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A Severe Test of the Eurocracy's 'Political Will' Is Coming
Carmel on Spain
An interesting presentation by Carmel Asset Management on Spain has recently made the rounds. Except for a few small details, it doesn't contain anything that readers of this blog don't know already, but it does represent a well researched and comprehensive overview of the problem (in spite of the fact that it also contains a few small inaccuracies, but these are mere trifles).
It should be noted here that in Europe we have Edward Hugh, who as we have pointed out previously must be regarded as the expert on Spain – and not only because he actually lives there.
The people putting together the presentation did pick his brain as it were and used some of his chart work as well. Specifically it appears that Edward advised them on all the hidden debt and contingent liabilities in Spain, which are truly staggering. Readers may remember that we have mentioned this in the past as well and pointed to the same work of Edward's regarding Spain's true liabilities that Carmel uses in the presentation. In fact, if all these liabilities are added up, Spain's public debt-to-GDP ratio is already at 100%, not the officially acknowledged 68%.
So they had expert advice, with the end result that there is now a credible and all-encompassing analysis of Spain 'out there' that flatly contradicts all the happy talk emanating from the eurocracy.
Some of the statistics in the piece were actually new to us as well, such as the fact that there are now so many houses in Spain due to the expired real estate boom that there are only 1.7 Spaniards per home – fewer people per home than anywhere else in the world. For two decades in a row, Spain's population growth was perfectly matched by real estate developers in that one house was added to the housing stock for every person added to the population. Moreover, 80% of the wealth of Spaniards is tied up in real estate, with 24% of Spain's citizens owning a second home.
Given the fact that prices still have a long way to fall, you can imagine that we have a problem at hand here that dwarfs even the famous real estate bubble collapse of Japan. In fact it most definitely is a far worse situation, as Japan never saw unemployment soar to double digits during its slow-motion depression, whereas in Spain it is now close to 25%, with youth unemployment at nearly 50% (sounds like the stuff revolutions are made of).
In addition, as we have been pointing out frequently over the past two years, the exposure of Spain's banking system to real estate credit is vast.
Given the enormous supply of houses in Spain, the market will have a long and tortuous road to travel until it reaches its clearing level. Carmel rightly asks: who is going to buy all these houses? Spain's demographic situation is worsening rapidly as well – there simply won't be enough demand.
Several charts in the Carmel presentation illustrate estimates regarding the extent to which homes remain overpriced at this juncture (according to the official price indexes anyway):
House prices in Spain compared to house prices in the US – Spain's bubble was far bigger and it seems highly likely that prices will eventually 'catch up' again with US prices - click chart for better resolution.
Relative to Spain's wages, homes are still 30% overvalued - click chart for better resolution.
You will notice in the second chart above that the wage index is declining as well. Should Spain remain in the euro area, then this wage index still has a long way to fall. Either that, or there has to be a productivity boom in Spain that dwarfs the concomitant productivity gains elsewhere. We can safely assume that the latter is not going to happen.
As it were, Spain's labor laws are among the most restrictive of all industrialized nations. It is for instance extremely difficult to fire employees with the predictable result that no business wants to take the risk of hiring people during a period of declining economic confidence.
As is the case in most of today's socialist welfare states, Spain's politicians erroneously thought that they could somehow suspend the laws of economics by legislative fiat.
This is why central planning snake oil is so popular with today's political class: while the classical economists and the Austrians brought the sober message that a ruler had no more hope to repeal the laws of economics than he could hope to repeal the laws of nature, the peddlers of inflationist snake oil, all the cranks Keynes eventually 'rehabilitated' with his 'General Theory', suggested otherwise.
Spain today stands as one of the monuments to the errors of this creed.
A few more statistics relating to Spain's banking system in the presentation have caught our eye. For instance, at €348 billion, the exposure of Spain's banks to commercial real estate is by far the highest in Europe in absolute terms. It vastly exceeds the commercial real estate loans held by German banks (€237 billion). In relative terms the number becomes even more egregious, as Germany's economy is about 2.5 times larger than Spain's.
Readers may also recall Scott Barber's long term chart of Spanish NPLs comparing NPLs to the unemployment rate we posted in a recent update on Spain. Carmel offers another take on the NPL situation in its presentation, comparing NPLs to corporate bankruptcies.
Via this comparison we have yet more confirmation that the economic fundamentals underlying the current crisis are in many ways far worse than those experienced in 1994, and yet we are supposed to believe that NPLs as a percentage of all outstanding loans are lower today than they were in 1994. We actually think this chart illustrates only one thing: namely the extent to which Spain's banks are fibbing about their delinquent loans.
The chart on the left shows that corporate bankruptcies are currently at eight times the level of 1994 and 20% above the high of the 2009 recession. And yet, NPLs, depicted on the chart to the right are supposedly still lower than in 1994. Something doesn't compute here. The only reasonable conclusion is that Spain's banks are hiding the true extent of the problem with various accounting tricks – something we have pointed out quite a while ago already - click chart for better resolution.
A Severe Test of the Eurocracy's 'Political Will' Is Coming
This brings us now to the point of all of the foregoing. We keep hearing from various sources that we must 'not underestimate the political will to defend the euro'.
“We are defending the euro and we believe in the future of the euro. All those who speculate that the euro would become weak or even inexistent currency were mistaken, there was a clear political will to strongly support the euro,” he added.
(emphasis added)
Then there is the number one living contrary indicator in the world, EU financial affairs commissioner Olli Rehn, delivering a simple soundbite headline that crossed the wires last summer:
“EU's Rehn: Political Will To Defend Euro Should Not Be Underestimated”
(emphasis added)
“But European Council President Herman Van Rompuy said in Beijing leaders would do all they could to keep the 17 country euro zone together "because at the heart of the project, is the peace, prosperity and democracy in the European Union"."So don't underestimate the strong political will to defend the eurozone and that's the message we want to convey," he said.”
(emphasis added)
One prominent observer, Martin Wolf of the Financial Times, recently also chimed in with the very same argument :
The principal political force is the commitment to the ideal of an integrated Europe, along with the huge investment of the elite in that project. This enormously important motivation is often underestimated by outsiders.While the eurozone is not a country, it is much more than a currency union. For Germany, much the most important member, the eurozone is the capstone of a process of integration with its neighbours that has helped bring stability and prosperity after the disasters of the first half of the 20th century. The stakes for important member countries are huge.Thus, the big idea that brings members together is that of their place within Europe and the world. The political elites of member states and much of their population continue to believe in the postwar agenda, if not as passionately as before.”
(emphasis added)
Wolf, who is a quintessential establishment mouthpiece, certainly lets us in on a truth here: the eliteswant a unified Europe. In fact, what they really want is to create a global socialistic/fascistic super-state – the often talked about 'new world order' project is not just a chimera that has sprung from the fevered minds of a few tin-foil hat wearers. It clearly is the agenda of the elites.
The euro itself can be seen as a stepping stone to Keynes' 'Bancor' – the Keynesian wet dream of a global fiat currency that has no competition and can therefore be inflated at will. Currently one of the the main obstacles in the way of completely unfettered money supply inflation is the fact that different currencies trade against each other and everyone can thus see the effect of an overly inflationary policy by observing a currency's external value relative to that of other currencies. A global fiat money along the lines of Keynes' 'Bancor' would do away with that concern.
Moreover, it has been a well-known tactic by the political and monetary elites throughout history to expand their power by keeping the population in a state of fear and using various 'emergencies' to expand the power of the State. The euro area's current crisis was in fact predicted by one of the architects of the socialistic super-state project in the EU, Romano Prodi, back in the year 2001. He noted that the crisis could then be used by the political elites to push through the centralization of the EU they could not yet achieve at the time the euro was introduced. This is what he said verbatim in an interview with the FT:
“I am sure the euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created.”
One could perhaps say that Prodi was extraordinarily prescient, but it is probably more accurate to state that he simply told us what the plan was all along.
'Never let a serious crisis go to waste. What I mean by that is it's an opportunity to do things you couldn't do before." as Rahm Emanuel once stated. It has been a guiding principle of the political elites throughout history – today the middle class is 'persuaded' to give up its wealth and freedom in exchange for a false promise of 'security' by the State. Every dictator in history has come to power based on this type of promise.
As H.L. Mencken once said:
“Civilization, in fact, grows more and more maudlin and hysterical; especially under democracy it tends to degenerate into a mere combat of crazes; the whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by an endless series of hobgoblins, most of them imaginary.”
(emphasis added)
As an aside, it behooves us to note here that the rubes unfortunately fall for this trick every time (we will discuss the topic of 'financial repression' in its myriad forms in this context in a follow-up post).
So we can state, there definitely is the 'political will' to defend the euro. However, the Carmel presentation raises an important point in this context. The authors of the presentation write that 'Europe will not have the political will or the firepower to bail out Spain'.
They buttress this claim by pointing out the following important facts (we are paraphrasing and correcting a few small mistakes):
“The headline numbers on the combined European firewall are as large as €940 billion. This includes €220 billion of funds already committed to Portugal, Ireland and Greece (note that this is the 'theoretical maximum' at the moment, ed.)Germany would guarantee a total of €401 billion, but the amount currently approved by the Bundestag is only €211 billion.Greece would guarantee €20 billion – quite a chunk for a country that has just been bailed out.Spain would guarantee/owe €176 billion – 16% of GDP and 154% of the projected tax revenues for 2012.”
It follows from the above that if Spain really needs a bailout, the total amount available for the European 'financial firewall' will be much smaller than advertised, since Spain can hardly be expected to bail out itself (although Spain's government has recently decided to get creative with its banks, which are supposed to lend the bank bailout fund the money it needs to bail them out, so you obviously never know).
If all the 'PIIGS' mooted contributions to the ESM were to be subtracted, the total amount available to the ESM would shrink by about one third. Moreover, the ESM will start out with only €80 billion in paid in capital – the remaining €500 billion can be 'drawn upon request' – they are mere guarantees.
It remains questionable whether the German Bundestag will agree to a near doubling of Germany's exposure to the bailout fund – moreover, as Carmel also points out and as we have frequently noted in the past – Germany's constitutional court is no longer simply following the government's agenda. In fact, its most recent decisions have severely limited the government's freedom of movement with regards to the bailouts. It now requires the Bundestag's approval for every further increase – and the parliament may well balk due to domestic political considerations.
Carmel calculates that in a putative 'worst case' scenario - i.e., should Spain lose access to market funding completely, similar to what happened with Ireland, Portugal and Greece - it would require a total of € 372 billion in bailout funding for 2012 and 2013. This represents 60% of the ESM's total size.
So you can see from this that it is primarily a question of the 'financial firepower' needed to bail out Spain. From there it becomes a question of 'political will'. Said political will has already nearly crumbled to dust over the second bailout of Greece and the debate over the ESM's funding. Several of the smaller nations such as Finland and Slovakia balked at the bailout demands and in the latter case it created a political crisis that brought down the government.
Meanwhile, political resistance to the bailout/austerity combo policy is growing by leaps and bounds as the recent first round of the French presidential election once again brought home in no uncertain terms. Given that even in the euro area's 'core' the resistance to the policy and to the euro project itself is growing at such a frenetic pace, imagine what will happen in the periphery where the faltering of the boom has resulted in untold misery for millions of people.
It is probably true that the 'political will' to rescue the euro remains quite strong among the ruling elites. It is however certain that if a bailout of Spain should come into view that this political will is going to be tested like never before. It may well be a test to the breaking point.
Addendum: Europe's 'New House'
Societe Generale recently came up with this picture that shows 'Europe's New House'. As the news editor of Seeking Alpha drily remarked: 'Just make sure you don't blow too hard'.
Europe's new house of cards, via SocGen – click chart for better resolution.
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