Unemployment in Spain is 24%. Youth unemployment (under 24 years old) is a shocking 53%. Both figures will rise during 2012 as the economy continues to contract. An unemployment of 30% by year’s end is within the realm of the possible. Hell, within the realm of the likely, even. Total government debt is projected to be 79.8% of GDP in 2012—that is, €800 billion. Much more troublingly, the debt last year was “only” €680 billion—but that was still 21% higher than in 2010. So at this rate—assuming the status quo remains unchanged, and without factoring in the contraction of GDP—in 2013 the projected Spanish government debt could well rise to 90% of GDP.
(Throughout this Supplement, when discussing “government debt”, I am referring both to Madrid’s and to the autonomous regions’ consolidated debt situation.)
Private debt is an additional 75% of GDP—and let’s not even start talking about the delinquency rates—while the banks have a capital shortfall estimated at a mere €78 billion.
On top of all this—as if “all this” weren’t bad enough—is the issue of the outstanding Spanish debt—
—the nub of the problem.
Spain has redemptions totalling €149 billion in 2012. It will issue a total of €186, with an eye to extend the maturity of the outstanding debt. But even with these concerted efforts, in 2012, the maturity of Spanish debt will in fact shrink from 6.4 years to 6.2 years. Add to that, in 2011, interest payments totaled €28.8 billion—up from €22.1 billion the year before. Why? Because of rising bond yields: Spain is considered riskier—due to the Troika’s inability to finally “fix” Greece and Spain’s own obvious domestic financial issues—and thus Spain has to pay more to borrow money.
In other words, Spain has fallen into the classic “borrowed-short-but-my-income-is-long-and-on-top-of-that-my-loans-are-getting-more-expensive” trap.
Last week, April 4, Spain’s Treasury held a bond auction—and fuck-all was it nasty: Of the expected €2.5 to €3.6 billion, Spain barely managed to get bids for €2.6 billion—and the yield on the 10-year spiked to 5.85%, before settling at a still-way-high 5.75%.
Worldwide markets all got down on this auction—
—but here’s the thing: Spain has a lot more of these auctions coming up—on average one every two weeks.
They have to raise €186 billion in 2012.
And of the first of these, they had a quasi-failed auction.
One hundred eighty-six billion euros—in less than a year.
They’re not going to raise that kind of money—simple as that. The April 4 auction was not an outlier—it’s what’s in the post for all of the next 17 auctions.
And the Germans—being the passive-aggressive dicks that they are (my maternal grandmother is German-Danish—so I know whereof I speak)—will not allow the ECB to open the money spigot to Spain. Just like they did with Greece, Germany will dither, while all the while blocking money to Spain until it’s too late.
Germany is thinking—in its passive-aggressive way—that it can string Spain along (just like it did Greece), and then save Spain at the last minute (just like Greece was sort-of saved).
But there’s one difference: Spain is bigger—much bigger—than Greece. You can’t pull an all-nighter and save Spain like they did Greece. You want to save Spain, you best be starting now.
Of course, they’re not.
So This Is What Will Happen
The new Spanish government of Mariano Rajoy, who took office this past December, has entrusted the running of the country’s finances to a so-called “technocrat”, Luís de Guindos.
De Guindos is a technocrat—and he is doing everything in his power to keep Spain steady, like a good technocrat would. He has presented a budget that will shrink Spanish government social spending by 4.3%; he is moving aggressively to stabilize the Spanish banking sector, decreeing that all banks with assets of less than €80 billion under management will be “encouraged” to merge, in order to foster stability through size.
You know: Some German austerity coupled with some Geithnerite Too-Big-To-Fail-ism, like you’d expect a good technocrat would.
But de Guindos is not a europhile-technocrat-insider à la Mario Monti or Mario Draghi or Lucas Papademos or Cristine Lagarde: De Guindos is a private sector nationalist. He is Spanish—not European. Look at his résumé: The guy’s worked only in Spanish institutions when he’s done a public sector gig, and though his private sector jobs were with Lehman and PricewaterhouseCoopers—high-echelon international gigs—in both cases it was with their Spanish offices.
Coupled to that the fact that, ever since Franco’s time, Spain has never been fully accepted as “European” by the rest of the continent.
Now, de Guindos isn’t stupid. Rajoy isn’t stupid. An unemployment of 24%—and rising—coupled with a shrinking GDP is a recipe for political turmoil. That’s polite-speak for “political shit-storm in the making”.
There have been massive demonstrations in all the major cities in Spain—and there will be more, without question.
Rajoy and his Partido Popular currently enjoy absolute dominance in the Congress (186 of 350 seats), the Senate (165 of 266 seats), and the regional governments (13 of 19). But Rajoy knows the score: He ran in 2004 and 2008, losing both time. He’s under no illusions that the Partio Popular didn’t so much win in 2011: Rather, the Rodríguez Zapatero’s PSOE lost, because of popular discontent with the economy.
If there are another couple of failed auctions of Spanish bonds, and the message from the Troika is clearly that they won’t turn on the printing presses to save Spain—or worse, if the Troika telegraphs the message that Spain is going to have to get down on bended knee and beg and plead, while simultaneously squeezing its population ’til they scream—then rather than continue to cut services and social spending and appeasing the Troika, Mariano Rajoy will exit the euro.
“Don’t blame it on me! Blame it on the euro!” will be Rajoy’s slogan—and his people will believe him. In fact they will get fully behind him, regardless of the short-term (12-18 month) pain.
Why will Spain exit the eurozone? Because you can’t squeeze blood from a stone. With a 24% unemployment rate that is rising, and over half of the young people unemployed, no politician in his right mind—especially a nationalist—will decide that evenmore austerity is the cure for the disease. One thing is cutting off the fat—it’s quite another to be cutting to the bone.
For Rajoy and de Guindos, it will be simpler to exit the eurozone, go back to the peseta, and devalue by 20% to 30% right off.
It is always easier for a politician to cut expenditures via devaluation than via nominal spending cuts. Since the Eurocrats won’t allow a 20-30% devaluation of the euro, and since Spain cannot really cut any more or find any more money in the bond markets, then the only thing left for it to do is devalue a currency that it controls:
The New Peseta: Coming to Spain before the end of the year.
And The Effect On The Eurozone Will Be . . .
The effect on the eurozone will be quite something. In next week’s SPG Supplement, I will outline what will be the immediate effects of Spain exiting the European monetary union—and what would be some smart bets and ideas to keep in mind, in anticipation of that event.
If you’re interested, check out the Strategic Planning Group’s preview page to see what it’s all about.
Unemployment in Spain is 24%. Youth unemployment (under 24 years old) is a shocking 53%. Both figures will rise during 2012 as the economy continues to contract. An unemployment of 30% by year’s end is within the realm of the possible. Hell, within the realm of the likely, even.
Total government debt isprojected to be 79.8% of GDP in 2012—that is, €800 billion. Much more troublingly, the debt last year was “only” €680 billion—but that was still 21% higher than in 2010. So at this rate—assuming the status quo remains unchanged, and without factoring in the contraction of GDP—in 2013 the projected Spanish government debt could well rise to 90% of GDP.
(Throughout this Supplement, when discussing “government debt”, I am referring both to Madrid’s and to the autonomous regions’ consolidated debt situation.)
Private debt is an additional 75% of GDP—and let’s not even start talking about the delinquency rates—while the banks have a capital shortfall estimated at a mere €78 billion.
On top of all this—as if “all this” weren’t bad enough—is the issue of the outstanding Spanish debt—
—the nub of the problem.
Spain has redemptions totalling €149 billion in 2012. It will issue a total of €186, with an eye to extend the maturity of the outstanding debt. But even with these concerted efforts, in 2012, the maturity of Spanish debt will in fact shrink from 6.4 years to 6.2 years. Add to that, in 2011, interest payments totaled €28.8 billion—up from €22.1 billion the year before. Why? Because of rising bond yields: Spain is considered riskier—due to the Troika’s inability to finally “fix” Greece and Spain’s own obvious domestic financial issues—and thus Spain has to pay more to borrow money.
In other words, Spain has fallen into the classic “borrowed-short-but-my-income-is-long-and-on-top-of-that-my-loans-are-getting-more-expensive” trap.
Last week, April 4, Spain’s Treasury held a bond auction—and fuck-all was it nasty: Of the expected €2.5 to €3.6 billion, Spain barely managed to get bids for €2.6 billion—and the yield on the 10-year spiked to 5.85%, before settling at a still-way-high 5.75%.
Worldwide markets all got down on this auction—
—but here’s the thing: Spain has a lot more of these auctions coming up—on average one every two weeks.
They have to raise €186 billion in 2012.
And of the first of these, they had a quasi-failed auction.
One hundred eighty-six billion euros—in less than a year.
They’re not going to raise that kind of money—simple as that. The April 4 auction was not an outlier—it’s what’s in the post for all of the next 17 auctions.
And the Germans—being the passive-aggressive dicks that they are (my maternal grandmother is German-Danish—so I know whereof I speak)—will not allow the ECB to open the money spigot to Spain. Just like they did with Greece, Germany will dither, while all the while blocking money to Spain until it’s too late.
Germany is thinking—in its passive-aggressive way—that it can string Spain along (just like it did Greece), and then save Spain at the last minute (just like Greece was sort-of saved).
But there’s one difference: Spain is bigger—much bigger—than Greece. You can’t pull an all-nighter and save Spain like they did Greece. You want to save Spain, you best be starting now.
Of course, they’re not.
So This Is What Will Happen
The new Spanish government of Mariano Rajoy, who took office this past December, has entrusted the running of the country’s finances to a so-called “technocrat”, Luís de Guindos.
De Guindos is a technocrat—and he is doing everything in his power to keep Spain steady, like a good technocrat would. He has presented a budget that will shrink Spanish government social spending by 4.3%; he is moving aggressively to stabilize the Spanish banking sector, decreeing that all banks with assets of less than €80 billion under management will be “encouraged” to merge, in order to foster stability through size.
You know: Some German austerity coupled with some Geithnerite Too-Big-To-Fail-ism, like you’d expect a good technocrat would.
But de Guindos is not a europhile-technocrat-insider à la Mario Monti or Mario Draghi or Lucas Papademos or Cristine Lagarde: De Guindos is a private sector nationalist. He is Spanish—not European. Look at his résumé: The guy’s worked only in Spanish institutions when he’s done a public sector gig, and though his private sector jobs were with Lehman and PricewaterhouseCoopers—high-echelon international gigs—in both cases it was with their Spanish offices.
Coupled to that the fact that, ever since Franco’s time, Spain has never been fully accepted as “European” by the rest of the continent.
Now, de Guindos isn’t stupid. Rajoy isn’t stupid. An unemployment of 24%—and rising—coupled with a shrinking GDP is a recipe for political turmoil. That’s polite-speak for “political shit-storm in the making”.
There have been massive demonstrations in all the major cities in Spain—and there will be more, without question.
Rajoy and his Partido Popular currently enjoy absolute dominance in the Congress (186 of 350 seats), the Senate (165 of 266 seats), and the regional governments (13 of 19). But Rajoy knows the score: He ran in 2004 and 2008, losing both time. He’s under no illusions that the Partio Popular didn’t so much win in 2011: Rather, the Rodríguez Zapatero’s PSOE lost, because of popular discontent with the economy.
If there are another couple of failed auctions of Spanish bonds, and the message from the Troika is clearly that they won’t turn on the printing presses to save Spain—or worse, if the Troika telegraphs the message that Spain is going to have to get down on bended knee and beg and plead, while simultaneously squeezing its population ’til they scream—then rather than continue to cut services and social spending and appeasing the Troika, Mariano Rajoy will exit the euro.
“Don’t blame it on me! Blame it on the euro!” will be Rajoy’s slogan—and his people will believe him. In fact they will get fully behind him, regardless of the short-term (12-18 month) pain.
Why will Spain exit the eurozone? Because you can’t squeeze blood from a stone. With a 24% unemployment rate that is rising, and over half of the young people unemployed, no politician in his right mind—especially a nationalist—will decide that evenmore austerity is the cure for the disease. One thing is cutting off the fat—it’s quite another to be cutting to the bone.
For Rajoy and de Guindos, it will be simpler to exit the eurozone, go back to the peseta, and devalue by 20% to 30% right off.
It is always easier for a politician to cut expenditures via devaluation than via nominal spending cuts. Since the Eurocrats won’t allow a 20-30% devaluation of the euro, and since Spain cannot really cut any more or find any more money in the bond markets, then the only thing left for it to do is devalue a currency that it controls:
The New Peseta: Coming to Spain before the end of the year.
And The Effect On The Eurozone Will Be . . .
The effect on the eurozone will be quite something. In next week’s SPG Supplement, I will outline what will be the immediate effects of Spain exiting the European monetary union—and what would be some smart bets and ideas to keep in mind, in anticipation of that event.
If you’re interested, check out the Strategic Planning Group’s preview page to see what it’s all about.
This post is adapted from a piece that originally appeared at my Strategic Planning Group. I've been doing a lot of work over there—hence the scarce postings over here. Sorry! GL
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Naked CDS’s are the new sport in Spain
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