Day: June 12, 2012

Tuesday, 12 June 2012

07:38 – Benchmark Spanish ten-year bond yields closed the day yesterday at about 6.5% and are now at about 6.7% and climbing. Apparently, that $125 billion EU bailout promise bought Spain only literally a couple hours of respite. Investors aren’t stupid. And Italian benchmark yields are now above 6% and climbing.

Note that the EU is carefully not saying whether this alleged bailout will be provided by the current EFSF or by the ESM, which is supposed to come into effect in July. If it’s to be the EFSF, the problem is that the individual legislatures of the other eurozone nations have to approve unanimously any payments to Spain. That’s not likely to happen. Finland has already said it will want collateral, and it’s not even certain that Germany can approve such payments without a change to its constitution. If it’s to be the ESM, there’s an even bigger problem. Loans from the EFSF aren’t senior; loans from the ESM will subordinate current debt. Having seen what happened in Greece, private lenders are likely to react very badly to having their current Spanish debt holdings subordinated to an EU entity. There’s likely to be a massive sell-off of private debt, which will increase yields dramatically. And no private entity is likely to be willing to buy any more Spanish debt. Or Italian debt. Given that Spain is already essentially cut-off from private loan sources and Italy nearly so, an ESM-funded bailout is likely to be the final straw, putting both Spain and Italy in the position of having no private alternatives at all for refinancing their current debt or issuing new debt. Not that I believe this latest bailout will actually materialize.

11:08 – Benchmark Spanish ten-year bond yields have now reached a euro-era record. No one seems to know what to do, so I’ll offer some free advice that will solve the problem, not just for Spain but for the rest of the world’s governments: start living within your means.

Now. Today. Spend only money that you actually have, and in that spending make allowance for paying back what you already owe, quickly. If you owe a lot of money, as do nearly all governments, plan to spend no more than 50% of what you’re currently taking in. And 25% would be better. Use the excess to pay off what you owe, and under no circumstances borrow more. Period.

Take a meat axe to public spending. Cut everything by very large percentages. Fire 90% of government employees at all levels. Eliminate or drastically cut back on social welfare programs, unemployment compensation, public health care spending, the military, everything. Put all government land and other properties up for sale to the highest bidder. Cut government pensions retroactively to 10% of what’s currently promised. Increase the social security retirement age by one year per year until it gets to 75. String up the politicians and elected officials who’ve taken us down this ruinous road.

Ridiculous, you say? Can’t happen, you say? Well, ridiculous it may be, but it’s going to happen one way or another. Something that can’t go on, doesn’t. The only question is how much longer it can go on. The optimists I know think the collapse may be 20 or 30 years in the future. I don’t think it’ll be that long.

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