Greek contagion spreading to Spain

Discussion of the economic crisis in Europe has been largely confined to Greece and how it effects the Euro. All that changed this week.
It all started with the Spanish banks at the start of the week.

CajaMurcia, Caja Granada, Sa Nostra, and Caixa are joining together in a SIP (System of Integrated Protection), which will combine bank reserves and result in a firm worth €100 billion, according to Cotizalia.
This comes after yesterday's announcement that four banks, Cajastur, Caja de Ahorros del Mediterráneo, Caja Extremadura, and Caja Cantabria were merging under a similar agreement.
All of this started with the weekend's €530 million bailout of CajaSur, and is sure to continue as Spain tries to sure up its banking sector under IMF pressure.

Sudden mergers of major banks, following a major bank bailout, is very suspicious. The markets noticed, and two days later the Spain's central bank was forced to act.

The Bank of Spain has ordered the country's lenders to face up to bad debts and set aside reserves of up to 30pc on property holdings in a bid to restore global confidence in the Spanish financial system after weeks of investor flight.
The authorities acted after severe strains in the inter-bank market had begun to raise questions about the ability of Spanish lenders to access routine funds from global peers. Deutsche Bank said Spanish lenders need to refinance €125bn by late 2011. "Liquidity is our main area of concern. Savings banks are in a very weak and risky position," it said.

Like banks in America, Spain's banks have been very reluctant to acknowledge the losses incurred from 60 billion Euros of foreclosed real estate. This is creating a crisis in confidence in Spain's financial system.
If all this wasn't enough of a kick in the teeth, the Fitch rating firm downgraded Spain's debt on Friday, leaving people to wonder how the markets will react on Monday.

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Nowhere, not even in Greece, has the recession struck harder than in Spain. With unemployment over 20%, Spain has downgraded its economic growth forecasts, and even those forecasts are not taken seriously.

The Spanish government expects gross domestic product to grow 0.3% in 2010 and 1.3% 2011, which is more optimistic than the European Commission's forecasts of -0.6% this year and 1.1% next year.
"The [Spanish] official growth forecasts for 2011-2013 appear to be too optimistic, with the government continuing to believe that a large chunk of the deficit reduction required by 2013 will arise from a cyclical return to strong economic growth," Raj Badiani, an economist at Global Insight said.

The lack of market confidence in Spain is forcing the government there to take unpopular austerity measures. The recent budget cuts passed by just a single vote, leaving the socialist government especially vulnerable. Conservatives voted against the measure. Spain's budget deficit was 11.2% of GDP in 2009.

The austerity was a pre-condition from the IMF and European government before they could have access to the massive bailout fund set up just a few weeks ago. The IMF is targeting the union contracts themselves.
Unions have called for a general strike on June 8.

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Greece is a problem for the Euro that is tough to solve. Spain, if it should be allowed to follow Greece into the abyss, is a problem for the Euro that is impossible to solve. Spain's economy is four times the size of Greece's. A default by Spain would mean the end of the Euro as we know it.
Meanwhile, Spain's government is unstable at this point and likely to collapse unless the economy can bounce back soon.

The good news is that Spain is starting out from a much stronger economic foundation than Greece, with much lower overall debt and a more productive workforce. It is likely that the fears for Spain are overblown, and the past week was just an exception.
But one thing is for certain, Spain can't afford another week like it just had.

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Comments

"austerity" measures

Did you see this Instapopulist I wrote Spain in trouble, here comes IMF.

What the hell does collective bargaining have to do with a housing bubble or derivatives?

It's just unreal. I'm thinking the IMF is a glorified neo-con philosophy machine. I'd have to look at Spain's overall budget but it should be create real production type jobs in new sectors yet the IMF only seems to focusing in on breaking unions, destroying pensions and firing workers.

Wouldn't it be nice to see the IMF come in and say "your executive compensation laws need to be updated and all managers can only have 2% more income than the other workers" or something to this effect?

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Nice dreaming Robert

Time to read some Naomi Klein "Shock Doctrine".

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Who's On First?

Hilarious take on the European Crisis, worth a minute to watch.

Where Are They Getting The Money for the Bailout?

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in last week's SMC

Sunday Morning Comics, Advertising Revenues Edition, along with other humor related to the European debt crisis.

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Printing Money From Thin Air

Where can we sign up for this?

I believe this has been part of the problem though. This can all be traced back to killing Bretton Woods. Bretton Woods prevented deficit spending. Bretton Woods failed not because of the tie to gold but because of the dollar being the world reserve currency. The unitas or bancor being tied to one currency or the other would have been worse.

The world economy is in trouble from over spending and over leverage and the answer is?

Borrow more and put more debt into play. This is great for the banks although no one seems to get that part. Everyone is in a hurry to maintain the status quo. Everyone got on the debt bus and did well and profited and now everyone is pointing in any direction but their own as a problem. When something can so easily be made into a joke as this skit did there is a real denial going on all around.

The sooner the world currency reserve is changed to a mix of dollar, euro, oil, gold, yen, pound etc the better off we will be in the long run because the Fed and its owners will not be able to manipulate us or our money so easily.

I missed that you had posted this elsewhere.

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Bailout Plan Is All About 'Rescuing Banks and Rich Greeks'

The bailout there and here and elsewhere is all about the banks and moving their debt onto the sovereign books.

Former Central Bank Head Karl Otto Pöhl Bailout Plan Is All About 'Rescuing Banks and Rich Greeks'

Pöhl: It was about protecting German banks, but especially the French banks, from debt write offs. On the day that the rescue package was agreed on, shares of French banks rose by up to 24 percent. Looking at that, you can see what this was really about -- namely, rescuing the banks and the rich Greeks.

There are grumblings by the Bundesbank that the ECB is buying Greek bonds instead of Irish and Spanish debt (ignoring the fact that they are still solvent and are issuing debt).

Further Evidence

This is why I say let them fail. I doubt we'd be in a barter economy for long. I lived through one briefly during the blizzard of 78 and was able to do everything I wanted without using a bank for nearly a little over a week. Probably the same time frame the system would be in chaos if the top 6 banks went under here. Our bailout protected the top banks and the wealthy bank shareholders thats it.

All of these bailouts is just to perpetuate the status quo. I wish people would see that.

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banks who hold those sovereign bonds

are worried about a default, so they are "buying them".

I think this has nothing to do with Spain's labor market frankly, or even Greece. It's the amount of money it took to bail out this banking ponzi scheme was too much for nation's to take on.

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Change the Posts Title

If this is about the Spanish labor market, its misleading as is.

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you're missing the point

The IMF is demanding these nations "reform their labor markets" when the problems, the losses are due to the housing/financial/derivatives crisis.

So, the title of the post is dead on, it's about sovereign default.

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The bad news continues for Spain's banks

This came in today:

(MarketWatch) -- The stream of negative news from Spain's savings bank sector continued on Tuesday, with a report that the second largest player, Caja Madrid, will tap the government for 3 billion euros ($3.6 billion) of rescue funds.
A spokesperson for Caja Madrid said the report that appeared in several Spanish newspapers saying it will ask for funds from the government's rescue fund was "speculation."
The savings bank said last Friday it was in talks to merge with several regional cajas -- Caja de Avila, Caja Insular de Canarias, Caixa Laietana, Caja Segovia and Caja Rioja.
More bad news emerged for Caja Madrid when Standard & Poor's placed its A/A-1 long and short-term ratings on the savings bank on CreditWatch negative, saying it expects "pronounced pressure" on its operating profit this year and into 2011.

I still think that the worries over Spain are somewhat overblown. However, Spain's financial system cannot tolerate this continuation of bad news days after day.

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what do you know about Spain's "Labor reform"

They are under attack, particularly by the IMF to do "austerity measures" for help.

Yet it appears it's all about the banksters (surprise, surprise) and a massive real estate bubble, over built...which has to do with ??? on labor beyond not expanding other areas of real economic growth and letting a bubble grow out of control...ahem, similar to the U.S.?

Seriously, over and over again I see a few things...firstly the threat of sovereign collapse, simultaneously an attack on labor/workers.

It's real CT, reminds me of create a crisis for some agenda to rip asunder social safety nets and labor protections.

How convenient that labor must be "reformed" straight away in the interim Spain gets a bunch of downgrades on it's sovereign debt.

If labor was in this "dire need of reform", where was the IMF and EU two years ago?

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There is No Crisis if They Can Pay Their Bills

Several thousand stories on the net can't create a crisis if they can pay their bills. Greece is going to default regardless of the bailout because no one wants their bonds. The ECB is buying Greek bonds because no one else will.

They are at the mercy of the market investors because they are so heavily leveraged. If that were not the case they would not have needed a bailout.

Borrow and spend hits a wall so its a conspiracy?

the Greek government has identified at least 580 job categories deemed to be hazardous enough to merit retiring early — at age 50 for women and 55 for men. Jobs like hairdressers.

But the Life Expectancy in Greece is 80

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in the U.S. people are "retired"

minus the funds starting at age 35 with age discrimination. So? When you write up a nice overview on executive pay and how < 1% hold the most wealth in this country I might take heed, but a retirement at 55 with funds is better than what is going on in the U.S.....without funds.....so everyone should be like Americans, a nuclear bomb of homeless, who have no retirement, who are too old to work too?

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That Doesn't Address the Situation Does it?

Is that an economics argument for the situation in Greece or Spain? I mean its a good spin but what does one thing have to do with the other?

You are making a social justice argument based on happenings in another country.

If they need to borrow more money and no one will give it to them because they are considered a bad risk but they will loan them money if they cut costs or raise taxes then that is what they have to do unless they default which is what I have said they should do but no one agrees with me. Everyone wants to have their cake and eat it too.

Raising taxes on the wealthy does the same thing so why don't they do that? Probably for the same reason that taxes did not go up here in 2009 when we had 60 Democrat Senators here. There is no effort being made to do so anywhere.

This will come down to a struggle between those that have and those that do not have its inevitable. If a place like Greece with a long history of strikes and riots caves into the banking cartels then this will happen everywhere.

Once the Euro is strong the attention will turn to the US and then we will experience the same thing. We still have the wrc that allows us to print but when attention focus's on US debt we will lose that. When other countries stop buying the dollar and our debt AND then the Fed prints the effects of monetization will start to show. Zimbabwe 2. Any guess on inflation in Europe this year or next?

I'm not in disagreement that the deck is stacked here. These bailouts were about protecting the wealthy and the banks bottom lines. BUT no one wants to experience and pain to change things so things will continue as they are and go the way the banks want them to. There is no will to REALLY change the status quo there or here. People are too soft for any real change.

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but why are they at risk?

It's not like suddenly labor got a bunch of dough. The reason they are at risk is bailing out the banks. It's derivatives, CDSes, LBOs and other financial "products" that went South. That and then they spent even more money "Stimulating" the economy yet not doing direct hires in those economies, just like the U.S.

So, sure maybe there is a little clean up but it really appears the IMF isn't interested in the least in addressing the real cause of the debt. I need to reseach this out and pie chart it because well, the EU just announced another &euro195 billion dollars in direct losses....due to the banksters, it's about half a trillion euros already. I'll bet money pensions don't come anywhere near that amount.

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If Greek Workers Made Greece Fail

Its obvious the government there has no stomach for real change with tax increases for the wealthy so this would lay on the workers to strike till the economy busted flat out. Then default would begin and the banks would not be paid and change would begin. So they start over with a clean slate and no ability to borrow for awhile.

Dump the debt.

It makes no sense except to the lenders to to deeper and deeper into debt to pay back loans you don't have the cash flow for. Then you pass laws for a balanced budget and never put yourself into a position to be dictated to again.

This is the end game for increased borrowing and increased spending while lowering taxes - complete capitulation to the banks. We have been on this course since the early 1960's.

Everything else is maintaining the current status quo and thats not a positive for real people. If countries cannot extricate themselves from the banks and cannot tax the wealthy more this will be the result worldwide. I give this same scenario 10-14 years before we are in the same boat.

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Its About Restoring Confidence in the Bond Market Thats All

IF they are able to pay their bills then it becomes a story they need to tell. This is no different than the crisis that private corps went through in the 6 months following Lehman.

As midtowng said they can't afford bad news every day. Plenty of banks and finance companies were put under the same pressure when they had good cash flow. Their swaps cost went through the roof and they were going to have trouble issuing debt so they mounted PR campaigns to overcome the bad news because they knew they were healthy financially.

During all this I see very little coming out of Greece, Spain, Italy, Portugal or Ireland government officials to calm the market. Either they do not understand what is going on or they do not care. Its a PR game right now.

The way Greek swaps are going they will default by years end unless the ECB buys everything they are selling. Doesn't that place an unfair burden on the rest of Europe as that is what is stepping on the throat of the Euro? The EC now CAN'T let Greece default after making such a play to bail them and the rest out. The Euro will be worth about 60 cents before this is over although only because the dollar is the wcr otherwise we'd be in the same boat.

Now if they can't pay these bills thats another story.

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