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Spain: The Latest Shoe to Drop

Posted: 2012-06-13
From: Mathaba
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Mathaba Analyst Stephen Lendman: Spain and other troubled Eurozone countries haven`t addressed fundamental economic deficiencies


by Stephen Lendman

This one won't be the last. The late Bob Chapman warned years ago about what's unfolding now in real time. He explained what this writer calls bad policies assure bad results. It happens every time.

They've simmered for decades. They continue now. They're worse than ever. Gresham's Law explained that bad money drives out good. So does bad behavior.

Money power in private hands assures it. Throughout its history, the Fed bears direct responsibility for monetary debasement and decline of American living standards. A 1913 dollar isn't worth a plug nickel today. Ahead perhaps it'll be worthless.

Chapman predicted it. He was spot on about what he told readers. He was way ahead of what others revealed. Before anyone saw trouble coming, he warned about easy money, market manipulation, reckless speculation, counterproductive fixes, and unsustainable debt causing today's crisis.

He predicted an eventual house of cards collapse. Only its timing remained uncertain. He said it could happen anytime from 2012 to 2017. He's not around to see it. It won't be pleasant when it comes.

America's economy is much weaker than reported. Europe is in serious crisis. Greece is bankrupt. Only its obituary remains to be written. Portugal and Ireland aren't far behind. So is Italy. Spain is the latest shoe to drop. It's been deteriorating badly for years.

It's the fifth EU country to seek bailout help. On what terms isn't clear. Some reports claim no stringent ones. Others disagree. The devil is always in the details. So far they lack clarity.

Spain's Economy Minister, Luis de Guindos, said draconian conditions aren't demanded. According to German Finance Minister Wolfgang Schauble, "troika" medicine accompanies the deal.

Bailouts, of course, never work. At best they buy time. They also assure greater trouble. Burdensome debt gets more onerous and harder to repay. Solving a debt crisis by adding more assures failure.

Spain is deeply troubled. Its major banks are insolvent. With unemployment around 25%, Prime Minister Mariano Rajoy admitted things are bad and getting worse. He expects protracted recession. He understated its severity.

At the same time, on May 28, he said "there will be no Spanish banking rescue." How do you say egg on his face in Spanish?

Madrid's debt burden and borrowing costs are unsustainable. Both sovereign and private sectors are troubled. Rajoy describes the deal as a non-sovereign loan to Spanish banks. How does he explain more egg on his face?

It'll come through the Fund for Orderly Bank Restructuring (FROB). In June 2009, Spain established it to bail out and restructure its troubled banks. Its own documentation says funds disbursed have "explicit, unconditional and irrevocable guarantee of the Kingdom of Spain."

Itís on the hook. More accurately, its taxpayers bear the burden as in all other troubled economies. According to Reuters:

"EU and German officials said Spain faces supervision by international lenders...." Their statement directly "contradict(s)" Rajoy. He insists it's a no strings deal.

According to Copenhagen-based Saxo Bank economist Steen Jakobsen:

"The EU is selling this as a 'great victory,' but when you look at the details, this is a loan, and we don't know yet where the money will be coming from. At the end of the day, it will increase Spain's debt-to-GDP ratio no matter what they say."

Previous bailouts failed. So will this one. Schaeuble and EU Competition Commissioner Joaquin Almunia said "troika" officials will oversee the deal. "Of course, there will be conditions," said Almunia. "Whoever gives money never gives it away for free."

Schaeuble added:

"The Spanish state is taking the loans, Spain will be responsible for them....There will likewise be a troika. There will of course be supervision to ensure that the program is being complied with, but this refers only to the restructuring of the banks."

It's just a matter of time before sovereign Spain needs bailout help. Its economy teeters on collapse. Understating the severity doesn't change things.

Spain looks increasingly like Greece 2.0.

Italian Industry Minister Corrado Passera tried hard to conceal that his nation may be next. It's also burdened with financing 22% of Spain's bailout. Talk about the blind leading others visually impaired.

China's Vice Finance Minister Zhu Ghuangyao criticized the Spanish deal. He called it a short-term fix. He said more decisive action is needed to safeguard longer term stability. It's sorely lacking in all bailout deals.

Moreover, by agreeing to terms, Spain subordinated its bondholders. They include its own banks. Madrid incurs a greater debt burden. It sacrificed sovereignty for ready cash. Spaniards face greater austerity. Cyprus just asked for urgent aid. Its banks are deeply troubled.

Its Finance Minister Vassos Shiarly described an "exceptionally urgent" situation requiring end of month resolution. Contagion is spreading. Five troubled economies assure greater woes for themselves and others to come. They can't all bail out each other. A bad ending looks assured.

European Financial Stability Facility (EFSF) funds are earmarked for Spain's banks. The European Stability Mechanism (ESM) is also supposed to help. Germany's parliament hasn't †ratified it, so it's yet to be set up.

Finland wants collateral for EFSF funds. Spaniards demand jobs and attention paid to other popular needs. They've gotten neither so far and won't. They'll suffer greater hardships ahead.

Spain and other troubled Eurozone countries haven't addressed fundamental economic deficiencies. Kicking the can down the road only buys time. Band-aid solutions don't work.

Coping with a debt problem with more assures far greater future trouble. By 2014, Spain's obligated for about 500 billion euros in claims. They include deficits, debt rollovers, and bank recapitalizations. Where the money comes from isn't known. Nor are solutions clear for other troubled Eurozone economies.

Spain's been shut out of the capital market. Last week's credit downgrade left its sovereign debt two notches above junk with a "negative outlook."

If its banks use bailout funds for more Spanish bonds, private and government solvency prospects are harmed. Reality, however, anoints them first and last resort buyers.

Moreover, bailouts are like roaches. Some around assures more to follow. The more money needed, the less likely it'll come. At issue is who'll supply it?

How can Spain handle its current debt rollover/deficit financing problems? Other sovereigns aren't buying its bonds. Neither are private investors. Its undercapitalized insolvent banks are its only ready buyer. Are they willing?

It's not a pretty picture. Resolutions aren't forthcoming. Proposed solutions seem worse than intractable problems. Throughout Europe, most banks have loans on their books way exceeding 100% of their deposit base. Estimates of their combined bank funding gap approach 1.3 trillion euros.

They face serious solvency problems. Expect Moody's to cut ratings for 17 giant global financial institutions. Things keep going from bad to worse. Runs on Spanish banks continue.

Eurozone bailout needs exceed available funds. Demands keep growing. Supply can't keep up. ECB president Mario Draghi admits he's running out of bullets.

Throwing good money after bad harms strong economies like weaker ones. Inaction assures failure. Flawed policies make bad situations worse. Nothing tried so far worked. What's proposed looks no better.

Excesses always harm economies. Collapse sometimes follows. Financial Times contributor Martin Wolf said he "never really understood how the 1930s" happened.

Now he does. A combination of "fragile economies, a rigid monetary regime, intense debate over what must be done, (believing austerity) is good, myopic politicians," prioritizing short-term fixes, sacrificing cooperation, and failing "to stay ahead of events."

Instead of solving problems equitably and responsibly, bad politics and economics fester together. Earlier hard times produced Nazism.

Hardline extremism today affects America and Europe. Police state harshness enforces it. Major parties endorse it. What's ahead looks ominous. †

World War II ravaged millions. Its sequel promises much worse. No one seems to notice. A potential abyss approaches.

Given the stakes, it should be prioritized. It's swept under the rug instead. Failing to learn from history assures repeating it. At issue now is doing it disastrously.

Stephen Lendman lives in Chicago. Read more from him at:
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