Spain's Economic Minister Needs a Swift Kick Up His Arse!

[Parsad]

I thought this quote from this article was incredulous:

 

http://finance.yahoo.com/news/money-flies-spain-regions-pressured-180052518.html;_ylt=An2ZZTOqCT4evvkL._60xrGiuYdG;_ylu=X3oDMTQ0bms2YmM3BG1pdANGaW5hbmNlIEZQIFRvcCBTdG9yeSBSaWdodARwa2cDOWQ2ZmFmN2UtNzM1ZC0zYzk4LWFhM2QtNTlmYmFlYzliMTliBHBvcwMzBHNlYwN0b3Bfc3RvcnkEdmVyA2I5OWQ1N2EwLWFiNzctMTFlMS1hZTc2LTQ1OTg3MjgyNGQyNw--;_ylg=X3oDMTFpNzk0NjhtBGludGwDdXMEbGFuZwNlbi11cwRwc3RhaWQDBHBzdGNhdANob21lBHB0A3NlY3Rpb25z;_ylv=3

 

De Guindos said that the future of the euro would be at stake in the next few weeks in Spain and Italy, adding that the rumors that Spain was negotiating financial assistance with the International Monetary Fund were "complete nonsense."

 

"The battle of the euro is being fought right now in Spain and Italy," he said at an event in Sitges, in the north-eastern region of Catalonia.

 

He also said Germany should help correct imbalances in the euro zone created by a loose monetary policy over the last decade and by the non-respect by Berlin of the stability and growth pact in 2003.

 

"We need to correct decisions which favored Germany... Germany has to assume its part," he said, adding that decisions in this respect would be taken in the next few days.

 

So you can't take care of your own fiscal house, and you think it was just Germany being Germany...it's always about her!  ;D  Geez, the nerve of this guy.  Cheers!

[PlanMaestro]

So you can't take care of your own fiscal house, and you think it was just Germany being Germany...it's always about her!  ;D  Geez, the nerve of this guy.  Cheers!

 

“it is not speed that kills, it is the sudden stop” - Rudi Dornbusch

http://www.businessweek.com/magazine/the-mit-family-tree-01192012-gfx.html

 

Sorry Parsad, it is actually Germany's, for their unwillingness to compromise, and France's, for pushing for an euro with some big internal faults. Maybe the periphery's only problem is their stubbornness in believing in a European project when now it is clear there is none.

 

I am glad the periphery is finally making a stand. It may surprise everyone but Spain's fiscal situation (Debt/GDP) is better than Germany's. Spain's is a Balance of Payments crisis (sudden stop) that is very different from a Fiscal crisis. One is a problem in flows and the other in stock (http://en.wikipedia.org/wiki/Stock_and_flow)

 

From Wikipedia:

Regarding policy measures adopted during sudden stop episodes, the massive slowdown in capital inflows, usually presented as large capital outflows, can be counteracted by exchange rate devaluation, loss of international reserves and/or increases in real interest rates. The nominal exchange rate behavior during most sudden stop episodes show that sudden stops in emerging markets are followed by a devaluation of the domestic currency, while most depreciation episodes in developed countries are not related to sudden stop phases. Real interest rates sharply increase during sudden stop episodes, especially in the case of emerging market economies. A sharp loss of international reserves is also observed during sudden stop episodes, both in developed countries and emerging markets. The current account balance shows a sharp reduction in current account deficits, with a significantly higher increase in the current account balance in emerging markets.

 

http://en.wikipedia.org/wiki/Sudden_stop_(economics))

http://en.wikipedia.org/wiki/Currency_crisis

 

I strongly recommend people start reading Guillermo Calvo and Rudi Dornbusch, there is a lot of research on this subject.

 

http://www.nber.org/papers/w9828

http://www.nber.org/papers/w10520.pdf

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=669452

 

these are just a few BOP crisis examples from the period 1982-1997 (nothing new under the sun)

 

Table 1. Sudden Stop

Country/Episode SS (percentage of GDP)

Argentina,1982–83 20

Argentina,1994–95 4

Chile,1981–83 7

Chile,1990–91 8

Ecuador,1995–96 19

Hungary,1995–96 7

Indonesia,1996–97 5

Malaysia,1993–94 15

Mexico,1981–83 12

Mexico,1993–95 6

Philippines,1996–97 7

Venezuela,1992–94 9

Korea,1996–97 11

Thailand,1996–97 26

Turkey,1993–94 10

 

 

 

 

[bmichaud]

Sorry Parsad, it is actually Germany's, for their unwillingness to compromise, and France's, for pushing for an euro with some big internal faults. Maybe the periphery's only problem is their stubbornness in believing in a European project when now it is clear there is none.

 

Wonderful point. Germany is HUGELY at fault. They generate massive trade surpluses via debt-financed exports it's neighbors - ONLY possible due to a lack of floating exchange rates, which would naturally correct trade imbalances - yet has the audacity to jam austerity measures down the throats of those same countries that fueled its booming economy. It's hysterical. They are China on steroids, yet they claim innocence while they drive the EZ into depression. They should be ashamed of themselves.

[Myth465]

Sorry Parsad, it is actually Germany's, for their unwillingness to compromise, and France's, for pushing for an euro with some big internal faults. Maybe the periphery's only problem is their stubbornness in believing in a European project when now it is clear there is none.

 

Wonderful point. Germany is HUGELY at fault. They generate massive trade surpluses via debt-financed exports it's neighbors - ONLY possible due to a lack of floating exchange rates, which would naturally correct trade imbalances - yet has the audacity to jam austerity measures down the throats of those same countries that fueled its booming economy. It's hysterical. They are China on steroids, yet they claim innocence while they drive the EZ into depression. They should be ashamed of themselves.

 

I agree. I think Germany has benefitted most from the Europe, and if their customers go up they are screwed 60% of their exports go to the EU.....

[Parsad]

Of course this has benefitted Germany!  No one held a gun to the European soverign nation heads to form the Union.  No one asked Ireland, Spain, Portugal or Greece to spend billions in excess of what could be supported by their GDP, or asked their citizens to speculate on real estate beyond their means.  The Union as formed was faulty to begin with. 

 

I'm not saying that Germany shouldn't do their share now that all hell may break loose...that's automatic.  But at the same time, Spain can't blame their failures on Germany.  Their failures are completely their own!  This is no different than real estate speculators blaming the banks for not reducing their loan values or issuing them mortgages in the first place...where is personal responsibility?  There may be some culpability to look the other way, but the blame lies squarely on their own shoulders.  Cheers!

[Sportgamma]

The Euro was implemented because politicians wanted it, not because it was an economically sound idea. The EU will either have to go forward with increased integration or step back, status quo seems unsustainable to me.

 

Plan: very well put.

[Uccmal]

At this point in time Germany owes it to the rest of Europe to get on with a proper bailout.  Germany is reporting Q after Q of stellar economic news.  They are benefitting from the low Euro.  If they want the system to stay together they need to further integrate. 

 

Otherwise, it all falls apart, and Germany loses because they are part of a shrunken Euro, that gets highly valued and kills their exports and their economy.  and they completely lose the ability to export to Spain, Greece, Italy. 

 

Obviously, Spain's economic minister, and pretty much everyone else (Read: Obama) is fed up with Germany's selfish stance.  Merkel is an intelligent woman.  She knows all this and will make the concessions in some face saving manner.  I expect there is alot of behind the scenes work going on to create a more integrated system.  Its not as if everyone involved is sitting there Holding their breath waiting for Germany to suddenly decide it will embrace a wholesale bailout. 

[LongTerm]

It is difficult for any German politician facing election (OK, all of them) to be in favor of German intervention. German voters look at the profligate Greeks, Italians and Spanish and wonder why they, the thrifty Germans, have to pay for Mediterranean mismanagement, why the wealthy in the South don't view it as an obligation to pay their taxes (which might go a long way to reducing budget deficits), and why corruption and waste in these countries can't be curtailed. Merkel recently received an electoral rebuke for being too lenient. Democracy and soverign borrowing can lead to difficult political situations where common sense disappears.

[Cardboard]

I remember going to Italy just prior to the Euro when the Lira was worth about $0.80 canadian and at that time the CDN$ was worth $0.60 U.S.  So the Lira was about $0.48 U.S.  Nowadays, the Euro is worth $1.28 canadian and roughly $1.24 U.S.  Germany also had a cheaper currency than it is now, but I do not recall the rate in Marks.

 

I remember also going afterwards once the Euro was implemented and the adjustment was painful with many prices going up by close to 50% in Italy. Germany not so much, but still an increase. So, I don't know how it could have lasted so long especially at these very high rates vs the U.S. dollar. I certainly can't call Italians more productive than Americans and I would say the same for the Germans. All these countries have about 6 weeks of vacation for their workers and they do like their coffee break! 40 hours over there is a rough week. True, they have high tech and very specialized manufacturing, but I have not seen a Silicon Valley of innovation over there.

 

What seems needed is massive devaluation. It seems to be happening, but on a very slow pace. They need to boost their exports especially in the PIIGS (exclude Ireland) to reduce their unemployment which will then solve a lot of their issues. Then the U.S. will need to devalue too... Just can't seem to see an end to this depression. It is not a depression, at least not yet, like in the 30's, but it smells awfully bad. Even the BRIC's are now slowing to a crawl and the U.S. unemployment report today was plain terrible.

 

http://money.cnn.com/2012/06/01/news/economy/may-jobs-report/index.htm?iid=HP_LN

 

Cardboard

[Viking]

I am not sure that Germany has a magic wand to 'fix' what ails Greece, Spain, Italy etc. The problem in those countries is their wages are not competitive. If wages do not come down, they will remain uncompetitive.

 

The easiest way to get wages down is to let the currency depreciate; the Euro is falling versus the US$ but I am not sure anyone outside of Europe will like a Euro 30%-40% lower than where it is today. The Euro is the problem, not Germany.

 

Germany can agree for the ECB to start cutting large cheques to the southern countries, like what happened with Greece. The problem with this solution is the quantity of Euro's that will be needed is likely very, very large. And this solution actually solves nothing... The fundamental problem of wage rates too high in the southern countries remains and the needed adjustments do not happen... more money needed... an endless cycle. This was the lesson that Greece has provided.

 

Bottom line, the Euro is a massively flawed currency. The can will get kicked down the road for as long as possible as the decisions are simply too hard for a governement to make and there are no good options. The needed decisions will only be made with the threat of social chaos; we are getting closer in many countries.

 

I would not be surprised to see the policital cracks in Europe get bigger and for old animosities to rise up. Things will likely get worse before they get better.

[PlanMaestro]

At this point in time Germany owes it to the rest of Europe to get on with a proper bailout.  Germany is reporting Q after Q of stellar economic news.  They are benefitting from the low Euro.  If they want the system to stay together they need to further integrate. 

 

Otherwise, it all falls apart, and Germany loses because they are part of a shrunken Euro, that gets highly valued and kills their exports and their economy.  and they completely lose the ability to export to Spain, Greece, Italy.

 

Very true and the worst part is that the bailout is coming either way: it's either the periphery, that does not have to be a bailout just easy money, or Deutsche Bank, Commerzbank, Credit Agricole, Societe Generele, Paribas,.... http://variantperceptions.wordpress.com/2012/01/03/charting-banking-tangible-common-equity/

 

If that moment comes, I hope no one in Germany and France starts complaining that the periphery put a gun on their heads. It's their own fault. Time for the German and French politicians to come clean on this.

[Kiltacular]

I would not be surprised to see the policital cracks in Europe get bigger and for old animosities to rise up. Things will likely get worse before they get better.

 

It's interesting.

 

Pre WWII, it would be relatively clear where Europe was headed -- War.  Since the advent of nuclear weapons, war is, of course, not a palatable option on a large scale.  It's the only upside of Nukes.

 

So, how does this shake out? 

 

In the short run, they have to figure out a way to print and/or there has to be a a wealth transfer from Germany?

 

The long-term problems for many of these nations are obvious.  And, on a very long scale, it's clear you can't have welfare states without population growth but with a strong currency that you can't print. 

 

There's no way this can work, is there?

 

 

 

[PlanMaestro]

To the europeans, is there a procedure that can kick Germany out of the euro? Maybe just kick them out of monetary decisions and inflate out of this mess?

 

I am not saying that it has get to this but they need to find a way to put Germany on the negotiation table.

 

[Parsad]

To the europeans, is there a procedure that can kick Germany out of the euro? Maybe just kick them out of monetary decisions and inflate out of this mess?

 

I am not saying that it has get to this but they need to find a way to put Germany on the negotiation table.

 

 

The Union cannot survive without Germany.  The GDP of the remaining solvent nations isn't enough to support the debt load of the PIIGS.  So that argument is completely moot. 

 

Germany will concede, but not without some assurances that the nations receiving extensive support will put their fiscal house in order...and it will get messy until that point arrives, where both sides finally make some concessions.  Cheers!

[PlanMaestro]

The Union cannot survive without Germany.  The GDP of the remaining solvent nations isn't enough to support the debt load of the PIIGS.  So that argument is completely moot. 

 

Parsad, check the debt load of the "PIIS". Germany has the same Debt/GDP as the rest of the Euro zone (82%) and in many respects the rest of the Euro zone is in a better position than the US or the UK on the Debt front.

 

Also, can we stop this cultural stereotype about German thrift and Spanish waste that is not reflected in the numbers? Spain has a debt/GDP of 68% wile Germany has 82%. The German banks were as or more wasteful than their Spanish counterparts (ask who was financing the cajas and who had the better banking regulation). And for all their thrift 1 out of every 2 Spanish between 18-30y is unemployed. Talk about blaming the victim.

 

This is a sudden-stop/BOP/currency crisis not a fiscal one. Let the Deutsche Mark appreciate to close the current account gap.

 

Debt/GDP of all the countries in the eurozone http://en.wikipedia.org/wiki/Economy_of_the_European_Union#Economies_of_member_states

 

[Parsad]

The Union cannot survive without Germany.  The GDP of the remaining solvent nations isn't enough to support the debt load of the PIIGS.  So that argument is completely moot. 

 

Parsad, check the debt load of the "PIIS". Germany has the same Debt/GDP as the rest of the Euro zone (85%) and in many respects the rest of the Euro zone is in a better position than the US or the UK on the Debt front.

 

Let the Deutsche Mark appreciate to close the current account gap. Also, can we stop this cultural stereotype about German thrift and Spanish waste that is not reflected in the numbers? The German banks were as or more wasteful than their PIIGS counterparts.

 

This is a sudden-stop/BOP/currency crisis not a fiscal one.

 

You're only looking at their soverign debt to GDP.  You have to also look at the amount of assets their banking system has relative to GDP, and how much of those loans are going sour relative to GDP.  Germany can easily support itself.  Spain, Greece, Ireland cannot...Portugal is on the cusp...and Italy and France can still keep their banks alive. 

 

If you look at all European soverign nations and their banking assets relative to GDP...I provided a slide a couple of weeks ago on here...you'll see that the remaining nations cannot support the banking system with their GDP if you exclude Germany.  It isn't only the soverign debt that is pushing the PIIGS into bailouts...it's them being unable to support their banking systems and it is driving the cost of their debt up.  That's why you have negative yields on 2-year German bonds.  Cheers!

[Viking]

Micheal Pettis recently wrote a somewhat detailed article explaining the challenges currenty faced by Spain: http://www.financialsense.com/contributors/michael-pettis/europes-depressing-prospects-spain-euro

[PlanMaestro]

 

You're only looking at their soverign debt to GDP.  You have to also look at the amount of assets their banking system has relative to GDP, and how much of those loans are going sour relative to GDP.  Germany can easily support itself.  Spain, Greece, Ireland cannot...Portugal is on the cusp...and Italy and France can still keep their banks alive. 

 

If you look at all European soverign nations and their banking assets relative to GDP...I provided a slide a couple of weeks ago on here...you'll see that the remaining nations cannot support the banking system with their GDP if you exclude Germany.  It isn't only the soverign debt that is pushing the PIIGS into bailouts...it's them being unable to support their banking systems and it is driving the cost of their debt up.  That's why you have negative yields on 2-year German bonds.  Cheers!

 

Man, I think you have to check how many of those banking assets are in Latin America, the USA and the UK ... Santander and BBVA would do very well without Germany in the Eurozone. Switzerland and the UK are also suffering a lot with that large % of banking assets.

 

Remember Spain has a 24% unemployment rate. Completely out of proportion with their fiscal and financial behavior. Let's convert the debt financing the Cajas  into equity and see who screams in Berlin.

[ERICOPOLY]

Santander and BBVA would do very well without Germany in the Eurozone.

 

Both of those banks are seeing share price gains today.

[Parsad]

 

You're only looking at their soverign debt to GDP.  You have to also look at the amount of assets their banking system has relative to GDP, and how much of those loans are going sour relative to GDP.  Germany can easily support itself.  Spain, Greece, Ireland cannot...Portugal is on the cusp...and Italy and France can still keep their banks alive. 

 

If you look at all European soverign nations and their banking assets relative to GDP...I provided a slide a couple of weeks ago on here...you'll see that the remaining nations cannot support the banking system with their GDP if you exclude Germany.  It isn't only the soverign debt that is pushing the PIIGS into bailouts...it's them being unable to support their banking systems and it is driving the cost of their debt up.  That's why you have negative yields on 2-year German bonds.  Cheers!

 

Man, I think you have to check how many of those banking assets are in Latin America, the USA and the UK ... Santander and BBVA would do very well without Germany in the Eurozone. Switzerland and the UK are also suffering a lot with that large % of banking assets.

 

Remember Spain has a 24% unemployment rate. Completely out of proportion with their fiscal and financial behavior.

 

I agree that Santander is perfectly fine, as much of their business is global...can't speak about BBVA...but overall, Spain's banking system is struggling, and they are requiring one capital injection after another right now for loan losses that are grossly underestimated.  Germany has benefitted from the inequities in the Union, but at the same time, everyone agreed to the terms.  No one was saying poor Germany when East and West reunited and Germany struggled to get their fiscal house in order.  The Union needs Germany and Germany needs the Union...both will conceed eventually. 

 

My point was that Spain shouldn't be tossing around blame, when it's blatantly obvious that Spain's problems, and most definitely Greece's problems, were due to the culture, excesses and reliance on social benefits within their own countries.  How can you spend one-third of your annual GDP on the Olympics?  How is real estate speculation in Spain, Germany's fault?  I'm right wing on economics and left wing on social issues, but let's call a spade a spade.  Just like the problems in the U.S. were due to a period of excess and lack of regulation, the same things have been occuring with the PIIGS...just they were even more leveraged already.  Cheers!

[PlanMaestro]

I agree that Santander is perfectly fine, as much of their business is global...can't speak about BBVA...but overall, Spain's banking system is struggling, and they are requiring one capital injection after another right now for loan losses that are grossly underestimated.  Germany has benefitted from the inequities in the Union, but at the same time, everyone agreed to the terms.  No one was saying poor Germany when East and West reunited and Germany struggled to get their fiscal house in order.  The Union needs Germany and Germany needs the Union...both will conceed eventually. 

 

My point was that Spain shouldn't be tossing around blame, when it's blatantly obvious that Spain's problems, and most definitely Greece's problems, were due to the culture, excesses and reliance on social benefits within their own countries.  How can you spend one-third of your annual GDP on the Olympics?  How is real estate speculation in Spain, Germany's fault?  I'm right wing on economics and left wing on social issues, but let's call a spade a spade.  Just like the problems in the U.S. were due to a period of excess and lack of regulation, the same things have been occuring with the PIIGS...just they were even more leveraged already.  Cheers!

 

Parsad, I think your cultural stereotypes are blinding you. To go back to the 1992 Olympics well before the start of the euro when the current debt/gdp is well below Germany's? And this is not about right/left wing economics ... this is about economics. You want to run a mercantilistic operation ... be prepared for a currency competition and a trade war.

 

Spain has been on the sharp end of the stick while these loan sharks in Berlin have the chutzpha of blaming the real estate bubble all on Spain when German money was all behind this. As I said, convert the Cajas debt into equity, kick Germany out of the ECB, ease money, and let's see who screams in Berlin.

 

Let's call a spade a spade.

 

PS:

 

1. Check the Spanish banking regulations. One of the best in the world, that included counter-cyclical provisioning but that did not stop the German hot money.

2. "Blatantly obvious": Parsad in all good nature there is a lot of research on this and it is not about right/left economics, it is about good economics.

[Parsad]

Parsad, I think your cultural stereotypes are blinding you. To go back to the 1992 Olympics well before the start of the euro when the current debt/gdp is well below Germany's?

 

I wasn't talking about the 1992 Olympics...LOL!  That would be taking it back a long ways. 

 

I was talking about the 2004 Athen's Olympics and how Greece spent so much damn money putting on a show for the world, when they couldn't afford it at all.  Cheers!

[PlanMaestro]

Parsad, I think your cultural stereotypes are blinding you. To go back to the 1992 Olympics well before the start of the euro when the current debt/gdp is well below Germany's?

 

I wasn't talking about the 1992 Olympics...LOL!  That would be taking it back a long ways. 

 

I was talking about the 2004 Athen's Olympics and how Greece spent so much damn money putting on a show for the world, when they couldn't afford it at all.  Cheers!

 

jajaja, that explains a lot. Greece has to go, for the good of them and the rest. 

[Rabbitisrich]

The downside of being so rhetorically aggressive is that wounded parties don't want to listen:

http://krugman.blogs.nytimes.com/2012/06/01/the-breakeven-point-wonkish-but-terrifying/?smid=tw-NytimesKrugman&seid=auto

 

Paul McCulley held a similar viewpoint and received walking papers from PIMCO for his perspective. Every country can point to unique villains (Greenspan) so it takes a while to see common threads.

 

[Charlie]

"blaming the real estate bubble all on Spain when German money was all behind this."

 

Why should German money be the cause of the real estate bubble in Spain?  :)