Category: politics

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.

08:14 – Spain has become the latest of the PIIGS to seek a bailout, leaving Italy the only remaining member of that original group that has not (yet) asked for international help to prop up its failed economy. The details, including the amount, are not yet clear, but what is clear is that as a sop to Spanish pride this won’t be called a “bailout”. Instead, it’ll be called a “recapitalization of Spanish banks”. But the duck walks and quacks.

What’s also clear is that, as always, the bailout will be much too little and much too late. More money down a rathole. The figures being bandied about are on the close order of $125 billion, which by even generous estimates are at most about 25% of what Spain needs to fix the immediate problems. Addressing the real structural issues would require at least $1 trillion, and probably much more. Spanish property values have, by official government estimates, fallen by about 20% since the onset of the crisis. The reality is that they’re currently down by 30% to 60%, with much further left to fall. In other words, every $1 billion in real estate loans that Spanish banks are carrying on their books at face value is actually worth only $800 million if you believe government figures. If you look at what properties are actually selling (or, more likely, not selling) for, that $1 billion is actually worth perhaps $500 million now and is likely to bottom out at $200 million or so. And that doesn’t include Spanish sovereign debt, nor the debt of Spain’s autonomous regions. $125 billion is not just a band-aid, but a tiny band-aid.

15:05 – One really has to have a sense of humor about these things. Spain, having been assured that its $125 billion bailout will be approved, is now concentrating on trying to convince everyone that it isn’t a bailout. Uh-huh.

Meanwhile, what no one talks about is that this bailout is to come from either the EFSF or the ESM, which supposedly have $500 billion to draw on. Not. They actually have literally only 1% of that amount to draw on. The other $495 billion is in the form of promises to pay by eurozone countries, including, ironically enough, Spain itself. So Spain, which doesn’t have the proverbial pot to piss in, finds itself in the odd position of being a partial guarantor of its own $125 billion loan. Not to worry, though. There are other guarantors. Italy, for example, is on the hook for something between a fifth and fourth of that amount. Of course, Italy is also potless. But, of course, there’s also France. Except that France is nearly as potless as Italy. Ultimately, it all comes down to Germany and Finland, neither of which are willing to pay.

The reality is that the European financial crisis is and always has been a gigantic game of three-card Monte, a pure shell-game designed to deceive markets about the reality of the eurozone economy. Every eurozone country has bankrupted itself by making promises it will never be able to keep. The costs of Europe’s social welfare programs never were sustainable, and that fact is now becoming abundantly clear even to the denialists. Twenty years ago, when Margaret Thatcher said the whole idea of the euro was fatally flawed, I thought she was stating the obvious. When the euro was introduced, I knew that it was doomed to a gigantic crash. I expected it to last a decade at most, and my estimate turns out to have been pretty accurate.

So now everyone is running around in circles crying that something must be done to save the euro. Wake up, folks. The euro can’t be saved. It never could have been saved. It was a terrible idea that apparently seemed to a lot of people to be a good idea at the time. It wasn’t. And now anyone can do is watch the euro collapse. All of the attempts to “fix” the problem are doomed to fail, and will ultimately just make the final collapse more painful.