By Mike Whitney
“Other countries have gone through similar experiences. Latin American countries suffered a lost decade after 1982, and Japan has been stagnating for a quarter of a century; both have survived. But the European Union is not a country and it is unlikely to survive. The deflationary debt trap threatens to destroy a still-incomplete political union.” — George Soros, Financial Times
Money might “make the world go ’round”, but it’s not going to stop the eurozone from breaking apart. That’s the lesson investors learned on Tuesday when global stock markets plunged on news that yields on Spanish and Italian debt had again entered the red zone. Stocks rebounded on Wednesday, but to little effect, after all, the cat is out of the bag. Now everyone knows that the European Central Bank’s 1 trillion euro ”adrenalin rush” (Long-Tern Refinancing Operation or LTRO) is a short-term fix that won’t relieve the debt troubles of struggling countries in the south or even reduce the prospects of a vicious credit crunch in the second half of the year. (As of Friday morning, Spanish 10-year bond yields are back in the nosebleed section, 5.92 percent, a rate which most economists see as “unsustainable”.)
So, what exactly did the LTRO achieve anyway?
Not much, it appears. While the lavish 3-year low interest loans allowed a significant number of underwater banks to roll over their debts; it did not address the eurozone’s institutional flaws, or –as economists Simon Tilford and Philip Whyte say– “reverse the increasingly perverse and self-defeating policies that the region is pursuing.” Policymakers in Frankfurt and Brussels have refused to heed the warnings of competent economists and other experts who’ve reiterated ad nauseam that “a monetary
union outside a fiscal union is deeply unstable.” What’s needed is greater “fiscal integration and debt mutualisation” they advize. But the ECB will have none of it. The Central Bank has decided to pursue its own blinkered strategy and use the crisis to push through excruciating anti-labor and privatization reforms that will help to divert more capital to big finance. The results speak for themselves. Spain is marching headlong into a depression.
To say that Spain’s financial situation is dire would be an understatement. According to International Finance Review:
“Covered bond syndicate bankers are expecting weak jobs data out of the US and a persistent deterioration of Spanish bank credit to weigh heavily on the new issue market for the foreseeable future. It’s a backdrop that is likely to lock Spanish banks out of the primary market and deprive the country’s banks of a funding plan B, according to one banker….
“The Spanish are completely shut out of the market,” said a covered bond trader. “You won’t get any momentum for a deal, and for investors, they have no incentive to buy into a deal when the market is declining.” (“Spanish banks face funding lock-out”, IFR)
Also, while unemployment across Europe has risen to its highest point in more than 14 years, (17.3 million people) in Spain, joblessness has soared to 23 percent, and among young people, it’s nearly 50 percent. An entire generation is being sacrificed so the 1 percent can grab a greater portion of the wealth.
If Spain is unable to manage its finances due to rising bond yields, then the eurozone will surely fail. The country is simply too big to bail out. It’s more than twice the size of Greece, Ireland and Portugal combined. And Spain’s three largest banks — Banco Santander, BBVA, and La Caixa, “have combined assets of about $2.7 trillion. Spain’s GDP is just about $1.4 trillion. In other words: Spain’s three biggest banks are nearly twice as big as the entire Spanish economy.” (CNBC)
Spain’s problems go far beyond its collapsing real estate market, its skyhigh unemployment, its widening debt-to-GDP ratio, and its teetering banking system. A historic structural adjustment program (“Austerity measures”) implemented by newly-elected Prime Minister Mariano Rajoy has accelerated the rate of decline by slashing spending and thrusting the economy into a deflationary spiral. Here’s a clip from Bloomberg:
“Under EU orders, Spain is promising what might be the tightest fiscal squeeze that it or any other European economy has ever faced. The new plan calls for the budget deficit to fall from 8.5 percent of gross domestic product to 5.3 percent this year. Since the economy is already shrinking, this requires a discretionary fiscal tightening of roughly 4 percent of GDP — with the unemployment rate already standing at about 23 percent.” (“Spain Not Greece Is the Real Test for the European Union,” Bloomberg)
This is fiscal suicide authored by rightwing fanatics who want to use the ongoing crisis to impose their own business-friendly economic model on Europe. As journalist Pepe Escobar says in a recent article, (It’s) “a counter-reformation that erases with a single stroke many labour and union rights acquired by the working class in decades and generations”. That includes extremely harsh cuts in health, education and social services….”
Here’s more from Escobar:
“The catalogue of Spain’s “austerity” is the usual catalogue of neoliberalism in trouble. A previous, nominally socialist and now an ultra-conservative government have furiously decimated unemployment, retirement and severance benefits; turned virtually all labour contracts into precariousness hell; steeply raised fees for education and transportation; vastly militarised the police; and spent fortunes to bail out banks….” (“All the pain in Spain”, Pepe Escobar, Aljazeera)
Now that the ECB’s lending program (LTRO) has failed and Spanish banks are more indebted than ever (Spanish banks borrowed more money from the ECB than any other country—227.6 billion euros or $300 billion); what’s next?
For starters, ECB president Mario Draghi will be forced to revive the vastly unpopular Securities Markets Program (SMP) and purchase more Spanish debt outright. Investors will see this as a sign of desperation since Draghi scotched the idea of reviving the program just last week. Now he will have to reverse himself and hastily resume the EZ’s version of QE.
Restarting the program will set off fireworks in Berlin where hardliners at the Bundesbank will fight tooth-and-nail to stop Draghi in his tracks. Even so, the wily ex-G-SAX managing director Draghi will undoubtedly outmaneuver his rivals and the bailout will go forward. That means big finance’s plan to crush organised labor, savage the social safety net and reduce EZ workers to a life of debt peonage will continue apace.