim of a "sudden stop" in capital flows, just like Germany in 1928 when Wall Street cut off loans.
We can argue about the deeper causes of Spain's crisis. It had little to do with fiscal policy. Spain ran budget surplus of 2pc of GDP in 2006 and 1.9pc in 2007. Public debt fell to 42pc of GDP.
What destabilized Spain was a private credit boom. The country was flooded with cheap capital from North Europe. Interest rates were minus 2pc in real terms for Spain for year after year. The ECB poured petrol on the fire by gunning the Euro zone M3 money supply at twice its target rate.
We all agree that it was folly to build 750,000 homes each year at the top of the boom - La Burbuja - for a market of 250,000. Spain should have copied Hong Kong and others with a long experience of fixed exchange rates in forcing down the loan-to-value ceilings on mortgages to 70pc, 60pc, 50pc , etc, to choke the boom.
While that is obvious in hindsight, it is not what the EU authorities told Spain at the time. The EU was complicit in the Spanish bubble, and so were German banks. This is a collective failure.
Mariano Rajoy has doubtless made a mess of the crisis since taking power, but that is a detail in this greater drama. He is right to claim that Spain has "done its part" in cutting to the bone, even if he is tragically misinformed in thinking that this is what global markets want. What investors really want is a way out of the deflationary impasse.
The reason why Spain’s €100bn bank rescue has failed to stem the crisis is because the EU summit deal in late June has proved to be a sham. It did not break the deadly link between banks and sovereigns, as originally claimed.
Germany now says it never agreed to such a deal. The law passed by the Bundestag last week states clearly that the Spanish sovereign state is solely responsible for the extra debt. Spain's public debt will gallop up to 90pc of GDP this year, just at the moment when international investors are fleeing, and deposit flight from Spanish banks has reached €50bn a month.
Spain's foreign minister José Manuel García-Margallo accused the ECB of "doing nothing to put out the fire". The ECB's Mario Draghi retorted that it is not the job of his institution to sort out the finances of EMU states. Its task is to ensure "price stability".
Actually, the ECB is currently in breach of Article 127 (clause 5) of the Lisbon Treaty obliging it to contribute to "the stability of the financial system". The first duty of every central bank is to avert disaster.
It is time for Spain and the victim states to seize the initiative. They cannot force Germany, Holland, Finland, and Austria to swallow eurobonds, debt-pooling and fiscal union, and nor should they try since such a move implies the evisceration of their own democracies.
What they can to do is use their majority votes on the ECB's Governing Council to force a change in monetary policy. Germany has two votes out of 23, with a hardcore of seven or eight at most. The Greco-Latin bloc can force a showdown. If Germany storms out of monetary union in protest, that would be an excellent solution.
The Latins would keep the euro - until the storm had passed - allowing them to uphold their euro debt contracts. There would be less risk of sovereign defaults since these countries would enjoy a pro-growth shock from monetary stimulus and a weaker Latin euro against the Chinese yuan, the D-Mark, and the Guilder.
The currency misalignment eating away at EMU would be cured instantly. There might even be a stock market rally once the boil was lanced. It would certainly be a better outcome than the current course of deflationary Troika regimes and loan packages for economies trapped with the wrong exchange rate, destined to end with one country after another being thrown out of EMU in a chain reaction.
For Germany it would entail a revaluation shock and stiff losses for German banks and insurers with large holdings of Club Med debt.
If Germany wished to soften the blow, it could do exactly what Switzerland is now doing by holding the Swiss franc to CHF 1.2 against the euro by unlimited intervention. It could fix the D-Mark rate against the Latin euro at whatever was deemed bearable, for as long as needed.
Is Mr Rajoy willing to entertain such heresies? Or Italy's Mario Monti, after a life committed to the euro Project? Or France's Francois Hollande, still in thrall to Quai d'Orsay orthodoxies and the strategic primacy of the Franco-German alliance -- now just a mask for German hegemony?
Yet a full fledged "rescue" of Spain is already on the cards. It will cost €400bn, bringing matters to a head swiftly. Contagion to Italy seems inevitable, with knock-on effects for French banks with €600bn of bank exposure to the Italian debt of different kinds. The EU bail-out machinery becomes irrelevant in such a conflagration.
The Latin Bloc are all too aware of this awful prospect, even if the latest safe-haven flows into France may tempt some in Paris to misjudge the dangers.
They dallied with revolt in June, only to be rebuffed by Berlin. It is time to sharpen swords for a real fight.
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