Spain’s army predicts 2 more waves of coronavirus

Source: AP
May 8 2020
By Joseph Wilson

BARCELONA, Spain (AP) — Spain’s army expects there to be two more outbreaks of the new coronavirus, according to an internal report seen by The Associated Press.

The army report predicts “two more waves of the epidemic” and that Spain will take “between a year and a year-and-a-half to return to normality.”

The document was published by Spanish newspaper ABC on Friday and later confirmed as authentic by the AP.

“There will be a second wave of COVID-19” in the autumn or winter the army report said, adding that it will be less serious than the initial outbreak due to higher immunity in the population and better preparations.

It said that a “possible third wave would be greatly weakened” next year if there is a vaccine available.

The report was produced by the army as its own forecast of the pandemic, which it can share with civilian authorities. Spain’s government has its own experts who make the final decisions on health policy, taking into account the opinion of other institutions and outside experts.

Spanish Prime Minister Pedro Sánchez has warned that he considers it highly probable that the virus will make comebacks until a vaccine is developed.

Health officials in Spain are carrying out a epidemiological survey to determine the extent of the contagion, including the several thousand people who have been mildly ill with cough and high fever but never been tested in a hospital. There are also believed to be thousands more who were infected but never showed symptoms. On Friday, the health ministry said that medical workers had taken blood samples from over 46,000 people over the first week of the survey. It plans to test 60,000-90,000 overall.

Over 26,000 Spaniards are known to have died from the COVID-19 virus. Spain has gotten control over the outbreak which has infected a confirmed 260,177 people in the country and is now easing restrictions to activate its battered economy.

Spain’s army has played a major role in combating the virus under the nation’s state of emergency established in mid-March. Thousands of soldiers and military medics have deployed to set up field hospitals, disinfect nursing homes and transport hubs, and transport patients between hospitals and corpses to morgues.

When considering steps to prepare for the coming months, the army report said “it would be extremely important” to develop a contact tracing method using mobile phone applications. Spain so far has not done that and is relying on a local network of public health clinics to monitor future cases.

Greece and Spain helped postwar Germany recover. Spot the difference

People exchanging food for tickets in 1923 Germany. 'Many, including Keynes, argued that [reparations imposed on Germany following the Versailles treaty] led to the rise of the Nazis and the second world war.

Πηγή: The Guardian
By Nick Dearden
Feb 27 2013

Sixty years ago, half of German war debts were cancelled to build its economy. Yet today, debt is destroying those creditors.

Sixty years ago today, an agreement was reached in London to cancel half of postwar Germany's debt. That cancellation, and the way it was done, was vital to the reconstruction of Europe from war. It stands in marked contrast to the suffering being inflicted on European people today in the name of debt.

Germany emerged from the second world war still owing debt that originated with the first world war: the reparations imposed on the country following the Versailles peace conference in 1919. Many, including John Maynard Keynes, argued that these unpayable debts and the economic policies they entailed led to the rise of the Nazis and the second world war.

By 1953, Germany also had debts based on reconstruction loans made immediately after the end of the second world war. Germany's creditors included Greece and Spain, Pakistan and Egypt, as well as the US, UK and France.

German debts were well below the levels seen in Greece, Ireland, Portugal and Spain today, making up around a quarter of national income. But even at this level, there was serious concern that debt payments would use up precious foreign currency earnings and endanger reconstruction.

Needing a strong West Germany as a bulwark against communism, the country's creditors came together in London and showed that they understood how you help a country that you want to recover from devastation. It showed they also understood that debt can never be seen as the responsibility of the debtor alone. Countries such as Greece willingly took part in a deal to help create a stable and prosperous western Europe, despite the war crimes that German occupiers had inflicted just a few years before.

The debt cancellation for Germany was swift, taking place in advance of an actual crisis. Germany was given large cancellation of 50% of its debt. The deal covered all debts, including those owed by the private sector and even individuals. It also covered all creditors. No one was allowed to "hold out" and extract greater profits than anyone else. Any problems would be dealt with by negotiations between equals rather than through sanctions or the imposition of undemocratic policies.

Perhaps the most innovative feature of the London agreement was a clause that said West Germany should only pay for debts out of its trade surplus, and any repayments were limited to 3% of exports earnings every year. This meant those countries that were owed debt had to buy West German exports in order to be paid. It meant West Germany would only pay from genuine earnings, without recourse to new loans. And it meant Germany's creditors had an interest in the country growing and its economy thriving.

Following the London deal, West Germany experienced an "economic miracle", with the debt problem resolved and years of economic growth. The medicine doled out to heavily indebted countries over the last 30 years could not be more different. Instead, the practice since the early 1980s has been to bail out reckless lenders through giving new loans, while forcing governments to implement austerity and free-market liberalisation to become "more competitive".

As a result of this, from Latin America and Africa in the 80s and 90s to Greece, Ireland and Spain today, poverty has increased and inequality soared. In Africa in the 80s and 90s, the number of people living in extreme poverty increased by 125 million, while economies shrank. In Greece today, the economy has shrunk by more than 20%, while one in two young people are unemployed. In both cases, debt ballooned.

The priority of an indebted government today is to repay its debts, whatever the amount of the budget these repayments consume. In contrast to the 3% limit on German debt payments, today the IMF and World Bank regard debt payments of up to 15-25% of export revenues as being "sustainable" for impoverished countries. The Greek government's foreign debt payments are around 30% of exports.

When debts have been "restructured", they are only a portion of the total debts owed, with only willing creditors participating. In 2012, only Greece's private creditors had debt reduced. Creditors that held British or Swiss law debt were also able to "hold out" against the restructuring, and will doubtless pursue Greece for many years to come.

The "strategy" in Greece, Ireland, Portugal and Spain today is to put the burden of adjustment solely on the debtor country to make its economy more competitive through mass unemployment and wage cuts. But without creditors like Germany willing to buy more of their exports, this will not happen, bringing pain without end.

The German debt deal was a key element of recovering from the devastation of the second world war. In Europe today, debt is tearing up the social fabric. Outside Europe, heavily indebted countries are still treated to a package of austerity and "restructuring" measures. Pakistan, the Philippines, El Salvador and Jamaica are all spending between 10 and 20% of export revenues on government foreign debt payments, and this doesn't include debt payments by the private sector.

If we had no evidence of how to solve a debt crisis equitably, we could perhaps regard the policies of Europe's leaders as misguided. But we have the positive example of Germany 60 years ago, and the devastating example of the Latin American debt crisis 30 years ago. The actions of Europe's leaders are nothing short of criminal.

Stiglitz: Greece and Spain are ‘in depression’

Πηγή: The Raw Story
By AFP
Oct 17 2012

Greece and Spain are in “depression, not recession”, Nobel prize-winning economist Joseph Stiglitz said on Wednesday, blaming tough austerity measures for their downward economic spiral.

Stiglitz also maintained that the International Monetary Fund was “a little too optimistic” in its forecast last week that the eurozone economy would shrink by 0.4 percent in 2012 and rise by 0.2 percent next year.

“I’m more pessimistic than they are (about growth)… I see significant risk of continuing turmoil,” he said in New Delhi on the sidelines of a conference held by the Organisation for Economic Cooperation and Development.

“Spain and Greece are in depression, not recession. That impact was brought about by austerity” with the countries now trapped in a vicious cycle of spending cuts and slumping growth, he said.

Stiglitz, who served as a senior advisor to former US president Bill Clinton, was speaking on the eve of a key two-day summit of EU leaders in Brussels that will seek to address the eurozone crisis.

“Austerity is bringing Europe down and diminishes chances of making things work — it is the wrong measure,” said the Nobel laureate, who is a professor at New York’s Columbia University.

Unemployment in nearly bankrupt Greece is at 25.1 percent as its economy contracts and it negotiates with lenders about more budget cuts.

In Spain, the jobless rate is 24.6 percent with the government unveiling new spending curbs as it seeks to fend off another bailout that would bring more foreign supervision of the Spanish budget.

Stiglitz expressed scepticism EU leaders will commit to proposals to implement a banking union involving safeguards for depositors’ savings — measures needed, he said, to avert a flight of capital.

“There’s no real evidence to suggest EU leaders are willing to do anything but temporise” about Europe’s debt woes, he told AFP, adding time is running out to address the situation.

“Things are unravelling in the banking system in Spain,” said Stiglitz, who was attending an Organisation for Economic Cooperation and Development conference on devising new statistical indicators to assess economic wellbeing.

Stiglitz, author of a recently published book, “The Price of Inequality: How Today’s Divided Society Endangers Our Future,” said widening unemployment in Western countries is increasing social divides.

“Those at the lower end of the income scale see wages driven down and because tax revenues decline, fiscal pressures weigh on public services — they get hammered in every way,” he said.

Turning to US problems, he added it was unlikely the latest round of US quantitative easing — aimed at spurring growth by lowering borrowing costs — would fuel inflation in the United States because its economy is so weak.

He warned it was essential that US Republicans and Democrats clinch a compromise on the so-called “fiscal cliff” facing the country — automatic budget cuts and higher taxes due to take effect in January.

“Going over the cliff,” he said, would “markedly slow down the US economy” from its current tepid growth.

Germany told to 'come clean’ over Greece

There were reports that Berlin is so worried that a Greek crisis would spin out of control that it is ready to back the next €31bn payment to Athens under its EU-IMF Troika rescue

Πηγή: The Telegraph

By Ambrose Evans-Pritchard
Sept 30 2012

German Chancellor Angela Merkel must “come clean at long last” and admit that Greece will need help for another seven or eight years, the German opposition leader said over the weekend.

“The Greeks must stand by their commitment, but we must give them time. We cannot tighten the screws any futher,” said Peer Steinbruck, the Social Democrat candidate for chancellor. He said the political and economic fall-out from Greek ejection from the euro would be devastating and must be avoided.

The plea came amid reports that Berlin is so worried that a Greek crisis would spin out of control that it is ready to back the next €31bn payment to Athens under its EU-IMF Troika rescue, despite failure to comply with the terms. Wirtschaftswoche, a German news magazine, said Greece’s parliament merely needs to vote on a list of detailed reforms.

It cited warnings from a top EU official that “domino-effect” dangers are too great to allow the ejection of Greece from EMU. Authorities across the world – including the Bank of England – fear a surge of capital flight from Portugal, Ireland, Spain, and Italy if the sanctity of monetary union is violated.

Diplomats say concerns go beyond financial damage. Both EU and US officials are worried that the fragile security system of the Western Mediterannean could start to unravel if Greece is alienated and withdraws from Nato under populist leaders in the future.

Washington has put intense pressure on Chancellor Merkel to accept a compromise that keeps Greece firmly anchored in the European bloc. Her ministers haves toned down their rhetoric in recent days.

François Heisbourg from the International Institute for Security Studies said an acrimonious Greek exit would be “extremely challenging”, leading to instability in the Balkans and opening the door to Russian meddling.

The apparent Troika deal gives Greek premier Antonis Samaras a chance to prove he can deliver an austerity package of €13.5bn, mostly cuts in pensions, benefits, and top civil service pay. His three-party coalition agreed on the “main points” in bruising talks last week.

Mr Samaras told the New York Times that there is “absolutely zero risk of Greece leaving the Euro” but he also said that lack of EU help would mean the “end of Greece”.

Payment of the next tranche may lift one cloud hanging over the markets but Greece’s drama has been eclipsed by events in Spain, where Catalonia’s drive for independence has rocked the country. The tense mood has not been helped by calls from top figures in Madrid for deployment of the Civil Guard to crush separatists.

Moody’s is expected to downgrade Spanish debt to junk status this week, which would make it harder to lure back global investors. The country is in limbo until premier Mariano Rajoy decides whether to request a rescue from the EU bail-out fund and sign a memorandum giving up fiscal sovereignty.

Analysts say the decision by Germany, Holland, and Finland to renege on a June summit deal to recapitalise Spanish banks directly may have hardened his will to resist. Paul de Grauwe from London School of Economics said the move by the AAA trio is a “disgrace”.

EMU Plans Package Deal For Greece, Cyprus, Spain: Press

Πηγή: Forexlive
By MNI
Sept 23 2012

FRANKFURT (MNI) – Eurozone authorities are preparing a broad, multiple-nation bailout package including a modified program for Greece, a second bailout for Spain and a first program for Cyprus, Germany’s Financial Times Deutschland reported over the weekend, citing Eurozone sources.

Fresh support measures for the three countries could be negotiated and presented to national parliaments as a package by November at the latest, the newspaper reported.

A joint package is aimed at breaking resistance against additional concessions to Greece – particularly among German parliamentarians – by presenting a broad solution that could represent a breakthrough in the
debt crisis, the paper said.

Initially, decisions were scheduled to be taken in October. According to the report, however, Berlin is putting the brakes on closing aid-related deal at the next EU summit in mid-October.

Inspectors from the International Monetary Found, the European Central Bank and the European Commission – the so-called “Troika” – will not have concluded their report on Greece by the next Eurozone finance ministers’ meeting on October 8, the paper said.

According to a separate report in Der Spiegel Sunday, preliminary findings from the Troika show that Greece’s budget shortfall amounts to around E20 billion, almost the double of previous estimates.

However, a Greek Finance Ministry official in Athens said the gap was E13.5 billion, and that it would be bridged with E11.5 billion in spending cuts and E2 billion in new revenues.

A New Run On The Banks? Spaniards Pulling Cash Out At Record Rates

Spanish unemployment climbed to 24.4 percent of the workforce, the government said.

Πηγή: IBT
By OLIVER TREE
August 18 2012

Spanish consumers are pulling their cash out of banks at record levels, according to figures released on Tuesday.

Private sector deposits fell by nearly 5 percent in July to €1.509, the Telegraph reported, citing European Central Bank data, as public confidence in the banking system reached all-time lows amid a worsening economic situation.

The news comes after bond markets continued to hammer the debt-ridden euro zone nations Spain and Italy last week.

On Friday, the interest rate on a 10-year loan to the Spanish government briefly topped 6 percent -- a level that forced Greece into a default earlier this year, despite massive financial support from international sources -- before settling back to 5.96 percent.

"The pick-up in yields is a clear negative headline for Spain," Jo Tomkins, an analyst at 4Cast, a consulting firm, told the New YorkTimes. "The country is facing a double-whammy of low growth and tough austerity, and [there are] doubts that it will be able to hit already optimistic deficit targets."

The surge in bond yields was followed by a two-notch credit downgrade by Standard & Poor's, which slashed the country's rating to BBB + on worries about the government's exposure to the nation's ailing banks. The current reduced rating is still considered to be investment grade.

The yield on Spain's two-year notes surged to the highest level in 18 years, Bloomberg News said.

Meanwhile, Spanish unemployment climbed to 24.4 percent of the workforce, the government said.

Italy's cost of borrowing was close behind its western neighbor: The yield on a 10-year note rose Friday to 5.84 percent from 5.24 percent.

"These ... results certainly came at a price which, in turn, leaves a question mark over how long Italy will be able to finance itself at levels that can be deemed sustainable," Richard McGuire, senior fixed income strategist at Rabobank, told the Wall Street Journal.

Europeans to Debate Further Aid for Greece

Πηγή: New York Times
By STEVEN ERLANGER
August 23 2012

PARIS — Vacation is over early this year in the euro zone, withGreece and its shaky future back on the table and Spain waiting in the wings to ask for help from European bailout funds.

The political debate in Germany over the euro has resumed at a heated level, Italy is preparing for a spring election and the new Socialist government of France must come to grips with how it will meet its own deficit targets for next year when growth is close to zero.

“September promises to be pretty dramatic in the euro zone,” said Megan Greene, director of European research at Roubini Global Economics.

The first problem for euro zone leaders is Greece. After two rounds of legislative elections, the Greeks finally gave the center-right leader Antonis Samaras enough votes to form a coalition without the leftist party Syriza, and he has spent the summer trying to find another $14.5 billion in spending cuts and new revenue over 2013 and 2014 to qualify for the next round of bailout money it needs to stay solvent.

Mr. Samaras, citing an ever-deeper recession, is asking for two years more to get the economy growing and increase revenue before hitting deficit targets. Germany’s chancellor, Angela Merkel, seems willing to consider it because she is committed to keeping Greece in the euro zone.

But with German elections next year, there are strong voices in her coalition warning against yet another bailout — a third, for a Greece that never seems to meet its deficit targets — and who suggest that a Greek departure from the euro is no longer out of the question.

To coordinate a response to Mr. Samaras, Ms. Merkel met President François Hollande of France in Berlin on Thursday night for a private, working dinner. Mr. Hollande is a firm supporter of Greece’s remaining with the euro and a vocal opponent of a steady diet of austerity for the suffering countries of the European periphery, not to speak of his own.

In a brief news conference before the dinner, Ms. Merkel said that Greece must stick to its commitments and that she was waiting for a report from the international lenders known as the troika on how Greece was performing. “We will, and I will, encourage Greece to continue on its path to reform, which has demanded a lot of the Greek people,” she said.

Ms. Merkel said Wednesday that for the European Union, Greece is “not just about economic questions, but about deeply political questions and thus also about the future of Europe as a whole.”

She will meet with Mr. Samaras on Friday, to hear his plans, while he will come to Paris for a Saturday morning meeting with Mr. Hollande.

But Ms. Merkel and French officials caution that no decisions will be reached at these meetings, and that they will await a report on Greece by the troika — the European Union, the European Central Bank and the International Monetary Fund — which is expected by late September or early October. That will lead to a European Union summit meeting scheduled for Oct. 18-19, in which some decisions on Greece are expected.

In an interview with Le Monde published Thursday, Mr. Samaras said he “will explain” to Ms. Merkel and Mr. Hollande, “with all the necessary details, that Greece can succeed and that it is changing.”

The troika is expected to accept Mr. Samaras’s plans in good faith, authorizing the next loans to Greece, in part because the permanent European bailout fund, the European Stability Mechanism, will not yet be in place to handle whatever instabilities might develop. The $600 billion fund, scheduled for July, has been held up by a lawsuit in Germany; the nation’s Constitutional Court is expected to rule on Sept. 12.

The German debate over Greece continues to be harsh and the government appears divided, with skepticism that Mr. Samaras’s plan would not mean extra costs for Germany. The finance minister, Wolfgang Schäuble, said Thursday that the issue was to get Greece economically credible so it could go back to the market. “More time is not a solution for the problems,” he said. “More time possibly means more money, and more money would require a new program.”

Even if Mr. Samaras gets more slack, Greece may not make it, Ms. Greene, from Roubini Global Economics, said. “Two more years are not a game-changer for Greece, and even if the troika accepts Samaras’s plans, they will have to be legislated through the Greek Parliament, and the coalition could fall apart.”

Ms. Greene expects that the Samaras coalition will eventually collapse under the fierce political pressure of the effort to remake the country, and that a new government could abandon the euro.

“There’s very little chance that Greece will stay inside the euro zone,” she said. “I think Greece could leave as early as next spring.”

Others disagree, saying that the risks of contagion if Greece leaves are enormous, and that it is simply less costly in the long run to nurse it along.

Greece aside, Italy and Spain, the third- and fourth-largest economies in the euro zone, represent another major headache, with investors earlier this summer pushing the interest rates on their bonds to unsustainable levels. The European Central Bank director, Mario Draghi, made a large impact on the soft summer market in a news conference this month after the bank’s board met when he said that “the euro is irreversible” and that the bank was unanimous in agreeing “to do whatever it takes to preserve the euro as a stable currency.”

The board will meet again on Sept. 6. There are suggestions in the news media that the bank will try to intimidate speculators by setting limits to the spreads, agreeing to buy Spanish or Italian bonds in sufficient quantities for a long enough time to beat back speculation.

But there is no confirmation of this plan from the bank, and there are problems with the idea, especially, as some suggest, if the bank decides to set a limit but not make it public, to try to keep flexibility. The markets will try to test the limits, and the bank is insistent on conditionality: it will buy bonds only if those governments agree to meet economic conditions, on debt limits, for example, or structural reform.

The bank is insistent on intervening only on short-term debt, while longer-term bonds should be bought by the bailout funds, which are themselves limited in size — and too small to cope with a full-scale bailout of Spain or Italy, let alone both of them.

The bank, Ms. Greene said, “is building a bridge to a bridge” — to give policy makers time to come up with a real response to the euro zone crisis — “a clear and credible road map to a fiscal and banking union.”

If the politicians can do that, the bank is likely to be even more adventurous, but Mr. Draghi and the director of the International Monetary Fund, Christine Lagarde, have both made it clear that their institutions cannot and will not take the place of political leaders, who must agree on how to restructure the European Union and the euro zone to reduce economic imbalances, create growth and enforce sustainable economic policies.

Spain, which has received approval for a $123 billion bank bailout, has been reluctant to ask for bond-buying help because Prime Minister Mariano Rajoy is nervous about the conditions that might be imposed and the political reaction to them. But many expect Spain to seek help after the permanent bailout fund is set up and before a big rollover of debt on Oct. 19.

Greece to Request Extension on Austerity Measures

Protesters shout slogans against reforms in Greece at an Aug. 1 protest.

Πηγή: Spiegel
August 15 2012

Greek Prime Minister Antonis Samaras is expected to have a difficult mission next week. He wants to persuade German Chancellor Angela Merkel to ease strict austerity conditions on his country, and he may also need to ask for billions in additional aid. Speculation is also growing about a possible bond-buying program for Spain.

Antonis Samaras is showing a bit of courage at the moment. Next week the Greek prime minister plans to travel to Berlin, where he wants to personally persuade Chancellor Angela Merkel to loosen tough conditions for aid, despite growing criticism of Athens in Germany. Samaras plans to seek a two-year extension to 2016 of an austerity plan that was previously agreed with the so-called troika of the European Commission, the International Monetary Fund and the European Central Bank, the Financial Times is reporting, citing a document it has obtained.

The British newspaper is reporting that Samaras wants to first present the plan next week to French President François Hollande and then travel to Berlin one day later for a meeting with Merkel. Iannis Mourmouras, Samaras' chief economic adviser, told the newspaper the extension was justified because of the country's deep recession, with the economy set to shrink this year by 7 percent.

Under current agreements with its international donors, the Greek government must cut its budget by €11.5 billion ($14.2 billion) by 2014. The new plan would see Greece reducing its government budget by 1.5 percent of annual GDP instead of the previously foreseen 2.5 percent. This would spread the implementation of all the cuts over a four-year period.

According to the document cited by the Financial Times, Greece will also need additional funding of €20 billion to support its running budgets. However, Athens' proposal does not foresee it requesting that money from its European partners. Instead it would be raised from an existing IMF loan or issues of treasury bills. According to the document, the country is hoping for a postponement of the start of repayments of its first EU-IMF loan from 2016 until 2020.

Successful Bond Float

On Tuesday, Greece succeeded in auctioning off bonds worth €4 billion, although they come due in just three months. The last-minute auction had been conducted to cover a bond redemption due on Aug. 20 and also happened with indirect aid from the ECB, which allowed the Greek central bank to issue additional emergency loans to the country's banks, which in turn bought up the Greek bonds with short maturities. The money had been needed to buy time until Greece obtains its next tranche of aid.

Samaras' plan to delay Greece's austerity plan is a daring one given a recent sharpening of criticism against Greece. In Germany, politicians within Merkel's conservative government coalition are already talking openly about the possibility of a Greek exit from the euro zone. They also categorically reject any loosening of austerity agreements with the country.

Meanwhile, the situation in Greece is deteriorating rapidly and Athens is once again at risk of an uncontrolled bankruptcy. The country had been scheduled to obtain aid tranches from the previously agreed bailout, but the EU-IMF-ECB troika monitoring progress in reforms suspended disbursements in June. As long as it remains unclear what policies the new Greek government will pursue, the donors have said they will hold back the payment of €31.5 billion that is due. The troika is now expected to decide in September whether it will pay out that tranche.

EU Ready for Spain Action if Needed

The crisis in Spain also remained in the headlines on Wednesday. Amid speculation that Madrid may soon require a full-fledged bailout, the EU's economics commissioner said the bloc would be ready to provide aid to the country if needed.

"The European Commission and the Euro Group stand ready to take action if needed," Olli Rehn told broadcaster CNBC. "Concerning Spain, we have already started the implementation of the banking sector program," he said, a reference to the €100 billion bank bailout currently being provided to the country. "We will in parallel be prepared for any further action if it is needed."

Responding to calls for the ECB to resume purchases of Spanish government bonds, Rehn answered: "To my mind, it is clear that both the EU -- and I dare say the ECB -- are ready to take action once certain conditions are met and if there is a request by some member state to go into a primary market purchase program."

The ECB recently said it is considering relaunching a bond-buying program, but only if countries first request aid from the euro bailout fund, which would require them to submit to strict supervision. Currently, the ECB can only purchase bonds on the secondary market, but the euro bailout fund is technically allowed to buy bonds directly on the primary market.

Pain with No Gain: Euro Triadic Illusions on Debts and Deficits

Πηγή: SEJ
By JOHN WEEKS
July 25 2012

The rightwing Spanish government plans a new 65 billion euro austerity package, while the no less rightwing Greek coalition hopes to reduce public sending by 11.7 billion. By accident or mis-design both hope to reduce net public sector spending over two years (2012-2013) by five percent of this year’s GDP. After several years of economic decline, these cuts make no economic sense and are inhumanly callous. We must, however, grudgingly accept that whether necessary or not, the cuts and taxes will reduce the large fiscal deficits of those countries.

Actually, we should not. In Greece and Spain the successful (if that is the appropriate word) implementation of spending cuts and tax increases is likely to have no substantial deficit reduction effect. It might even drive public finances deeper into the red. To understand why this apparently perverse outcome is the likely one, I must start with the deficit measure used by the mad men and women in the Triad (European Commission, International Monetary Fund and European Central Bank, with the first a semi-surrogate for the government in Berlin).

The deficit that the Triadic Scrooges so fervently wish to cut is the overall budget balance, total revenue minus total expenditure, as a share of gross domestic product. I have, in other articles on this website, demonstrated that this is the wrong technical measure for the objective that the Triadic fiscal hawks seek, foolish as that objective is. They should use the primary balance, which is the overall balance minus interest payments.

By whatever measure they might use, the Triad operates under the firm conviction that if a government spends less, this will reduce the ratio of the fiscal balance to GDP. But, will it?

The level of GDP (national output) is determined in the short run by how much households, businesses, governments and foreigners buy (less what the locals buy from abroad). This generalization comes

from the commonsense inference that if products and services go unsold, they will not continue to be produced. When a government reduces its expenditures, it simultaneously reduces production, partly its own and partly that of the private sector. For example, a reduction in spending on health care might consist of firing nurses from the public sector, plus buying fewer medicines from the private.

If cuts and nothing else happened, the deficit measure used by the triad must fall (become less negative). For example, if public expenditure is 15 euros, public revenue is ten euros, and GDP one hundred euros, the fiscal deficit is five percent of GDP. If nothing else changes, a cut in spending of five euros eliminates the deficit (the public balance becomes [10 - 10]/95 = zero). True, national income has fallen by the amount of the spending cut, unemployment rises, but the deficit is gone. With the deficit gone, the famously capricious financial markets will calm, and the economy will recovery (check with the somewhat beleaguered UK Chancellor George Osborne on the details of this recovery process).

Not so fast. The reduction in public spending is a fall in household and business income. As a result of this fall, business and household tax revenue decline. These declines are well-recognized and documented. The Organization of Economic Cooperation and Development (OECD) estimates that the average elasticity across the euro countries of changes in corporate tax to changes in GDP is 1.38. Thus, a one percent rise in GDP increases corporate tax revenue by 1.38 percent, and the same statistic for household income tax is 1.48. When GDP falls the reverse occurs (see Escolano, page 19, full reference below). When a government cuts expenditure, by reducing national output it also reduces its revenue.

The story is still not complete. The fall in household income brought on by the budget cuts occurs because some people lose their jobs (quite a few in Spain and Greece, as matter of fact). In every euro country, people who lose their jobs receive support payments, with some countries more generous than others. The OECD estimates that the average across euro countries for the elasticity of all current expenditures (these exclude public investment) to GDP is minus .11. The negative sign means that a decline in GDP of one percent increases these expenditures by .11 percent.

The final element in the story is how much national income falls when public expenditure is cut. I simplistically presumed a one-to-one relationship. It is never this simple, because the income lost by laid-off public servants will lead to less spending by them in shops. The shops will reduce orders to wholesalers, wholesalers will cancel orders to factories, etc. etc. In periods of recession (like now, as you may have noticed) the change in national income to changes in public expenditure is substantially greater than one-to-one (see discussion at the Royal Economics Society website).

I can now summarize. A reduction in government expenditure results in a fall in national income and employment, which decreases tax revenue and increases social support payments:

(Click on table to enlarge)

For Spain the declines in GDP are less, minus 3.8 and minus four percent for 2012 and 2013. The smaller contraction for Spain, despite the same relative cut in public expenditure as in Greece, results the different structures of expenditures and taxes in the two countries.Using the statistics from the OECD, I first estimated the likely impact of the announced expenditure cuts in Greece and Spain on gross national product (the bottom of the Triadic deficit ratio). This is shown in Chart 1. For Greece, the 11.7 billion euro package, when split equally between 2012 and 2013, results in growth declines of 4.4 and 4.6 percent, respectively. It is probable that these numbers underestimate the declines. They do not include the almost certain possibility of falling private investment that would aggravate the public sector cuts. Underestimation is also implied because these declines are considerably less than the seven percent contraction in 2011. It is unlikely that new cuts added to the old would reduce the rate of national income decline (quite the contrary).

In 2011, the Greek and Spanish fiscal balances were minus 9.2 and minus 8.5 percent of GDP. We can predict with total confidence that cutting net spending in both countries by five percentage points of GDP, will not reduce the deficits by that same five percentage points; that is, to (-9.2 + 5.0) = – 4.2 (Greece), and (-8.5 + 5.0) = -3.5 (Spain).

My calculations, shown in Chart 2, indicate that the deficit reduction for Greece will be trivial, from minus 9.2 in 2011 to minus 8.8 in 2013. In the case of Spain, the calculated fiscal balance increases, from minus 8.5 in 2011 to minus 8.8 in 2013. These results have straight-forward explanations. The downward inflexibility Greek deficit results in great part from the enormous debt service payments of the government, almost seven percent of national income in 2011. Cuts in these would mean government default.

It is important to note that if the Triadic demand for deficit reduction referred to the appropriate measure, the primary deficit, the Greeks in 2011 would have met the infamous Maastricht Criterion of three percent of GDP (overall deficit of 9.2 minus the debt payments of 6.8, yields a primary deficit of 2.6).

In the case of Spain, the cuts make the deficit worse because of the sensitivity of social support payments to falls in output and employment. The Greek deficit problem would become “manageable” by the simple step of measuring it in a technically competent manner. The Spain problem would be solved by growth, which would rapidly reverse the vicious circle of cuts-contraction-deficit.

Chart 1: Actual and calculated GDP for Greece and Spain, 2008-2011 (index, 2008 = 100, constant prices)



Statistics from oecd.org

Chart 2: Actual and calculated Overall Fiscal Balance as percentage of GDP for Greece and Spain, 2008-2011



Statistics from oecd.org

A final comment on Spain is necessary. The recent and repeated anxiety that a seven percent borrowing rate represents a threshold or literal deadline above which Spanish debt is non-sustain has no rational basis. Today, with the public borrowing rate in the 7-7.5 percent range, interest payments of the Spanish government on its debt are barely 2.5 percent of GDP, the same as the German government whose borrowing rate is much lower. Even more important, in the mid-1990s every important indicator of Spanish debt sustainability was “worse” than now (see Chart 3). The net debt (public liabilities less liquid assets) was higher than the OECD forecast for the end of 2012. At eleven percent in the 1990s, the public sector borrowing rate was well above the allegedly unsustainable seven. And, debt service in the mid-1990s was over four percent of GDP, compared to less than three today.

The exit from Spain’s present debt and deficit problems will be achieved in the same way it was during the second half of the 1990s and into the 2000s, by output growth. The growth must come from public sector action, a fiscal stimulus.

Chart 3: Debt Sustainability in Spain, 1994-2012

(net public debt on left axis in percentage of GDP, interest payments/GDP and borrowing rate on right axis, percentages)



Note: Net Public Debt is gross minus liquid assets as share of GDP, IntPD/GDP is interest on the public debt as share of GDP. Values for 2012 are projections by OECD, except for the interest rate which is the public bond rate at end of July 2012.

Albert Einstein famously remarked that doing the same thing repeatedly and expecting a different outcome is a sign of madness. In the case of the Triad, Einstein’s comment must be considered a hypothesis to take seriously. I think it is a more credible hypothesis to explain the euro crisis than a frequently offered alternative, “kicking the can down the road” hypothesis. This explains the on-going crisis as a muddle resulting from lack of resolution and foresight by EU politicians.

A third hypothesis carries considerably more weight with me than transitory madness or dented cans, namely, the national self interest hypothesis. The common currency arrangement has proved a tremendous advantage for large German capital, as I have argued in other articles. To put it simply, strict inflation control, largely through real wage restraint, provided German industry with a tremendous competitive advantage over euro countries not pursing the same mercantilist trade strategy. The financial power generated by aggressive export-led growth has served the interests of those in Germany seeking economic pre-dominance in Europe. In my view the German government’s strategy is, stretch out this crisis as long as possible. The weak will leave and those that remain will themselves be too weak to challenge to German self-interest as it is perceived by the present government in Berlin. One might say that the re-unification of Germany has run its course.

Escolano, Julio (2010) A Practical Guide to Public Debt Dynamics, Fiscal Sustainability, and Cyclical Adjustment of Budgetary Aggregates, Technical Notes and Manuals, Fiscal Affairs Department (Washington: IMF)

About John Weeks

John Weeks is an economist and Professor Emeritus at SOAS, University of London. John received his PhD in economics from the University of Michigan, Ann Arbor, in 1969.

Spanish police clash with protesting miners

Miners sit on a street to protest against government austerity measures in Madrid July 11, 2012. Joined by supporters and trade unionists in the capital, the miners rallied noisily at the climax of a 44-day protest against a 60 percent cut in coal subsidies which they say will force mines to close and put many out of work.

Πηγή: Reuters
By Clare Kane and Emma Pinedo
July 11 2012

Police fired rubber bullets at protesting miners on Wednesday, injuring several people, during a demonstration against slashes in coal subsidies aimed at trimming the budget deficit of the euro zone's fourth largest economy.

Spain is cutting costs and raising taxes in an effort to hit strict European budget targets. Prime Minister Mariano Rajoy on Wednesday outlined a package of measures aimed at saving a further 65 billion euros ($79.66 billion).

The miners, joined by public sector workers and unions, rallied noisily in central Madrid at the climax of a 44-day protest against a 60 percent cut in coal subsidies, which they say will force mines to close and put many out of work.

"We're only asking that they cut 10 percent instead of 60," said Carlos Marcos, 41, who has worked in the mines for more than half his life. "If they don't pay attention to us, we'll be back - with dynamite."

Tens of thousands of protesters, chanting and throwing firecrackers, marched through the capital to the Industry Ministry, where some threw stones, fruit, bottles and firecrackers at waiting riot police.

Police charged at protesters and fired unleashed several rounds of rubber bullets after demonstrators knocked down fences to contain the protest.

Some of the miners on the "black march" had walked 400 km (250 miles) from the north of Spain where mining has been a part of life since the 18th century. Many waved wooden walking sticks.

"We have to take to the streets to fight because the time is coming when we won't have enough to eat," said 38-year-old miner Jose Ramon Pelaz.

Miners from all over Spain traveled in 600 buses to the capital on Tuesday.

They gathered in Madrid's Puerta del Sol, the center point of Spain and switched on the lights on their helmets in the early hours of Wednesday, and were met by thousands of Spaniards who turned out in sympathy.

The protesters marched down the city's main business strip, Paseo de la Castellana, singing rowdy songs and waving banners with slogans like, "Rajoy, your future is darker than our coal."

Official figures on the number of arrests were not available, but a Reuters witness saw several people detained at the protest.

Europe Summit Surprises With Bold Moves

German Chancellor Angela Merkel leaves an EU Summit in Brussels on Friday, June 29, 2012. European leaders have agreed to use the continent's permanent bailout fund to recapitalize struggling banks, and agreed to the idea of a tighter union in the long term.

Πηγή: abcNEWS
By DON MELVIN (AP)
June 29 2012

After 18 disappointing summits since the start of the debt crisis, Europe's leaders appeared Friday to have finally come up with quick fixes and long-term plans that show they are serious about restoring confidence in their currency union.

Global markets sighed with relief, debt-saddled Italy and Spain appeared victorious and Germany's Angela Merkel faced potential criticism at home for conceding to pressure for an immediate deal.

Leaders of 17 countries that use the euro agreed to:

—Allow two European bailout funds to pump money directly into troubled European banks, rather than make loans to governments to bail out the banks. The move rescues banks without putting strapped countries deeper in debt.

—Use bailout money "in a flexible and efficient manner to stabilize" European government bond markets.

—Let countries that have made economic reforms as require by EU authorities tap the European rescue funds without submitting to stringent bailout programs.

—Tie their budgets, currency and governments ever tighter in a vast new economic union down the line.

European Council President Herman Van Rompuy called it a "breakthrough." Global stock markets and the euro rallied hard.

Concerns remain. Most of the measures approved in the Brussels summit will take months to come into force. The €500 billion ($630 billion) firepower of the permanent bailout fund may not be enough. And given how shaky Spain's and Italy's finances are, and how jittery markets are, new roadblocks could send the continent back into crisis.

But some key points will kick in within 10 days: On July 9, eurozone countries will agree to give Spanish banks rescue loans and also allow the current, temporary European bailout fund to directly purchase Spanish government bonds.

The decision is a victory for Spain and Italy, whose borrowing costs have risen to near unsustainable levels despite their efforts to cut government spending and reform their labor markets.

In Germany, Chancellor Angela Merkel is likely to face a grilling from a skeptical German Parliament later. Heading into the summit, Merkel had stuck to her line that any financial help from Europe's bailout fund must come with tough conditions, so a separate decision allowing countries that have reformed their economies easier access to bailouts, without such stringent conditions, was widely seen as a defeat by the German press.

Merkel insisted the funds would still only be released when it was clear countries were undertaking serious reforms.

"We remain completely within our approach so far: help, trade-off, conditionality and control, and so I think we have done something important, but we have remained true to our philosophy of no help without a trade-off," Merkel told reporters in Brussels.

Van Rompuy dismissed talk that Merkel had lost in the negotiations.

"It was a tough negotiation," Van Rompuy said. "And you can't summarize this in winners and losers."

In addition, the leaders of the eurozone countries authorized the EU bailout funds to buy bonds of countries in order to reduce the interest rates the markets charge.

Leaders of the full 27-member European Union, which includes non-euro countries such as Britain and Poland, also agreed to a long-term framework toward tighter budgetary and political union, though those plans will require treaty changes and won't be realized for years.

The scale of the moves were unexpected and provided investors a reason for optimism, even as analysts cast doubt on the plans' feasibility and noted that some fundamental problems with the common currency remain.

"I think the elements we put together will reassure the markets," said Eurogroup President Jean-Claude Juncker.

Mario Draghi, the head of the European Central Bank, was similarly optimistic.

"I'm actually quite pleased with the outcome of the European Council," said Draghi. "It showed the long-term commitment to the euro by all member states of the euro area. But also it reached tangible results in the shorter term."

Stocks around the world surged Friday, with markets in countries on the front line of the crisis doing particularly well. Italy's FTSE MIB and Spain's IBEX indexes each rose 3 percent.

Perhaps more importantly, the yield on Spain's 10-year bond dropped by 0.32 percentage points to 6.58 percent. Italy's was down by 0.14 percentage points to 5.94 percent. Both countries have seen their rates edge toward the 7 percent level which is seen as unsustainable over the long term.

The importance of recapitalizing banks directly from the bailout fund became evident this month when Spain was offered €100 billion ($125.6 billion) for its shaky banks. Previously the bailout loan would have to be made to the Spanish government, which would lend it on to the banks. The prospect of having that debt on the government's books spooked investors, who began demanding higher interest rates to reflect the risk of a Spanish default.

Lending the money directly to the banks avoids putting more debt on the government's books.

Also boosting market confidence was the agreement to waive the permanent bailout fund's preferred creditor status for aid given to Spanish banks. So far, any money the fund puts into a bank would get repaid before any other investors.

When Spain agreed to take rescue loans for its banks, the news failed to boost confidence in the banks because investors worried that, if one of those banks collapsed, they would be last to get repaid. Eurozone leaders agreed to waive the bailout fund's preferred creditor status only in Spain's case.

Some analysts, however, noted that the size of the bailout funds some €500 billion would have to be increased to be a realistic backstop for public debt and banks across the continent. Italy alone has government debt of €2.4 trillion.

"These steps are the obvious ones to take to try to restore some confidence in the market in the short term," said Gary Jenkins, managing director of Swordfish Research in London. "Alone, they do not solve the underlying problems but they might buy a bit of time, which is probably about the best they can do right now."

Though welcoming the measures that were taken, analysts think more will have to be done.

"If the aim is to ease tensions on the Italian and Spanish bond market on a more sustainable basis, we probably will need to have more assurance on the fire power," said analyst Carsten Brzeski of ING in a note.

Brzeski said more liquidity support from the ECB — such as in the form of cheap loans to banks — "looks inevitable" and may come as soon as Monday.

The EU leaders also agreed to devote €120 billion in stimulus to encourage growth and create jobs, though half of it had already been earmarked and it includes only €10 billion in actual new commitments. France had pushed for the growth package, arguing that austerity measures are stifling growth and making debt reduction more difficult.

They also agreed to give the ECB powers to oversee big European banks by the end of the year.

For the longer-term, the 27 leaders of the EU agreed on "four building blocks" of a tighter union — but postponed specifics until a study due in October. The building blocks, which include sharing debt in the form of jointly issued eurobonds, were laid out in a sweeping document presented by Van Rompuy and colleagues before the summit.

However, France's President Francois Hollande said the general agreement on the tighter union did not for now include any commitment on eurobonds from Germany and other stronger economies that have firmly opposed sharing debt with more profligate countries such as Greece.

Hollande claimed to play the role of mediator instead of partnering with Germany as France traditionally does.

"No one can say I won or I lost," he said. "What was at stake was Europe. That's who won."

Austerity To Growth: IMF Double-Talk On Greece And Spain

Πηγή: Seeking Alpha
By Elliot Morss
June 27 2012

Austerity - What Should Have Been Learned

The IMF should have known that austerity policies (reduce government deficits) cause unemployment to grow. After all, its own research found that a reduction in the government deficit of 1% in GDP results in an increase of .3 percentage points in the unemployment rate.

But it got roped into pushing austerity in both Greece and Spain by the Germans. So what happened? Table 1 provides the IMF's GDP growth rate projections made in both 2010 and 2012. Back in 2010, the Fund estimated growth rates of 0.2% and 1.5% for Greece and Spain, respectively for 2012. The IMF now projects GDP to decline this year by 4.7% in Greece and by 1.8% in Spain.

Table 1. - IMF Growth Rate Estimates, Made in 2010 and 2012

Source: IMF (WEO Database and Country Reports)

It also appears the IMF missed the effect of austerity on unemployment. Back in 2010, the Fund thought unemployment in Spain would be 18% this year - bad enough. In fact, unemployment is over 24% with more than 50% of younger people out of work. The situation is similar in Greece - in 2010 the Fund estimated 2012 unemployment at 15% where it is in fact at 22%. Well, the Fund learned its lesson. What has happened to Greece and Spain in the last two years convinced the IMF and many others that more austerity will not work.

So now, the new "buzz" word is "growth". All Eurozone leaders are talking about it. I have two questions:
What now is being said about government deficits, the target of the austerity hawks?
How exactly is growth to be promoted?

Government Deficits

Keynes and economists that followed him believed that at a time the private sector is not providing enough jobs (Greece and Spain today), the government must step in to get people back to work. Governments can do this either by cutting taxes (leaving citizens with more income to spend) or by increasing expenditures. In either case, government deficits will increase. So what is the IMF saying now, and how does it compare with what it was saying a few years back in the "austerity era"?

To get an answer to this question, I compared IMF statements in the recent Concluding Statement of its 2012 Article IV Consultation with Spain with what it said in 2010. In 2010, it said:

"Spain has started ambitious fiscal consolidation to reach the 3 percent of GDP deficit target by 2013. This new package significantly strengthened the envisaged adjustment and enhanced credibility by taking concrete and emblematic measures.…The new deficit path is also appropriately front-loaded, with nearly two-thirds of the required adjustment achieved by 2011."

So that was the plan in 2010. But that is not how things turned out. The 2011 deficit turned out to be closer to 9% than 6%. The Fund was clearly not happy. I quote from the "Concluding Statement":

"The impact of the large overrun (almost 3 percent of GDP) was exacerbated by maintaining the message, until almost the end of the year, that the deficit was on track, and by the lack of timely and reliable data."

Looking ahead, the IMF says: "…the very ambitious 5.3 percent of GDP deficit target for 2012 will likely be missed.

So as the Fund and its partners move from "Austerity" to "Growth", how are the statements on government deficits changing? The following are quotes from the IMF:
Because structural reforms will take time to generate growth, aggregate demand support is needed in the short run.
Fiscal consolidation should proceed decisively and credibly where market pressure is high, but more gradually elsewhere to help support demand in the region….In this context, the flexible implementation of the current fiscal framework is essential.
Growth projections are in line with ours, but incorporating the fiscal consolidation envisaged in the Stability Program would entail lower growth under staff's framework.
Given the weak growth outlook, however, slippage should not be made up in a compressed timeframe.
The deficit path envisaged in the Stability Program should be less front-loaded (in agreement with European partners).

I quote further from a paper written by Nemat Shafik, a senior official in the Fund

"We all know that fiscal consolidation―reducing deficits by cutting spending or raising revenues―can stifle growth. When a number of countries need to engage in fiscal consolidation simultaneously, the negative impact on growth is reinforced. Getting the pace of fiscal consolidation right is therefore of paramount importance, especially given the current context of weak growth and employment…. Overall, fiscal adjustment plans for this year are broadly appropriate in Europe. In a few euro area countries, however, the nominal fiscal targets for 2013 agreed before the current slowdown in growth may prove too pro-cyclical and may need to be adjusted or at least expressed in structural terms. The Stability and Growth Pact's excessive deficit procedure does allow for some flexibility in deciding how fast to bring deficits below 3 percent of GDP. Should economic conditions worsen, this flexibility should be used to revise deadlines for meeting the targets."

The quotes make it clear the Fund has learned its lesson on austerity. It is saying as clearly as it says anything: ease up on government deficit reductions - they will reduce growth and make things worse. Germany is now pretty much by itself in still pushing austerity for Greece and Spain.

Growth - How Is It To Be Achieved?

So the Fund has backed away from austerity as the solution in Greece and Spain. Growth is now in. How will it be achieved? To answer this question, I again quote from the 2012 statement referenced above. While this document applies to Spain, the IMF is saying exactly the same thing to Greece.
To restore growth across the union, long-standing structural rigidities need to be tackled to raise long-term growth prospects. In many countries, labor market reforms are needed to raise participation and address disparities in protection that confine "outsiders" (typically younger workers) to low-wage, temporary jobs….
…targeted investment in infrastructure and human capital will support growth and employment.
Lowering unit labor costs in the tradables sector is essential for deficit countries. This means productivity-enhancing reforms (e.g., lowering barriers to entry, making it easier for small firms to expand into foreign markets) and labor market measures that ensure that nominal wage developments are aligned with productivity growth.
To foster relative price adjustment between the North and the South, monetary policy should ensure that overall inflation does not drop far below the two percent for the euro area as a whole, while allowing for larger inflation differentials between North and South.
Unfortunately, there is no magic bullet to spur growth and job creation. Crisis-hit countries in Europe will only be able to revitalize their economies by selling more goods abroad and creating new jobs in the private sector.
This challenge is complicated by the constraints imposed by the Eurozone. In a context where the exchange rate cannot be devalued and productivity increases only take hold over time, improving competitiveness unfortunately requires a reduction in costs, including labor costs.

So what, in essence is the Fund saying? What is its formula for growth?
Growth will require Greece and Spain to become competitive with Germany.
This cannot happen via an adjustment in the exchange rate because all Eurozone countries use the Euro.
How can it be accomplished? Greek and Spanish workers will have to become more productive.
That means cutting jobs and reducing wages.
Eurozone monetary policy should be inflationary. This will cause prices to increase in the full employment countries. Prices will not increase in Greece and Spain and that differential will improve their competitive position.

Conclusion

There is nothing promising in what the IMF saying in moving from Austerity to Growth. Growth apparently means Greece and Spain must get their costs down so they can compete with Germany. How to get there? Greece and Spain must cut jobs and wages. This is not going to happen, and without currencies they can devalue to make the adjustment, the Greece and Spain are locked into a system in which they cannot compete. This is not a sustainable situation.

And while one side of the IMF is calling for this "technological fix" that will not work the political side of the IMF is calling for more Eurozone backing to avoid "contagion".

Is there a legitimate reason for a contagion concern? In an earlier piece, I calculated Foreign Claim/Other Potential Exposures of banks in major countries to banking collapses in Greece, Italy, Portugal and Spain. The results are presented in Table 2. The percent of total deposits is worrisome as are the sizeable amounts.

Table 2. - Foreign Bank Exposures

Source: Morss

Another contagion concern - possible bank runs in Greece, Italy, Portugal and Spain. According to the European Central Bank, total banks deposits in these four countries are $6.3 trillion. They should be insured.

Investing in these troubled times? I will stick with 4-5% yields I can get on emerging market debt (ELD, TGEIX) and US real estate (FRIFX).

Disclosure: I am long ELD.

Stiglitz: Spain bank deal may not work

Πηγή: Business Report
By Reuters
June 11 2012

Europe's plan to lend money to Spain to heal some of its banks may not work because the government and the country's lenders will in effect be propping each other up, Nobel Prize-winning economist Joseph Stiglitz said.

“The system ... is the Spanish government bails out Spanish banks, and Spanish banks bail out the Spanish government,” Stiglitz said in an interview.

The plan to lend Spain up to 100 billion euros ($125 billion), agreed on Saturday by euro zone finance ministers, was bigger than most estimates of the needs of Spanish banks that have been hit by the bursting of a real estate bubble, recession and mass unemployment.

If requested in full by Madrid, the bailout would add another 10 percent to Spain's debt-to-gross domestic product ratio, which was already expected to hit nearly 80 percent at the end of 2012, up from 68.5 at the end of 2011. That could make it harder and more expensive for the government to sell bonds to international investors.

With Spanish banks, including the Bank of Spain, the main buyers of new Spanish debt in 2011 - according to a report by the Spanish central bank - the risk is that the government may have to ask for help from the same institutions that it is now planning to help.

“It's voodoo economics,” Stiglitz said in an interview on Friday, before the weekend deal to help Spain and its banks was sealed. “It is not going to work and it's not working.”

Instead, Europe should speed up discussion of a common banking system, he said. “There is no way in which when an economy goes into a downturn it will be able to sustain policies that will restore growth without a form of European system.”

Stiglitz, a former economic advisor to US President Bill Clinton, is a long-standing critic of austerity packages. He also wrote book attacking the International Monetary Fund for policies it has imposed on developing countries as a precondition for emergency loans.

What the European Union has done so far has been minimal and wrong in its policy direction because austerity measures to restore risk have the effect of reducing growth and increasing debt, he said.

“Having firewalls when you're pouring kerosene on the fire is not going to work. You have to actually face the underlying problem, and that is, you're going to have to promote growth,” Stiglitz said.

Instead, sweeping reforms to make Europe more of a fiscal union are needed to solve the debt crisis, reinforce the single currency and ultimately help Germany which, as the richest country in the union, will have to bear the highest cost of guaranteeing any commonly issued debt and providing more resources to boost public spending.

“Germany keeps saying that the strengthening is fiscal discipline, but that is a totally wrong diagnosis,” Stiglitz said.

Germany is expected to propose at the end of June a road map toward a European fiscal union, but Berlin favours joint euro bonds, backed by all the area's governments, only as a medium-term goal, once other countries have fixed their high debts and budget deficits through austerity measures so they are not reliant on Berlin's deep pockets.

“Eurobonds is just one institutional arrangement that could work, there are others: a common treasury,” said Stiglitz adding that ultimately “there has to be a way of raising revenue across Europe, to support the weaker countries in case of an economic downturn.”

While the economies of Spain, Greece, Italy and Portugal are contracting, Germany grew 0.5 percent in the first quarter. The divide in the euro area in many cases reflects austerity programs to tackle debt and deficit problems.

Critics have said the focus on cutting costs is aggravating Europe's crisis and jeopardising the future of the single currency. Greek elections next week could bring to power parties opposed to the tough conditions attached to the country's EU and IMF-led rescue plan and raise the possibility of Greece leaving the euro zone.

“Germany is going to have to face the question, do they want to pay the price that would follow from the dissolution of the euro, or do they want to pay the price of keeping the euro alive?” Stiglitz said. “I think the price they will pay if the euro falls apart will be greater than the price they will pay for preserving the euro. I hope they will come to realise that, but they may not.”

Stiglitz's latest book, “The Price of Inequality: How Today's Divided Society Endangers Our Future,” is scheduled to be published on Monday. It challenges the idea that inequality is an unavoidable evil needed to sustain economic expansion.

“We could have more growth and less inequality,” Stiglitz said, “so we could do better in both dimensions simultaneously.”

Analysis: Greece causes new concern after bailout of Spain

"This year is going to be a bad one."  Spain's Prime Minister Mariano Rajoy

Πηγή: post-gazette

By Jack Ewing (The New York Times)
June 11 2012

FRANKFURT, Germany -- With an agreement to bail out Spain's struggling banks, Europe again avoided a financial meltdown in a debt crisis that is in its third year. But Europe still faces far bigger challenges that threaten the continent and, with it, the world economy.

The most urgent of those concerns is being driven by events in a country at the other edge of the eurozone: Greece.

While the Spanish banking rescue will be expensive -- as much as $125 billion -- it will be well within the means of a European emergency fund established for just such purposes.

Far harder to calculate are the costs if, after Greek elections next Sunday, the new government reneges on the bailout Greece negotiated with its European lenders a few months ago. That could lead to a withdrawal from the eurozone, threatening that currency union, which has largely benefited more prosperous members like Germany.

What is more, the Spanish bailout will do little to address European banks' addiction to the borrowed money they have depended on for their daily financing needs.

"The way the currency union has been functioning is not sustainable," Jens Weidmann, the president of the German Bundesbank, told the Welt am Sonntag newspaper Sunday. "A breakup of the currency union would bring extremely high costs and risks that no one can really predict," he said.

Lucas Papademos, a former interim prime minister of Greece, said that Greece's departure from the eurozone would be catastrophic, pushing inflation in the country to as high as 50 percent, putting extreme stress on Greek banks and slashing living standards.

"The stakes are exceptionally high," Mr. Papademos, who is also a former vice president of the European Central Bank, told a group of bankers in Copenhagen last week. "Because the decisions to be made at, and immediately after, the forthcoming elections will determine the country's future for at least the next decade."

Those problems would not be Greece's alone. Europe's big fear is contagion -- an infection of financial panic that could spread far beyond Greece. Spain's leaders have long said Greece's problems contributed to the general market uncertainties that helped undermine Spanish banks.

On Sunday, Spain's Prime Minister Mariano Rajoy cautioned that the ailing Spanish economy, Europe's fourth largest, which has had an unemployment rate of nearly 25 percent, would worsen before getting better.

"This year is going to be a bad one," he said.

And it may not end there, with Italy struggling with economic stagnation and escalating borrowing costs.

A critical question will be how Saturday's deal will be received by investors today, particularly with the Greek elections approaching.

"By no means is this a solution," said Adam Parker, chief U.S. equity strategist at Morgan Stanley. The aid for Spain, "could be a near-term positive from a trading standpoint, but you haven't solved anything in the long term."

The next task for European leaders is to show the rest of the world that they are making a credible effort to repair the flaws in the eurozone that allowed the problems in one small country, Greece, to threaten the world economy.

On June 28 and 29, European Union leaders will gather in Brussels to discuss, among other things, ways to forge closer fiscal integration. Despite calls from some leaders for shared oversight of budgets and deficit spending, no concrete proposals have been made.

Even if Greece ends up with a government willing to try to live up to the terms of its 130 billion euro bailout deal by meeting its payments and attempting to narrow its wide budget gap, strong doubts remain whether any new leadership in Athens can fulfill those obligations. A lot of private money has already fled Greece, while its deeply depressed economy and dwindling tax revenues threaten to put the country even deeper in the hole.

"Even in case of a new government, I doubt whether the institutional framework in Greece can guarantee the program," said Jurgen Stark, a former member of the European Central Bank's executive board. "Who has the competence to implement the program? That is the key point."

Mr. Stark is among those who contend the eurozone is strong enough to withstand a Greek departure. "There will be contagion," he said in a telephone interview. "But I think it can be managed. It will be costly in the short term. There will be benefits in the long term."

Jitters about what Greek voters might do may have helped soften statements from Germany, the eurozone's paymaster, in recent days. Although Berlin has been Greece's harshest economic critic, Germans awoke last Thursday to find Angela Merkel, their chancellor, telling them on television that Europe needed a fiscal union -- implying that some of their tax dollars may be needed to help the suffering Spaniards and Greeks.

"We need more Europe," Ms. Merkel said on ARD television. "We do not only need a monetary union, but we also need a so-called fiscal union. This means that we also need a common budgetary policy, and we also need a political union."

Such a statement might have provoked an outcry a year ago -- Ms. Merkel quickly played down the prospect of a "big bang" solution coming from the gathering in Brussels -- but Germans may be realizing that their own well-being is in imminent danger. This week, official data will provide more clues about how the crisis is affecting Europe's largest countries. Figures on industrial production in France and Italy are expected today and for the eurozone as a whole Wednesday.

Analysts have predicted declines, which would be bad for Germany because Europe's biggest trading partners are other European countries. But slower growth in Germany could also create a political backlash, making Germans more reluctant to help their stricken fellow eurozone citizens.

"If people think they are poorer maybe they become more reluctant to share the burden," said Clemens Fuest, economics professor at Oxford University.

Mr. Fuest said he was skeptical that Europeans would ever agree to delegate control over their national budgets to a European authority as part of a fiscal union. European leaders would be better off concentrating on measures that are more realistic, he said, such as a common system for overseeing banks, guaranteeing deposits and dealing with sick financial institutions.

That could help avoid situations like those in Ireland, Cyprus or now Spain, where the cost of bank rescues raises doubts about the solvency of the national government.

Many proposals to push members of the European Union closer together would take years to carry out, too late to help ease current tensions. Mario Draghi, the president of the European Central Bank, said last week that it would help a lot if European leaders simply wrote a detailed plan for the future of the eurozone.

Spain is worse off than Greece two years ago

Πηγή: CBSnews
By Constantine von Hoffman
April 13 2012

(MoneyWatch) COMMENTARY Spain's economy is in the worst shape of any European nation and it still has a lot of falling left to do. Its condition is at least as bad as Greece's was two years ago when the debt crisis began. There is one critical difference between the two though, and it is not a good one. As Spanish Prime Minister Mariano Rajoy said Thursday: "It's not possible to rescue Spain."

The nation is in a recession, has an unemployment rate of 23 percent, and most of its banks could be cast as extras in "The Walking Dead." That is basically what the head of Spain's central bank said earlier this week. "If the economy worsens more than expected, it will be necessary to continue increasing and improving capital as necessary in order to have solid entities," Miguel Angel Fernandez Ordonez told a conference Tuesday. The most optimistic forecasts have the nation's GDP shrinking about 1.7 percent this year.

Spain's banks were crushed by the 2008 crash in real estate prices. As Gavyn Davies noted:

The downward correction in real house prices in the years after the construction bubble was fairly minor, at least by US standards. This has accelerated in recent months, and the renewed recession in 2012 is causing concern that the country's largest banks, which the Bank of Spain has repeatedly said are in good shape, may after all, require further injections of new capital.

Where this new capital is supposed to come from is entirely unknown.

In addition to a lot of bad real estate debt, the banks now also hold a lot of bad Spanish government debt. Since December they have used cheap loans from the European Central Bank to become the primary buyers of Spanish bonds. Spain's banks weren't unique in this. All across the EU, banks with little capital have bought bonds from the very same debt-ridden nations which are supposed to stand behind those banks.

The reason the ECB loaned them the money to buy these bonds is that it was supposed to give them some good assets that might offset all the bad real estate assets. Instead it is has left them with holding bonds where the best case scenario is that they will be worth 70 percent less than face value.

The program under which the ECB loaned this money has come to an end, so the banks no longer have funds to buy the bonds. Because foreign investors recognize a bad deal when they see one, there is little market for the bonds. An auction of Spanish bonds on Tuesday barely sold the minimum amount the government needed. Also, the amount of interest the government must pay is back to the level it was in December. That is right before the ECB started its loan program.

Prime Minister Rajoy is entirely correct when he says it is impossible to rescue Spain. The nation's economy is almost twice the size of Greece, Ireland and Portugal combined. This has left even the experts baffled at what to do. In a speech Thursday, Christine Lagarde, chair of the IMF, actually called on Madrid to do what are essentially two mutually exclusive things: rein in its debt and deficit and not strangle what little economic growth Spain still has.