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Spanish and Italian debt spiral
El País, Madrid ^ | 8/3/2011

Posted on 08/04/2011 1:07:57 AM PDT by bruinbirdman

With each passing day, both countries are growing weaker on the markets. And the more it costs to finance their debt, the less chance they have of surviving the crisis. To date, no one has come up with a solution.

The hike in the risk premium for Italian and Spanish debt (Spain's spiralled to 403 basis points relative to German bonds and closed above 380) ended up driving both countries into an emergency situation on August 2. The political alarm triggered by the unending punishment from the financial and stock markets has forced consultations among the Prime Minister, José Luis Rodríguez Zapatero, and the opposition parties to analyse possible responses to the serious deterioration in Spain’s creditworthiness and to avert fears about a possible bailout of Spain, which Brussels has denied.

The constant battering of the markets against Spanish and Italian debt is threatening the very survival of the euro zone, which is practically exposed out in the open for lack of political resources still needed to ward off speculation against the national debts.

The diagnosis is already in, but Europe persists in failing to tackle the roots of the Greek crisis and in failing to present the image of a unified economic governance. Meanwhile, Spain and Italy remain trapped in the insoluble contradiction that arises when a drastic fiscal adjustment plan is applied. The deeper the cuts required of a country, the further the fall in their expectations of growth. Investors understand that without growth there can be no return of the financing they loaned. The cost of refinancing therefore goes up, and in turn the tourniquet tightens on their already somewhat diminished activity. And so on, until a bailout becomes inevitable.

The month of August will be a tough test for Spain and Italy. Investors have not set much value on the bringing forward of elections, as the early elections weigh in rather marginally next to the economic factors mentioned, such as the stunted capacity for growth (Spanish GDP will, hopefully, grow by 0.7 percent this year), the stagnant world economy (evident in the case of the U.S.) and the dire political mismanagement of the crisis in Europe.

Choosing between bad and worse…

Neither Germany nor the ECB have finished carrying out the financial reform criteria set out in the last European summit. Meanwhile, Europe is sliding into an irreversible crisis. If Italy and Spain, the third and fourth largest economies in the euro zone, were forced to fall back on a rescue plan, the disaster for the single currency would be complete.

The wriggle room for the Spanish government is somewhere between bad and worse. If the risk premium does not drop, the rising cost of servicing the debt will devour any such room for manoeuvre that public policy may still have. The recovery is hard enough with a spread of over 100 basis points; at 400 points, it is impossible to break the deadlock, create jobs and make any significant dent in unemployment.

One orthodox response (suggested by the IMF) would be to present to Europe and to the markets an additional budget cut of about 2 percent of GDP. But that decision would have impacts on growth equivalent to the strangulation that is producing the unbridled rise in financing costs. It would mean giving up any recovery for the next five years

The die is cast. And, facing the failure of the most orthodox formulas, new ways forward must be found. One would be immediate and decisive action by the ECB (massive buying of Spanish and Italian debt). Another would be the acceptance of a European debt to replace national debts.


TOPICS: Business/Economy; Crime/Corruption; Government; News/Current Events
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1 posted on 08/04/2011 1:08:00 AM PDT by bruinbirdman
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To: bruinbirdman

IMHO, this euro debt issue has too many moving parts to point to a single clear outcome yet. Wow.

I’ll have butter on that popcorn.


2 posted on 08/04/2011 1:44:09 AM PDT by PieterCasparzen (We need to fix things ourselves)
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To: PieterCasparzen

I hope Bachmann and Cain are staying up on all this...


3 posted on 08/04/2011 1:45:19 AM PDT by PieterCasparzen (We need to fix things ourselves)
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To: bruinbirdman
Ahhhh...the NWO led global bankster derivatives hedge fund Ponzi Scheme working at its best to expand goobermints worldwide and their sweeten the pensions of their retired workers. So nice.

'Sir, would you first care to skim a little cream off the top with that?'

4 posted on 08/04/2011 2:23:06 AM PDT by RSmithOpt (Liberalism: Highway to Hell)
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To: RSmithOpt

their = then


5 posted on 08/04/2011 2:24:00 AM PDT by RSmithOpt (Liberalism: Highway to Hell)
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To: bruinbirdman
Here's an idea. Why don't these countries look at its current revenues, and cut spending on all government expenses (except for financing the debt) to be below that amount. Then tell all the bond holders to piss-off, you made a bad investment, we're not going to pay off the bonds. We will live within our means and won't borrow any money. Therefore, we don't give a damn about what S&P or Moody's thinks.
6 posted on 08/04/2011 4:53:02 AM PDT by Go Gordon (One Big Ass Mistake America)
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To: Go Gordon

That would work, but of course it wouldn’t be countenanced by parties that rely on Big Government (which in the EU is pretty much all of them). And also the ECB would never countenance it: they would lose all their power.

Another solution would be to immediately kick all Euro members except the ‘Nordic Euro’ countries out of the Euro, letting them return to their national currencies: and shutter foreign Euro counters. That’s not going to happen either, but again it would work.

What’s left is piling debt upon debt and printing press upon printing press. The middle class will get hollowed out and Europe will return to totalitarian barbarism. This indeed is what will happen - simply because it’s the easiest and most gradual method of coping: no one person at the top will get blamed.


7 posted on 08/04/2011 5:07:35 AM PDT by agere_contra ("Debt is the foundation of destruction" : Sarah Palin.)
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