http://globaleconomicanalysis.blogspot.com/2012/08/spain-predicts-43-increase-in-tax.html
What does matter is Spain is in an economic downward spiral and tax hikes will make matters worse. Sadly that is the primary option on the table.
Mike "Mish" Shedlock
So, Greece has to come up with another €14 billion, revenues will collapse further, and the already monstrous unemployment rate of 23.1% will rise again.
Since none of this will help Greece pay back debts, a discussion is now underway to charge Greece zero percent for emergency loans. Lovely.
Mike "Mish" Shedlock
As Reuters reports:
Tuesday, August 21, 2012 6:40 PM
Spain Predicts 4.3% Increase in Tax Revenues, Actual Results are 3.5% Drop; Proposed "Solution" is More Tax Hikes
Spain has been devastated by round after round of tax hikes. Another one is on the way. Via Google-translate, please consider this non-modified translation of government shuffles new tax increases to reduce the deficit
Never two without three. The brutal tax increases approved by the Government of Mariano Rajoy in late 2011, increasing the income tax and the tax on savings , among other figures, and the recent increase launched last July, with the increase in VAT , Taxes -special rate you could add soon a new tax hike to reach the deficit target of 6.3% of GDP set for this exercise. This, with an eye on a country's total bailout, whose application could occur next September.
Before formalizing the request for assistance, the government wants to make sure you are ready to meet the deficit target, and for that "is likely to take much more drastic measures they currently have," reveals a member of the Government, on Monday reported the newspaper El Pais. Among these, it weighs a new tax increases and a freeze on state pensions.Spain's economy minister says "there is no room for further cuts in spending", a position I believe is preposterous. However, my position does not matter.
"The evolution of expenditure, with the cuts we have made, we have more or less clear, we do not know is how the revenues are going to go," admitted to the Government. In the first half of the year things did not go well: overall, tax revenues fell by 3.5% annual rate, far from expected for 2012 (increase of 4.3% per year).
The Ministry of Finance will report to the Executive on the development of tax collection during the summer months, and "if revenues continue to fall, probably will have to return to raise taxes and cut spending again, although here and can hardly play more ", added the sources. Specifically, in its editorial, the paper notes that Prisa Economy Minister Luis de Guindos, thinks "there is no room for further cuts in spending," which means that additional adjustments would have to come from the side of income.
Thus, the government may choose to remove the shelter deduction retroactively (about 6,000 million euros) or relief for contributions to private pension plans (2,000 million); impose verd penny and not only gas, but also to fuels; Excise reraise (alcohol, snuff ...) or implement new environmental taxes, and more. It is not ruled out anything.
What does matter is Spain is in an economic downward spiral and tax hikes will make matters worse. Sadly that is the primary option on the table.
Mike "Mish" Shedlock
and.....
http://globaleconomicanalysis.blogspot.com/2012/08/greece-shortfall-rises-another-25.html
Monday, August 20, 2012 10:05 PM
Greece Shortfall Rises another €2.5 Billion to €14 Billion; Proposed Solution is Zero Interest Rate on Emergency Loans
The torture of Greece continues unabated. The country has absolutely no chance of getting out of the economic hellhole it is in as long as it remains on the euro.
Although Germany has signaled it is fed up with can-kicking exercises, such delays are the only thing Brussels and the ECB can conjure up, even though Greece's deficit problems are always greater than expected.
No one should be surprised to learn Greek Shortfall Growing Ever Larger
Although Germany has signaled it is fed up with can-kicking exercises, such delays are the only thing Brussels and the ECB can conjure up, even though Greece's deficit problems are always greater than expected.
No one should be surprised to learn Greek Shortfall Growing Ever Larger
Athens has not been having an easy time coming up with the €11.5 billion in cost cutting measures over the next two years it has promised Europe. Indeed, Greek Prime Minister Antonis Samaras is reportedly set to request an additional two years to make those cuts during meetings later this week with German Chancellor Angela Merkel on Friday and French President François Hollande on Saturday.
But according to information obtained by SPIEGEL, the financing gap his country faces could be even greater. During its recent fact-finding trip to Athens, the so-called troika -- made up of representatives from the European Central Bank, the European Commission and the International Monetary Fund -- found that Greece will have to come up with as much as €14 billion to meet the terms for international aid.
According to a preliminary troika report, the additional shortfalls are the result of lower than expected tax revenues due to the country's ongoing recession as well as a privatization program which has not lived up to expectations. The troika plans to calculate the exact size of the shortfall when it returns to Athens at the beginning of next month.
Many in Europe, particularly in Germany, are losing their patience and there has been increased talk of the country leaving the common currency zone. Over the weekend, German Finance Minister Wolfgang Schäuble reiterated his skepticism of additional aid to Greece. "We can't put together yet another program," he said on Saturday, adding that it was irresponsible to "throw money into a bottomless pit."
In order to prevent the need for an unpopular third bailout plan, SPIEGEL has learned that euro-zone governments are considering other measures. Under discussion is a reduction -- or the complete elimination -- of the interest rates Greece must pay for its emergency aid loans.
So, Greece has to come up with another €14 billion, revenues will collapse further, and the already monstrous unemployment rate of 23.1% will rise again.
Since none of this will help Greece pay back debts, a discussion is now underway to charge Greece zero percent for emergency loans. Lovely.
Mike "Mish" Shedlock
and.....
http://www.acting-man.com/?p=19147
A Growing Gap
Der Spiegel reports that the Greek financing gap is not €11.5 billion as hitherto believed, but rather €14 billion, amid an intensifying economic crisis. This concerns the additional spending cuts Greece must enact to qualify for its next bailout tranche.
Exasperation with the Geek situation is not surprisingly once again increasing, especially in Germany. German finance ministerWolfgang Schäuble was rather blunt in his assessment:
“German Finance Minister Wolfgang Schaeuble ruled out another aid program for Greece, even though the country is in a “very difficult situation” with a shrinking economy.
“It can’t be helped — we can’t make yet another new program,” Schaeuble told visitors today at his ministry’s open day in Berlin. “There are limits.”
(emphasis added)
The unsaid implication is of course that Greece may be pushed out of the euro area if it does not comply with its bailout conditions. Meanwhile, J.C. Juncker of the 'gang of four' used a rather more ambiguous wording when discussing the matter:
“ Greece will not leave the euro zone unless the country "totally refuses" to fulfill any of its reform targets, the head of the Eurogroup said on Saturday, as Germany insisted the crisis-stricken country must stick to the agreed reforms.
"It will not happen, unless Greece were to violate all requirements and not to stick to any agreement," Eurogroup President Jean-Claude Juncker was quoted as saying in Austria's Tiroler Tageszeitung newspaper days before meeting Greece's prime minister."In case of such total refusal by Greece with regards to budget consolidation and structural reform, one would have to look into the question."Juncker said he expected Greece to double its efforts to fulfill its reform targets.(emphasis added)
See, as long as they stick to just one tiny bit of the agreement…everything will be fine! The only 'total refusal' would have been dished up by SYRIZA, so apparently this means Greece will be allowed to muddle on.As we have previously pointed out, we actually think that Juncker is for a change the one closer to the truth in this case (it has become a running gag that he is 'lying when opportunity demands it', as he once admitted in an unguarded moment). The reason is that a Greek exit from the euro would still represent a huge headache for the eurocracy and its beloved currency experiment. In fact, we believe it could well be like a breaking of the dam – others would likely follow in due course once it is demonstrated that the euro is not 'irreversible' under all circumstances.The other option is one that a number of German politicians are without a doubt considering: namely to expel Greece in order to make an example out of it – one that scares everybody else back into line. No doubt the Greek government has been cajoled with such threats occasionally. The euro-group could make it into a kind of European pariah state if it wished to so so. However, we do not think that the political leadership in Germany is really open to this plan. Only certain factions within the governing coalition are supporting an uncompromising hardline stance, and even that may be mostly empty rhetoric aimed at the domestic audience.Give Us Two More Years
The Greek government, which demonstrably cannot calculate its way out of a paper bag, has now come up with an econometric forecast designed to get creditors to lower the pressure. The forecast is probably made up out of whole cloth, but here goes:“Finance ministry officials in Greece have calculated [ha!, ed.] that the debt-stricken country's economy will recover faster and its debt be more sustainable if it is given two more years to reduce its budget deficit, a Greek newspaper reported on Saturday.The estimate chimes with the view of Greek Prime Minister Antonis Samaras who has tried, unsuccessfully, to win such an extension in the past and is expected to refloat the proposal next week with the leaders ofFrance and Germany as well as with Jean-Claude Juncker, the Eurogroup chief.
Under the terms of its European Union/International Monetary Fund bailout, Greece is bound to implement painful austerity measures to bring its budget deficit below 3 percent of GDP by the end of 2014, from an expected 9.3 percent of GDP this year.But with the country in its fifth consecutive year of recession and social and political discontent rising, Samaras is keen to soften the impact of budget cuts on society by extending the deadline international lenders set it.”(emphasis added)Now, let us not forget here that Greece is on its second bailout since 2010, and it is highly doubtful that things it has been unable to do thus far will suddenly miraculously materialize. The main obstacles are the corruption and inefficiency of the bureaucratic apparatus. This is coupled with a traditional unwillingness of many Greek citizens to pay taxes if it can be avoided.The latter would be no big problem if not for the fact that a great many vested interests are feeding at the government's trough. What we don't believe for a second is that it can possibly make much of a difference to the country's growth prospects if spending cuts are delayed. The only point that may have merit is that it would be politically easier for the government to have more fiscal breathing room, but the problem with this is that any slackening in pressure will invariably mean a slackening of the already much too slow reform process.We don't think anyone will believe in the finance ministry's calculations anyway – one might as well consult a fortune teller. However, Antonis Samaras may well be able to negotiate a compromise if he can convince the 'troika' that anything else would simply be not be politically doable. Playing the 'chaos card' so to speak.A mildly interesting development is that the Greek stock market is in somewhat better spirits lately than the government bond market and the CDS market on Greece's government debt. It seems quite possible that the stock market has already discounted all the worst possible outcomes short of an android strike at its recent lows – at which point its decline from the 2007 high actually exceeded the decline of the DJIA from 1929 to 1932.The market has now reached lateral resistance – if a breakout were to occur it would probably be quite meaningful.
and everyone likes a good circus , right....
http://www.acting-man.com/?p=19134
Spain Tries To Preempt the Conditionality Debate
Many observers agree that Spain has the rest of the euro area, specifically paymaster Germany, over a barrel: if it were to leave the common currency in order to inflate itself back to prosperity, as ruinous as such a decision would likely prove to be, it would probably precipitate the end of the euro.
This is apparently also the opinion of Spain's government. After having dawdled since the GFC and having failed to seriously deal with its insolvent banks and the implementation of a rigorous economic reform program, the Rajoy government now is trying to preempt the ECB by issuing demands regarding the shape and form of its upcoming bailout.
“The European Central Bank must take forceful and unlimited steps to buy sovereign debt to help Spain reduce its refinancing costs and eliminate doubts over the euro zone's future, Spain's economy minister said in comments published on Saturday."There can be no limit set or at least (the ECB) can't say how much they will use or for how long," when it buys bonds in the secondary markets, Luis de Guindos told Spanish news agency EFE.The Spanish government will study the details of the ECB's debt-buying program, which are likely to be outlined before the Eurogroup meeting mid-September, before making a decision on applying for more European aid, de Guindos said.[...]In response to a renewed intensification of the debt crisis, ECB President Mario Draghi said on August 2 the ECB may buy more government bonds, but only once countries had turned to the bloc's rescue funds for help and agreed to strict conditions."I believe Spain has presented its budget adjustment program and its structural reforms, which from a general point of view, have been accepted as sufficient and appropriate," de Guindos said.”
(emphasis added)
In other words, what they want is an unlimited bailout in the form of central bank buying of their bonds (naturally this is will be done with money created ex nihilo), with absolutely no conditions attached, on the grounds that the steps taken thus far are already more than enough. This is obviously an opening gambit to the upcoming talks in mid September, designed to make it perfectly clear to those insisting on conditionality that Spain doesn't intend to give up control over its fiscal policy in exchange for the bailout.
There have been several occasions when Spain has had its way in the past – recall for instance the EU's back-pedaling on the deficit targets. Very likely a lively debate took place behind closed doors, garnished with threats.
At the same time, German news magazine Der Spiegel reported on a putative ECB plan to set caps on peripheral interest rates(which once again would only work if the central bank threatened to engage in unlimited buying of the debt concerned). This was immediately denied by the ECB itself, with the somewhat cryptic remark that it was “absolutely misleading to report on decisions which have not yet been taken and also on individual views, which have not yet been discussed by the ECB’s governing council”.
The remark is cryptic because it is not a clear no - however the German government let it be known that it too was unawareof such a plan, with a finance ministry spokesman saying that “In purely theoretical, abstract terms, such an instrument would certainly be very problematic. But I know of no proposal along these lines”.
In 'purely theoretical, abstract terms'?
Then the German Bundesbank chimed in via its monthly report, reiterating its opposition to all kinds of sovereign bond buying by the ECB, regardless of 'conditionality' and whatnot. Some of the words from the Bundesbank's missive are worth quoting:
“Decisions on whether to share solvency risks much more widely should be taken by governments and parliaments."“The Bundesbank holds to its opinion that government bond purchases by the Eurosystem in particular are to be seen critically and are linked to considerable risks to stability."Moreover, “moves to create a single euro-zone banking regulator, as envisaged by the European Commission, shouldn't transfer solvency risks among member states via aid for banks.”
It couldn't be any clearer that Jens Weidmann is almost as implacably opposed to the central bank straying into the fiscal realm as his predecessor Axel Weber was. The big question is whether this means he will simply continue to be outvoted at the ECB, or whether Germany's political leadership is already sawing on the limb he has climbed out on. Although German ECB board member Jörg Asmussen insists that “Nobody should try to create the impression that the Bundesbank or its president are isolated”, Weidmann sure does look isolated at this point.
The rumors and denials yanked both interest rates and stock markets to and fro in European trading on Monday – which is actually business as usual in the euro area.
Spain's 2 year note yield on Monday – yanked around by rumors and denials – click chart for better resolution.
Spain's NPL's Soar, Banks Run Out of Collateral
Meanwhile, now that it has been decided that the euro area's bailout mechanisms will pay for the clean-up of the Spanish banking system, NPL's have begun to jump higher in a rather impressive increment and have finally reached the long expected all time high, clocking in at 9.42% of all outstanding loans as of June.
A long term chart of Spain's NPL's via Scott barber of Reuters. A new all time high of 9.42%, while 'doubtful' loans are approaching 25% – click chart for better resolution.
Concurrently, the borrowings of Spain's banks from the ECB have soared to a new all time high of €411 billion as at the end of July – and the banks have now finally run out of collateral to pledge. Reuters reports that 'Spanish banks are next for a Greek-style ECB shakedown', in reference to the growing use of 'ELA' (emergency liquidity assistance) en lieu of normal ECB funding.
In this manner the ECB shifts the risks back to the Bank of Spain and ultimately the sovereign – in theory, anyway. One should not lose sight of the fact that what the Bank of Spain does when it extends ELA funding is that it prints euros and not pesetas. Therefore it would be more realistic to call this a risk borne by all users of the euro, as a future write-off of the assets the BoS gets in return for extending these funds could potentially leave the newly printed money stranded in the economy. These assets are little more than IOU's issued by the banks themselves, although sometimes imbued with a government guarantee. In Greece's case the guarantee is issued by an insolvent government. In Spain the same could soon be the case.
Something that is often overlooked when discussing Spain's NPL's as a percentage of outstanding loans is how big the credit bubble actually was and how much bigger therefore the amounts involved are compared to the 1994 peak in NPL's. This can give us an idea what the only just beginning deleveraging phase of the credit bubble will actually entail. Not to forget, NPL's remain a moving target, as both residential and commercial real estate prices continue to decline. As the FT reports, transaction volumes in commercial property markets in both Italy and Spain have collapsed by over 90% in just the past three months.
A long term chart of Spain's NPL's in billions of euros, via Querschüsse.de – click chart for better resolution.
Private Sector Credit Growth Goes into Reverse, Bank Balance Sheets Expand Anyway
The credit bubble in Spain has finally begun to deflate – private sector bank credit growth has turned negative in recent months. It may be a long and thorny road before the deleveraging process is finished.
As of June, the cumulative decline in private sector loans stood at €54.3 billion (via the WSJ)
To put this decline in private sector credit into perspective relative to the amount of credit extended during the boom, a look at a long term chart is once again instructive:
Total bank credit extended to the private sector in Spain – as can be seen, the 1993-1994 credit crisis did not lead to any deleveraging at all. This time, things are different and given the likelihood that up to a quarter of the credit outstanding is unsound, there may be a long way to go indeed (chart via Querschüsse.de) – click chart for better resolution.
Interestingly though, the balance sheets of Spain's banks have not shrunk – instead they have actually reached a new all time high in June. How can this be explained? The only reasonable explanation we can think of is that Spain's banks have bought so many government bonds this year that the extension of credit to the government has handily exceeded the negative growth in private sector credit.
Spain's bank assets in total now amount to over 400% of nominal GDP, having risen to €4.33 billion in total.
The balance sheets of all reporting MFI's in Spain have reached a new all time high – bank assets amount to over 400% of Spain's GDP – click chart for better resolution.
Investors Are Hearing What They Want to Hear
In his weekly missive John Hussman has pointed out in the context of Angela Merkel recently reiterating her support for the ECB's plan, 'investors have stopped actually listening for fact, and are increasingly hearing only what they want to hear'.
If you still require proof that in the short term, market action is driven by perceptions and sentiment rather than reality, here it is. It is worth quoting again what Mrs. Merkel said in Ottawa in toto:
“The European Central Bank, although it is of course independent, is completely in line with what we’ve said all along. And the results of the meeting of the central bank and their decisions, actually shows that the European Central Bank is counting on political action in the form of conditionality as the precondition for a positive development of the Euro.”
(emphasis added)
Does this sound like 'unlimited bond buying without preconditions' to anyone? No? Investors seemed to think that is what it meant. We see no painless way out for Spain, regardless of what ultimately happens. Even if the ECB were to act without conditionality or limits, it could not possibly alter the underlying solvency problems - and this isn't going to happen anyway. So what are markets currently pricing in? Everybody seems quite certain of a happy end at the moment. The bet is that massive central bank intervention is heading our way in the near future and will boost asset prices further. This is a mindset that has very likely set up the markets for disappointment.
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