Placing Spain on Deathwatch

Originally with our idea of ‘tracking’ posts, we began them with a discussion or preamble followed by a chronology that is updated as news-worthy events come in. We have decided to reverse the structure so the reader has ready access to the latest events. Below are what we consider to be major events leading to a Spanish default on debt, possible political revolution and withdrawal from the eurozone.

Keeping a Running Tab on the Situation

  • 20130530: Mike Shedlock reports: Spain Records Largest First Quarter Deficit in History; Tax Revenues Plunge 6.7% Year-Over-Year; Surprising Comments from German Finance Minister Wolfgang Shäuble.  So the depression in Spain deepens.
  • 20130405: According to Mike Shedlock, 97% of Spain’s Social Security Pensions are Invested in Spanish Government Debt. The issue is that any significant degradation in Spain’s credit position will boost rates while destroying the value of bonds. A default would be borne by Spain’s pensioners.
  • 20130402: From Mike Shedlock: Spain’s Deficit Set to Soar; GDP Poised to Plunge; Job Losses Fastest in 3 Years; IIF Wants Permanent Tax Hikes. The Spanish economy continues to implode.
  • 20130326: As the EU steps up its efforts to reach an unavoidable conclusion, the part of the Great European train Wreck that is Spain continues in slow motion. Read: Contrary To Prior Lies, Spanish 2013 Economic Contraction Even Worse Than In 2012
  • 20130217: These sovereign collapses are slow and painful and we have backed off documenting the decline. Today, to just keep the reader assured that the death spiral is alive and well we reference Mike Shedlock’s piece whose title speaks for itself: Spanish Debt Grows by €146 Billion, Largest Ever Recorded; Debt-to-GDP Highest Since 1910. Spain is not recovering but continuing its inexorable slide towards default and a eurozone exit.
  • 20121204: We return to the topic with a piece from Zero Hedge: Spain Plunders 90% Of Social Security Fund To Buy Its Own Debt. The significance of this is the future pain for the citizens of Spain being created by their own government. Similar to the practice in countries like the US and Canada, the government is spending current pension premium payments and replacing them with sovereign debt. As the debt held by foreigners matures it is rolled over onto the future Spanish pensioners. When the debt is defaulted on, the pensions will be gone.
  • 20121001: Grant Williams, in his latest piece titled Jeopardy published by John Mauldin’s group, gives  a wonderful overview of how bad Spain’s economic position really is. Basically, the authorities have fudged the figures and despite continually being caught, continue to do so.
  • 20120928: For a quick check of the pulse: The Misery In Spain Is Everywhere… And Has Never Been Higher.
  • 20120927: The positive feedback loop that is destroying the Spanish economy is such that daily documentation of it contributes very little. The effort is simply not worth the return. Spain is in its death throes. Ambrose Evans-Pritchard gives you, dear reader, a glimpse of the current issues: Spain’s rising debt costs eat up austerity gains.
  • 20120927: And another comment from Ambrose Evans-Pritchard, Europe’s betrayal of Spain. It should be read for a bit of background on Spain’s economic collapse and the duplicity of EU powers in the whole sordid disintegration of the EU Mengelian experiment.
  • 20120906: From Stratfor: Capital Flight Hits New Levels: The total amount of money that flowed out of Spain during the second quarter of 2012 was equal to 50 percent of the country’s gross domestic product, EU Observer reported Sept. 6, citing research from Nomura Securities. Indebted regions and banks in need of government assistance are contributing to Spain’s fiscal difficulties and hampering its access to financial markets. Such a run on banks usually prefigures a banking system collapse. Such will not be allowed to happen but it will cascade into a full sovereign bailout before a final collapse probably in the next year or so.
  • 20120905: We return to Spain after a week or so away, not because of the lack of relevant news, but the surfeit of stories available. As a sample consider Spain’s Social Security Fund Runs Out of Money; Full Sovereign Bailout Hits €300 Billion; Breathtaking Implosion in Every Way; Five Things Spain Needs to Do. The slow motion train wreck that is Europe has its slow-motion sub-themes, and the one that is center stage is Spain.
  • 20120828: A nice explanation of the problems facing the Spanish banking system was posted on Zero hedge today: Spain: Shall Bitterly Begin His Fearful Date. Basically it shows that Spa All efforts to bailout the banks transfer the private sector debt into sovereign debt  to be borne by Spanish bond holders.nish banks are insolvent but accounting policies hide the real loses carried on their books that are associated with bad real estate loans.
  • 20120821: Spain has been quiet lately. Just to keep the pot on simmer though we add this post from Mike Shedlock: Spain Predicts 4.3% Increase in Tax Revenues, Actual Results are 3.5% Drop; Proposed “Solution” is More Tax Hikes.
  • 20120801: Lest we think the patient is recovering, Mike Shedlock reports: Problems in Spain: Revenues Collapse, State Spends Nearly Twice as Much as Revenues Collected in First Half. Both factors are heading in the wrong if opposite direction.
  • 20120722: Ambrose Evans-Pritchard gives a lovely summary of the EU policies that are destroying Spain in Blaming the Spanish victim as Europe spirals into summer crisis. He also suggests a solution in which the northern states leave the eurozone and a southern euro is left. He explains how that would work, possibly avoiding defaults.
  • 20120721: InPrepare for Spanish Implosion: Businesses Threaten to Leave Spain Over Tax Hikes; Finance Minister Proposes 56% Tax on Short-Term Financial TransactionsMike Shedlock comments on the latest proposals the Spanish government is making. If implemented it will cause a flight of money and business from the European periphery, similar to what will happen in France with socialist policies there.
  • 20120721: Zero Hedge, in a Google translation from a Spanish source reports that: ‘Black Friday’ Blame-Game Escalates As Spain Is Out Of Money In 40 Days. The ‘Black Friday’ reference is to yesterdays bond auction that saw yields rise to record prices. Spain runs out of money in September. There will have to be further EU summits as the drop-dead date approaches that will create continuing market volatility without producing an effective rescue plan. Prime Minister Mariano Rajoy will promise a pint of blood from every Spaniard. Merkel will demand 2. Hollande will demand 3. Finland will want it delivered before they contribute. And so it goes.
  • 20120719: Ambrose Evans-Pritchard gives an update on the ‘Spanish flu’ in Spanish borrowing costs soar despite austerity. The key point is bailout costs are escalating, the fiscal situation continues to deteriorate and the 10-year bond yield is well over 7% at post crisis highs.
  • 20120716: Courtesy of Zero Hedge (IMF Says Japan And Spain Are Done, “Debt Ratio Will Never Stabilize”) and the IMF (Nurturing Credibility While Managing Risks to Growth): the debt/GDP ratios of Spain and Italy will not peak (stabilize), or in layman’s terms, they’re screwed.
  • 20120712: Ambrose Evans-Pritchard in his essay Debt crisis: Spain bows to EU ultimatum with drastic cuts, reveals the details of the cuts that Spain had to make to secure the recent bank bailout. A first observation is that the government has shifted the burden of the private sector bank loses onto the public’s shoulders. The second is that the the bad realestate debts that brought the banks down, ewmain on their books – the solvency issue has not been addressed. Finally, he makes this point: “It is pointless pain,” said Nobel economist Paul Krugman. “The new austerity measures make no sense. This will clearly deepen Spain’s depression.”
  • 20120701: We have not been posting much on Spain, partly because thew bailout of its banks and the latest EU summit appear to have improved things. Certainly the deck chairs have been shuffled to the delight of the markets, but although much has been suggested and promised, nothing has changed. No new money to date and no major ratified policy changes to date. To keep the pot on a low boil we have from Zero Hedge, Spain Reminds Us What The Main Problem With Blank Checks Is: Says Q2 GDP Will Be Worse Than Q1. This sends budget deficits in the wrong direction and makes austerity more difficult.
  • 20120617: Ambrose Evans-Pritchard writes that Greece will have to leave EMU whoever is elected. Key points:
    • Token bond purchases by the ECB will not help at this late stage. Half measures will accelerate the crisis by pushing other creditors down the ladder.
    • It will require monetary stimulus on a crushing scale to restore confidence, and arguably a pledge to do whatever it takes to cap real Italian and Spanish bond yields at 3pc. Not even the agile Mr Draghi can hope to extract this much from the men in Frankfurt.
    • The impasse is total.
  • 20120615: Mike Shedlock posted an article today: IMF Pressures Spain to Lower Salaries, Raise the VAT, Eliminate Housing Deduction. He outlines some IMF demands. The problem with a VAT increase is that as with any tax, it reduces consumption and economic growth at a time when that is exactly what is needed. The problem with removing any incentive towards housing is Spain’s banking problem is the huge overhang of housing which needs to be reduced. The usual IMF recommendation of a competitive devaluation is not possible because Spain is nailed to the cross of the euro. No help here.
  • 20120614: According to Zero Hedge, S&P: “Spanish Home Prices To Drop Another 25%”. The implication is that Spanish banks which just received a bailout of their insolvent real estate portfolios can expect more of the same requiring additional bailout money. This just makes the hole Spain is in deeper and guarantees no relief in the near future.
  • 20120525: Zero Hedge reports that It Begins: Spanish Region Of Catalonia Demands A Bailout. The three pillars of weakness in the Spanish economy are the central government with its high debt and deficits, Spanish banks that are essentially insolvent due to non-performing and defaulted real estate loans, and the regional government which seem more opaque to scrutiny of their budgetary woes. The latter condition appears to be changing. Where does the central government get the money to bail out the regions?
  • 20120523: Reuters tells us in Spain struggles to meet regions’ 36 billion-euro debts, that Spain has found another 28 billion euros in regional debts that were not made public previously. This gives investors an instant boost to the risk profile to any Spanish debt they hold, increasing their incentive to hold it and acquire more (not!).
  • 20120517: We explained in Some Initial Cost Estimates of Greece’s Default, how a bank run can bring down a perfectly healthy bank. A perfectly unhealthy bank, as most of Spain’s are, are even more susceptible to bank runs. Today we read in Zero Hedge: Nationalized Spanish Bank Plummets On News Of Bank Run. The collapse of Spain will be much faster than the collapse of Greece which is still imploding. And to confirm the grim picture from MarketWatch: Moody’s cuts ratings of 16 Spanish banks.
  • 20120511: Mike Shedlock collects some of the latest news on Spanish banks: Spain Nationalizes BFA and 45% of Bankia; No Bid for CatalunyaCaixa, Bank Worth Less Than Zero; Der Spiegel: Germany Fears “Bottomless Pit”. Also: Spain nationalises Bankia as euro crisis escalates. Spain’s insolvent banks are collapsing and the government is having to step in and nationalize them. This requires money that Spain does not have. We have a selection of alternatives:
    1. One or likely more banks will either be allowed to fail or cannot be prevented from failing.
    2. The government will borrow money (increase the deficit) to rescue selected banks – at least until the money runs out.
    3. In any case and the above cases, interest rates and CDS spreads risk blowing out, accelerating the need for a bailout. But we have been hearing for a long while that “Spain is too big to bail”.
    4. Good luck – we’re all going to need it.
  • 20120428: Mike Shedlock gives us an update of the deteriorating employment picture in Spain in Depression in Spain: Unemployment Rate Up .5 Percentage Points to 23.6%; Expect Much Higher Rates Later This Year; When is the Breaking Point?. As he says, I do not know the precise breaking point. Whatever it is, Spain has little chance for growth prospects for a decade as long as it remains in the eurozone.
  • 20120427: Nigel Davies writing in The Telegraph, comments on the downgrade in Spanish debt: Spanish economy in “huge crisis” after credit downgrade. Key points are:
    • Standard and Poor’s weighed in with a two-notch downgrade of the government’s debt.
    • Unemployment shot up to 24 percent in the first quarter.
    • Retail sales slumped for the twenty-first consecutive month.
    • Spanish banks could need state aid and the country faced further downgrades if its debt troubles continue to escalate.
    • Spain’s austerity measures have aggravated economic woes. The treasury ministry estimated the increase of 365,900 jobless people in the first quarter meant a loss of 953 million euros in tax income, making deficit cutting an even bigger chore.
  • 20120417: There is almost daily negative news out of Spain, so much so we have stopped reporting most of it. Just to keep things moving though we present this piece from Zero Hedge: This Is The Chart Spooking Europe This Morning. Spanish banks’ bad loan ratio is now at 8.16% of their total book or €143.8 billion.
  • 20120411: Ambrose Evans-Pritchard focuses on Spanish and Italian banks in an article: Europe’s banks beached as ECB stimulus runs dry. The recent ECB €1 trillion liquidity injection was used by these banks to purchase their own countries’ sovereign debt. With the recent rise in yields due to increased perceived risk of sovereign default, these banks’ positions are now facing major losses.
    • He goes on to say Weaker lenders are merely parking the ECB’s ultra-cheap funds in these bonds until they need the money to roll over their own debts. That is coming due since European banks have €600bn in redemptions over the rest of the year. Many are now stuck with losses that they cannot afford to crystalise.
    • the ECB … will have to cut rates to near zero, and ultimately launch full-scale QE, perhaps as soon as the third quarter.”
    • For Spain, this is the issue: Spanish banks have been buying sovereign debt with money borrowed from the ECB’s liquidity program which has ended. This has artificially propped up Spanish auctions and we are now seeing the results in rising yields and failed auctions. This increases the risk of sovereign default in parallel with the increased risk of bank insolvency leading to the need for  bailouts. In short, Spain is a dead-man walking.
  • 20120411: And in another article, Spanish epiphany as depression deepens?, Ambrose gives the stats that industrial output fell 5.1% (y/y) in February, after 4.3% in January and 3.5% in December. Also, that unemployment is expected to reach 27.5pc by the end of the year (which is roughly 32pc using the old measure from the 1990s, based on a Bank of Spain study). This is simply a worsening depression. The only chance the patient has is to exit the EMU, default and devalue – the standard path countries take to transcend these difficulties.
  • 20120410: Ambrose Evans-Pritchard at the Telegraph has his usually succinct take on EU issues, this time Spain: Spain’s ‘lose-lose’ struggle reignites euro crisis. A disastrous debt auction last week was taken as a sign that Spanish banks have exhausted their LTRO money and can no longer prop up the Spanish state through this back-door funding – so expect more failed auctions.
  • 20120410: Mike Shedlock calculates Spain’s budget deficit will be 7% rather than the official 5.3%, explained in Inconsistencies in Spain’s Budget Suggest Deficit will be 7% not 5.3%; Andalucia Regional Government Will Not Agree to Deficit Targets; Only 26% Trust Prime Minister to Overcome Crisis. The EU has demanded that Spain adhere to a 3% deficit or face reprisals. The real impact will be in bond yields which could make upcoming auctions even less successful. Recall in the year before Greece defaulted, budgetary and accounting irregularities there were coming to light.
  • 20120407: The trigger for financial crises has been overinflated housing markets, first in the US then in various EU countries including Ireland, Hungary and Spain. Mike Shedlock posts some quick Spanish stats: Over 20% of All Real Estate Loans in Spain are Delinquent; Construction Firm Delinquencies Ended 2011 at 17.65%; Late Payment on All Loans Ended 2011 at 7.61%. For those not tracking real estate, these are really bad numbers. They may well be enough to bring down Spanish banks which would have to be nationalized shifting the debt into the sovereign category – not good for Spain. The translation provided is a bit opaque but the magnitude of delinquent loans would seem to be in the tens to hundreds of billions of euros.
  • 20120405: Zero Hedge presents excerpts from a UBS report: On The Pain In Spain. The article is good as it gives a graphical picture of some important Spanish economic data such as house prices and unemployment numbers. All are very bad but all are deteriorating.
  • 20120404: For our daily dose of horrible news from Spain we turn to Mike Shedlock. The title says it all: Spanish Economic Drama: Nearly 57% of Budget Devoted to Pensions, Unemployment Benefits, and Interest; Unemployment Rate Hits 23.6%; Spain Warns of Soaring Debt. We would observe that the 57% of the debt devoted to pensions, UI benefits and interest are generally considered to be non-discretionary. This leaves a rather small portion from which to make deficit reduction cuts.
  • 20120403: Zero Hedge has a longish article titled Next Up Spain: OpenEurope Looks At Spanish Banks’ Underprovisioned 20% In Toxic Loans. They review a reportby the organization OpenEurope. A few key points are:
    • €80bn of €396bn (1/5) in loans that Spanish banks have made to the bust construction and real estate sectors is considered ‘doubtful’ and potentially toxic, … with the banks only holding €50bn in reserves to cover potential losses. Already dropping, house prices could potentially fall another 35%, meaning … hefty losses as more households default on their mortgages.
    • As domestic banks are currently the main buyers of Spanish government debt, this could also lead to major funding problems for Spain. … threatening to push the whole country into a full bailout.
    • The level of unpaid debt on the balance sheets of local  and regional governments has risen by €10bn (38%) since the start of the crisis (now topping €36bn). This will likely be paid off by the central government, increasing the country’s debt and deficit.
    • The country’s long- term unemployment has now reached 9% of the economically active population, and youth unemployment reached 50.5% last month.
  • 20120331: John Mauldin gave a nice overview of the Spanish crisis: All Spain All the Time. Key points are:
    • the regional Spanish banks, the cajas, are bankrupt, as they made massive loans for construction and mortgages.
    • Spanish private debt is 220% of GDP, dwarfing government debt, which is high and rising.
    • The government wants to increase taxes or reduce spending by 17% to get the deficit down from over 8% to 5.5% … such policies … in Greece … meant lower, not increased, revenues.
    • Mark Grant suggests that Spanish debt may be closer to 130% of GDP.
  • 20120331: Mike Shedlock covers a number of issues with Violence, Firebombings Erupt as Spain Announces €27 Billion Deficit-Cutting Plan; Spanish Economy Will Implode; Spain Headed for Bond Revolt and Bailouts.
    • He notes that MarketWatch reports Spain Announces €27 Billion Deficit-Cutting Plan.
    • The result was reported by NPR: Austerity Measures Prompt Spanish Workers To Strike. The result: a general strike and violence in the streets. Recall Greece a year ago.
    • As Mish notes, With unemployment rate already at 23.3% austerity measures are guaranteed to make matter worse, and tax hikes on top of it all will be the nail in the coffin.
    • His prediction: A bond market revolt and bailout are in the cards this year. Ultimately, Spain will not survive in the Eurozone.
  • 20120330: Zero Hedge has two articles today.
    • The first is titled Is Spanish Regional Debt Out Of Control?. ZH notes Spanish regional debt currently stands at 13% of GDP and has surged from EUR60bn in 2006 to over EUR140bn currently. … What is more worrisome is the heavily front-loaded nature of the maturing debt with substantial refinancing needs in the next 2 years. In other words, regional debt is out of control and may require central government support both for the debt and the loans carried by commercial banks, adding to the overall central government burden.
    • The second is titled The Insanity Of The Sarkozy Carry-Trade’s Contagion Risk In 3 Charts. Spanish banks have an exceptionally high exposure to their own country’s sovereign debt as well as eurozone government debt. As contagion fears and a new round of sovereign default fears arise, the banks risk huge loses on their debt holdings. The risk of this is the need for central bank intervention and an increase in the risk of sovereign default.
  • 20120329: Any student of the European Train Wreck will understand that all of the money to bailout EU countries, banks and institutions comes from two sources, the IMF and institutions and special funds within the EU. The astute observer will have asked where these institutions get their money from. The answer is the member countries. So Spain has an obligation to help fund the bailout of countries such as Ireland, Greece and Portugal as well as Spain itself. Hopefully at this point, you are feeling somewhat incredulous: countries that are broke are borrowing money from countries that are broke in part to finance themselves and all the other countries that are broke. Spain’s official debt/GDP as reported in Fighting With Spanish Windmills, Or How Spain’s Debt/GDP Ratio Is Double What Is Reported is 68.5% but when their European obligations are added in, it rises to 133.8%. It is only a matter of time until default occurs for some obligation.
  • 20120328: Ambrose Evans-Pritchard reports in Spain slumps back into recession that Spain has gone back into recession due to austerity measures designed to cut the deficit.  He also notes that last year’s deficit from 6pc to 8.5pc of GDP had damaged Spain’s “fiscal credibility” resulting in elevated bond yields. This in tern moves them closer to a default scenario.
  • 20120317: Mike Shedlock has a good pieces on the topic: Spanish Banks Account for 47% of ECB Credit in February; Spain’s Real Debt to GDP Ratio is 110% Not Reported 68%; Spain Will Implode. It’s a Wonder it Hasn’t Already. Key points are:
    • Spain’s weight in the eurozone economy is roughly 14%. Yet Spanish Banks Account for Nearly Half of ECB Credit in February.
    • Spain’s debt-to-GDP ratio is wildly understated because it does not include regional debt, nor does it include government guaranteed bank debt and other miscellaneous items. It is actually 113% of GDP rather than the generally reported figure of 68%.
    • Spanish unemployment [is] over 23%, with youth unemployment of 49%.

While Greece was being subjugated by the eurocrats, speculation in the media and the blogosphere was that Portugal would be next with Ireland a close contender. The logic of this argument based on their debt situation and the state of their economies seemed irrefutable. So we were surprised when the guns of Brussels were turned on Spain.

Perhaps it was Spain’s assertion of sovereign right when they gave the middle finger to the eurocrats and told them what their budget deficit would be for the coming year. As noted by The Economist, Mariano Rajoy. Spain’s new center-right prime minister, told Brussels and the rest of the world to forget the budget-deficit target that Spain had agreed to hit this year. Rather than 4.4% of GDP it would aim for a significantly looser 5.8%.

Brussels fire back threatening a hefty fine if they didn’t bring the deficit down to 3% (see Brussels Presses Spain for Budget Details on How Spain Will Reduce Deficit to 3% of GDP; Threatens 2 Billion Euros Fine). Granted the Maastricht Treaty required EU members to limit their budget deficits to 3%. But where were the eurocrats in 2003, 2004, 2005, 2006, 2010 and 2010 when Germany exceeded treaty deficit provisions?

Well, to adapt a common saying, ‘Hell has no fury like a eurocrat scorned’ – as the Greeks found out.

That all is not well in Spain has been apparent for some time. As The Guardian notes, Spain has Europe’s worst unemployment rate at 22.8% of the population. Youth unemployment is above 50% (The Telegraph). The state of Spanish banks has been known to be precarious and ZeroHedge reported on March 14, that Spanish banks are having to increase their capital position by borrowing heavily from the ECB.

If financial markets become focused on Spain along with EU officials, Spain’s position should deteriorate swiftly. With this post, we begin actively monitoring the situation.

20130405: According to Mike Shedlock

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