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Spain Is Trapped In A 'perverse Spiral' As Wage Cuts Deepen The Crisis

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http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7786450/Spain-is-trapped-in-a-perverse-spiral-as-wage-cuts-deepen-the-crisis.html

The Spanish Inquisition used to burn Englishmen in Sevilla's Plaza de San Francisco when they had the chance. There must have been some nostalgia for this practice when the news hit that Fitch Ratings had stripped the country of its AAA status.

The downgrade could not have come at a more dreadful moment. The EU's €750bn "shield" for eurozone debtors has halted an incipient run on Club Med banks, but it has failed to restore full confidence for the obvious reason that such a guarantee cannot plausibly be extended from Greece to Portugal and then to Spain. The sums are too large, the number of solvent creditors too reduced, the intra-EMU politics too poisonous.

Pierre Lellouche, France's Europe minister, compares the shield to NATO's Article 4, the mutual defence clause that deems an attack on any one state to be an attack on all. Leaving aside the question of whether Nato's Article 4 was ever credible I doubt it was this use of NATO language illustrates the confusion in EU circles over the causes of the Club Med bond crisis. This is not a war. It is a beauty contest. Eurozone states must attract capital from pension funds and Asian central banks to finance their deficits or default.

Whether intended or not, Mr Lellouche may have pulled the detonation plug on EMU by boasting that Europe's politicians had created an EU debt union on the sly. "It is expressly forbidden in the treaties. De facto, we have changed the treaty," he told the Financial Times. How will that go down at Germany's constitutional court, already facing a growing in-tray of claims that these bail-outs breach the Maastricht Treaty?

For Spain it has been a horrible week. The central bank seized CajaSur and imposed draconian write-down rules on banks to restore confidence. The Spanish Socialist and Workers Party (PSOE) of Jose Luis Zapatero then rammed a 5pc cut in public wages through the Cortes by a single vote, shattering consensus. The government cannot hope to pass a budget. Its own trade union base is planning a general strike.

The sub-text of Fitch's 32-page report shows Mr Zapatero's self-immolation to be futile in any case. The agency has not downgraded Spain for lack of austerity. Its implicit conclusion is that the policy of 1930s wage cuts - or "internal devaluations" - being imposed on southern Europe's humiliated states as a quid pro quo for the EU shield is itself part of the problem. Ultra-austerity will bleed the economy, shrivel tax revenues and fail to close deficit anyway. "Fitch believes the risk that economic growth will fall short of the government's projections," it said.

El Pais spoke of a "perverse spiral" in its editorial. "The Fitch note drives home the apparently unsolvable contradiction in which the Spanish economy finds itself. To maintain debt solvency Spain must squeeze public spending: yet this policy undermines the chances of recovery which itself causes further loss of confidence."

Spain's unemployment was already 20.5pc even before this latest dose of shock therapy. There are 4.6m people without work. Dole payments alone account for half the budget deficit. By comparison, the Anuario Estadístico shows that Spain's unemployment never rose above 9.5pc during the Great Depression . The economy shrank by 3pc from peak to trough. The Zapatero slump is worse than anything inflicted by Gil Robles during the Bienio Negro.

It is no mystery why Spain is trapped in depression. The country joined the euro without grasping its Faustian implications, as did others. Germany was equally naive in thinking it could have a currency union entirely on its own terms.

EMU caused Spanish interest rates to halve overnight, with dire results as the Bank of Spain's governor confessed in April 2007. "The single monetary policy has meant that excessively loose conditions for our economy have been almost continuous," he said.

Real rates were -2pc as the bubble reached its crescendo. Nearly 800,000 homes were built in 2007, more than in Britain, Germany, and Italy combined. There is now an overhang of 1.6m unsold properties, six times the level per capita in the US. Total public/private debt has reached 270pc of GDP.

The boom was a debt illusion, just as it was in Britain but with the added twists of lower wealth to offset household debt and a global investment position that is underwater by 70pc of GDP. Britain still has the instruments to extricate itself. The Bank of England has engineered a devaluation of 20pc, restoring competitiveness at a stroke. Spain can try to claw back an even greater loss by cutting wages, but that risks a slow death by debt-deflation as compound interest tightens its vice.

This can end only in two ways. Either Germany tolerates massive monetary reflation by the ECB or Spain will be forced out of EMU, setting off a catastrophic chain-reaction through north Europe's banking system.

Your choice, Berlin.

AEP fails to grasp that inflation isn't a way out of this mess, it simply won't work you'll still end up with a north European banking crisis.

There is no way out of this mess, in the debt based monetary system we can only issue more debt, but once you have a crisis of confidence in debt the option to issue more debt which is needed to repay the existing debt has gone.

Debt is wealth

Debt is poverty

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So the solution to a crises brought on by over inflation of the money supply is to over inflate the money supply.

The contradiction is so self evident that one wonders how anyone fails to see it.

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http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7786450/Spain-is-trapped-in-a-perverse-spiral-as-wage-cuts-deepen-the-crisis.html

AEP fails to grasp that inflation isn't a way out of this mess, it simply won't work you'll still end up with a north European banking crisis.

There is no way out of this mess, in the debt based monetary system we can only issue more debt, but once you have a crisis of confidence in debt the option to issue more debt which is needed to repay the existing debt has gone.

Debt is wealth

Debt is poverty

This is the conundrum: Continue borrowing and say future growth can pay it all off OR cut your deficit and suffer immediate recessionary symptoms. At the levels of structural and national debt in in the PIGS neither looks as though it can end with paying off/controlling or servicing their deficits over the next few years. Any increases in the market rate for borrowing causes mayhem to their projections. The UK can allow devaluation, buth otherwise is in the same mire. Spain looks to be the trigger to Euro demise because its economy is 4 x the size of Greece and too big for markets to ignore. Add in Portugal and oh dear Lord......Italy...Arggggggggggggggh thump

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....

AEP fails to grasp that inflation isn't a way out of this mess, it simply won't work you'll still end up with a north European banking crisis.

...

He's a wingnut and obsessed with his own anti-EU propaganda to the point he actually believes it.

Your observation is correct - inflation will not work. Devaluing the currency will not work. (Why is is so often cited as a good thing? I don't want to be 25% poorer every four months)

Not sure that anything is going to work to be totally honest.

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Not sure that anything is going to work to be totally honest.

default is the only thing that will work.

the remaining question is how it is going be organised (or alternatively, in what way it will manifest itself in a non organised manner).

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default is the only thing that will work.

*nods*

the remaining question is how it is going be organised (or alternatively, in what way it will manifest itself in a non organised manner).

The organised ship has sailed, I would say. No one wants to play Mr. Rational and tell the population that the cake is only a 30th the size they were told it was by the banking system and the ruling elite have this insane tendency to think that perception creates reality, as all sociopaths tend to.

Edited by Injin

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http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7786450/Spain-is-trapped-in-a-perverse-spiral-as-wage-cuts-deepen-the-crisis.html

AEP fails to grasp that inflation isn't a way out of this mess, it simply won't work you'll still end up with a north European banking crisis.

There is no way out of this mess, in the debt based monetary system we can only issue more debt, but once you have a crisis of confidence in debt the option to issue more debt which is needed to repay the existing debt has gone.

Debt is wealth

Debt is poverty

To be fair on AEP, the last paragraph in his article is:

This can end only in two ways. Either Germany tolerates massive monetary reflation by the ECB or Spain will be forced out of EMU, setting off a catastrophic chain-reaction through north Europe's banking system.

He's well aware that there's no easy way out of this, which is why he has spent the last decade loudly opposing european monetary union.

I think the underlying point is that when push comes to shove, countries like Spain are going to have to act in their own interests rather than those of the EU, and the north european banks, and for Spain it will be preferable to leave the euro and devalue rather than face years of deflation. What perhaps AEP doesn't realise though is that the current Spanish government is incapable of understanding or accepting this situation.

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What perhaps AEP doesn't realise though is that the current Spanish government is incapable of understanding or accepting this situation.

It's ironic, is it not?

PIIGS politicians blundered their way into the single ccy, selling it to the local sheeple as a one way ticket to the gravy train.

And now that the game is up, what do they do? Absolutely nothing, denial all the way.

It's the anglo-saxon speculators fault, innit? :D

Edited by VoteWithYourFeet

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Reminds me if I was the prime minister of Spain I would threaten the nuclear option. Say publicly.. either print and buy the national bonds or Spain leaves the EU.

I agree with Liveandletbuy.. Spain cannot just sit around and suffer years of deflation. Unemployment already at 20% and rising. So far the Spanish public sounds amazingly complacement though.

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Reminds me if I was the prime minister of Spain I would threaten the nuclear option. Say publicly.. either print and buy the national bonds or Spain leaves the EU.

I agree with Liveandletbuy.. Spain cannot just sit around and suffer years of deflation. Unemployment already at 20% and rising. So far the Spanish public sounds amazingly complacement though.

That's partly because unemployment benefit is very generous (it's taking up half the deficit apparently) and partly because expectations are different - being an unemployed 30 year old living with your parents isn't such a big deal.

I'm secretly hoping that the Spanish government might be forced into selling off the remains of nationalised industries, deregulating, opening up the labour market, etc and reducing the deficit that way. This solution is mentioned in this article:

http://www.timesonline.co.uk/tol/comment/columnists/bill_emmott/article7131185.ece

Steffen Kampeter, the No 2 in the German Finance Ministry, said that what would have to happen is a strictly enforced fiscal union, combined with a broad liberalisation of goods, services and labour markets. In other words, if monetary policy is in the hands of the European Central Bank, and there is no fiscal room for manoeuvre, the eurozone had better deregulate and turn Thatcherite. He is right. No other answer is on offer to the question of how the eurozone will restore growth and get itself out from under its debts

However again this ain't going to happen under the current Spanish government.

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That's partly because unemployment benefit is very generous (it's taking up half the deficit apparently) and partly because expectations are different - being an unemployed 30 year old living with your parents isn't such a big deal.

I'm secretly hoping that the Spanish government might be forced into selling off the remains of nationalised industries, deregulating, opening up the labour market, etc and reducing the deficit that way. This solution is mentioned in this article:

http://www.timesonline.co.uk/tol/comment/columnists/bill_emmott/article7131185.ece

However again this ain't going to happen under the current Spanish government.

UK deficit is £170 billion, while our spending on Benefits and Pensions is £200 billion.

Is it not part of the eurozone controllers grand plan for governments to sell of absolutely everything? so it's all looking good for them, everything is a t bargain basement prices.

I agree that there are some industries that should not be run by the state, but on the whole privatisation has been bad for the proletarian and good for the oligarchs.

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This can end only in two ways. Either Germany tolerates massive monetary reflation by the ECB or Spain will be forced out of EMU, setting off a catastrophic chain-reaction through north Europe's banking system.

Your choice, Berlin.

Spot on. Forced deflation isn't going to work.

Germany need to stop hoarding, get out of the eussro and take the default/inflation losses instead of trying to deflate the entire eurozone into poverty.

They'll just never buy into it. They'll keep pushing until the piggy poor are being shot in the streets by their own governments. 3 years tops.

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Spot on. Forced deflation isn't going to work.

Germany need to stop hoarding, get out of the eussro and take the default/inflation losses instead of trying to deflate the entire eurozone into poverty.

They'll just never buy into it. They'll keep pushing until the piggy poor are being shot in the streets by their own governments. 3 years tops.

If governments around the world had the balls to apply their existing legislation to banks regarding bankruptcy and depositor bail outs at the beginning this disaster might have been avoided. Of course, this would have meant many rich people would have suddenly got a lot poorer so obviously that could not be allowed to happen. Now the VI must start worrying that their haircut will take place at the guillotine in front of the mob rather than just in the form of write downs on their investments.

Edited by realcrookswearsuits

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He's a wingnut and obsessed with his own anti-EU propaganda to the point he actually believes it.

Your observation is correct - inflation will not work. Devaluing the currency will not work. (Why is is so often cited as a good thing? I don't want to be 25% poorer every four months)

Not sure that anything is going to work to be totally honest.

Inflation works very well at writing down debts denominated in your own currency but in reality it is just a form of silent default.

Those who cant inflate like Spain are doomed to default openly since the spiraling collapse of their economy in an uncontrolled deflation will ultimately render the interest on the principal unserviceable.

What ever route is taken sovereign debt default is the ultimate destination as it has been from day one of the crisis when governments decided to bail out banks, their share holders, bond holders and depositors in full.

This debt is ultimately not going to be paid.

I am amazed this fact has still not yet sunk in with everyone.

Edited by realcrookswearsuits

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Inflation works very well at writing down debts denominated in your own currency but in reality it is just a form of silent default.

Those who cant inflate like Spain are doomed to default openly since the spiraling collapse of their economy in an uncontrolled deflation will ultimately render the interest on the principal unserviceable.

What ever route is taken sovereign debt default is the ultimate destination as it has been from day one of the crisis when governments decided to bail out banks, their share holders, bond holders and equity holders in full.

This debt is ultimately not going to be paid.

I am amazed this fact has still not yet sunk in with everyone.

inflation doesnt work.

money is the monetising of wealth with debt.

only wealth can pay off debt.

inflation does not effect wealth.

wealth is what we make, grow or mine that somebody else wants. money represents the wealth. the seller must accept a suitable agreed sum in return for the sale of his wealth. inflation just means the seller will need more money in exchange.

this is the same for taxes. OK, the interest in the currency will be worth less, but the tax take will need to increase too. this makes the man selling his wealth less likely to accept the newly inflated currency.

Once the inflation Genie is out of the bottle, weak governments are unable to put it back in.

if you make not enough wealth to keep people in jobs, then it matters not how much the money is inflated...for the majority.

the problem is not private debt so much as public debt. this means that bigger and bigger government IS the problem. supported on a decreasing wealth creation.

You see, Government doesnt police the streets, empty the dustbins or teach the kids. People do. All Government can do is take money and pretend IT is doing these things and taking the credit....and boy, do they take the credit!

There is no real convincing reason why £1 worth of my great grandfathers time should be any less than £1 worth of my time.

Edited by Bloo Loo

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It's much higher than in the UK, but €426 a month for the long-term unemployed is hardly "very generous".

AFAIK you normally you start off with 2 months full pay for every year worked from you employer (so if you've been somewhere 6 years you get a year's salary to help you on your way) then on top of that you usually get 65% of the national average salary each month for to 2 years, and then after that you get €426 a month.

This partly explains why youth unemployment is so high in Spain: there's a lot of older people hanging around in non-jobs, but their employer can't afford to sack them. Also many civil sevants have contracts that make it illegal for the government to fire them. The system obviously puts people off changing jobs. It gets worse because companies are obviously reluctant to give people permanent contracts if it's so expensive to fire them, so they give out temporary contracts for up to two years (the legal limit) and then replace people cheaply. So you've now got a demographic in Spain whereby those over 35 have very highly protected jobs, and those under 30 are either unemployed or being pushed from one sh1tty temp job to another. People in the UK complain about the so-called boomers stealing from other generations - they really ain't seen nothing.

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http://www.bloomberg.com/apps/news?pid=20601102&sid=aXtd41.MMUZ4

Debt Crisis Drying Up European Lending, Espirito Santo Says
By Fabiola "Fab" Moura
May 31 (Bloomberg) -- Europe’s sovereign debt crisis is making financial institutions reluctant to lend, threatening to choke off credit to the region’s banks and consumers, said a senior executive of Banco Espirito Santo SA.
“There is a problem with the real economy, because now credit is shortening completely,” said Jose Maria Espirito Santo Ricciardi, head of the investment banking unit of Portugal’s largest traded bank. “I will not say capital markets are completely closed, but it has been difficult, more for the banks than for sovereigns. Namely, the medium and small banks are having problems.”

Ugly days ahead for the Euro I am afraid. We are okay as we are well placed to weather the global crashes simply because we, unlike Spain and France, are too big to fail.

.

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http://www.bloomberg...id=aXtd41.MMUZ4

Debt Crisis Drying Up European Lending, Espirito Santo Says
By Fabiola "Fab" Moura
May 31 (Bloomberg) -- Europe's sovereign debt crisis is making financial institutions reluctant to lend, threatening to choke off credit to the region's banks and consumers, said a senior executive of Banco Espirito Santo SA.
"There is a problem with the real economy, because now credit is shortening completely," said Jose Maria Espirito Santo Ricciardi, head of the investment banking unit of Portugal's largest traded bank. "I will not say capital markets are completely closed, but it has been difficult, more for the banks than for sovereigns. Namely, the medium and small banks are having problems."

Ugly days ahead for the Euro I am afraid. We are okay as we are well placed to weather the global crashes simply because we, unlike Spain and France, are too big to fail.

.

Nah, bankers will just lie about their asset values.

No lending = no income.

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Ugly days ahead for the Euro I am afraid. We are okay as we are well placed to weather the global crashes simply because we, unlike Spain and France, are too big to fail.

.

I agree with the ugly days ahead, but we aren't too big to fail if Germany and France get hit so will the UK, they won't be able to contain the fallout from this mess. The whole financial system is so intertwined once the first domino falls there will be no stopping it.

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  • 152 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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