Posts Tagged ‘PIIGS’

>below are some excerpts from Jim Rogers interview:

Dollar will be debased; gold and silver to hit new highs

Chinese economy:

There is some overheating and inflation

setback in urban, coastal real estate is under way

China has been overbuilding ever since I have been visiting. There is at least eventual demand for much of it, but that does not preclude some bankruptcies in the future.


I think we are getting closer and closer to the point where someone in Europe is going to have to take some losses, whether it's the banks or the countries, but somebody has to acknowledge that they are bankrupt.

Following is an interview that The Daily Bell had with Jim Rogers:

Jim Rogers: Dollar will be debased; gold and silver to hit new highs
05 April 2011 |

Daily Bell: We've interviewed you before. Thanks for spending some time with us once again. Let's jump right in. What do you think of the Chinese economy these days?

Jim Rogers: There is some overheating and inflation, which they are wisely trying to cool – especially in urban, coastal real estate. They have huge reserves so will suffer less than others in any coming downturn.

Daily Bell: Is price inflation more or less of a problem?

Jim Rogers: More. At least they acknowledge inflation and are attacking it. Some countries still try denying there is inflation worldwide. The US is even pouring gasoline on these inflationary trends with more money printing instead of trying to extinguish the problem.

Daily Bell: Is China headed for a setback as you suggested last time we spoke?

Jim Rogers: Did I say a setback or a setback in real estate speculation? I think you will find it was the latter. Yes, the setback in urban, coastal real estate is under way.

Daily Bell: They are allowing the yuan to float upward. Good move?

Jim Rogers: Yes, but I would make it freely convertible faster than they are.

Daily Bell: Will that squeeze price inflation?

Jim Rogers: It will help.

Daily Bell: Why so many empty cities and malls in China? Does the government have plans to move rural folk into cities en masse?

Jim Rogers: That is a bit exaggerated. China has been overbuilding ever since I have been visiting. There is at least eventual demand for much of it, but that does not preclude some bankruptcies in the future.

Daily Bell: Is such centralized planning good for the economy?

Jim Rogers: No. Centralized planning is rarely, if ever, good for the economy. But the kind of construction you are describing is at the provincial level – not the national level.

Daily Bell: The Chinese government is worried about unrest given what is occurring in the Middle East. Should they be?

Jim Rogers: We all should be. There is going to be more social unrest worldwide including the US. More governments will fall. More countries will fail.

Daily Bell: Are they still on track to be the world's biggest economy over the next decade?

Jim Rogers: Perhaps not that soon, but eventually.

Daily Bell: Any thoughts on Japan? Why haven't they been able to get the economy moving after 30 years? Will the earthquake finally jump-start the economy or is that an erroneous application of the broken-windows fallacy?

Jim Rogers: It has been 20 years. They refused to let people fail and go bankrupt. They constantly propped up zombie companies. The earthquake will help some sectors for a while, but there are serious demographic and debt problems down the road.

Daily Bell: The Japanese were going to buy PIGS bonds. What will happen now? Does that only leave China?

Jim Rogers: Obviously the Japanese have other things on their mind right now. I think we are getting closer and closer to the point where someone in Europe is going to have to take some losses, whether it's the banks or the countries, but somebody has to acknowledge that they are bankrupt. The thing that the world needs is for somebody to acknowledge reality and start taking haircuts.

Read more »


Tyler Durden

Subject: Hypo Fails, All Other German, Portuguese, French Banks Pass Test

And we uncover that the German Landesbanks (the equivalent of the bankrupt
Spanish cajas) did their own stress tests. Time for the PPT to step in with
this pretext and soak up all offers. Totally pathetic BS.
Update 1: Somehow Bank of Ireland “passes” the test but needs over €2
billion in extra equity… uhm… WTF??? This is the point where the
audience rushes the stage and burns the theater down.
Update 2: 5 Spanish cajas, 1 German and 1 Greek banks are eliminated on
their quest to marry the US taxpayer. 84 other banks will soon be the
recipients of far more US taxpayer generosity. And with that the season
finale of the farce comes to a close.

View article…
Hypo Fails, All Other German, Portuguese, French Banks Pass Test | zero hedge

Pimco caught out by strength of gilts

By David Oakley, Capital Markets Correspondent
Published: July 14 2010 10:57 | Last updated: July 14 2010 10:57

Pimco, the world’s second-biggest bond fund manager, has backtracked on its aggressive position of selling UK government bonds after the impressive performance of the gilts market this year.

Pimco, which took a negative view on the UK last year because of the widening budget deficit and poor public finances, has switched its stance to neutral or “agnostic” on gilts, according to people familiar with the situation.

Bill Gross, co-head of Pimco, in January described the UK government bond markets as so volatile that they were “resting on a bed of nitroglycerine”.

At the time, most investors feared that the worsening public finances and the uncertain political outlook before the general election in May would spark a big sell-off in prices.

However, the reverse has happened. Gilts have been one of the best-performing government bond markets of the year, becoming a haven from the troubles in the eurozone in recent months.

Gilt yields, which have an inverse relationship with prices, have fallen more than 20 per cent to 3.39 per cent since this year’s peak of 4.27 per cent on February 19.

Gilts have mainly been buoyed by buying of international investors, particularly Asian funds that switched out of peripheral eurozone bonds as the eurozone debt crisis deepened.

Investors have also been reassured by the new pact between the Conservatives and Liberal Democrats following the deadlocked May general election that produced a hung parliament. The Con-Lib pact’s promise to tighten fiscal policy sharply over the next five years has improved sentiment and even eased fears that the UK might lose its prized triple A credit rating.

Most investors have changed their forecasts for the gilts market in recent months, with some even saying gilt yields could fall further amid ongoing worries over European bank stress tests and the peripheral eurozone economies.

Pimco were not outright sellers of gilts, but set up a relative trade against Bunds, which fund managers say has been profitable.

Gilts have on occasion outperformed German bonds – but since the start of the year Bund yields have fallen more than those of gilts. Ten-year gilt yields have fallen 16 per cent while Bund yields have dropped 20 per cent.

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© Copyright The Financial Times Ltd 2010 / Capital Markets – Pimco caught out by strength of gilts


The MasterBlog

Eleven Banks Will Fail EU Stress Tests: Strategist

Posted By: Robin Knight | CNBC Associate Web Producer
| 14 Jul 2010 | 08:20 AM ET
Eleven banks including Germany’s Commerzbank and Italy’s Banco Popolare will fail the European Union’s stress tests, Alessandro Roccati, director at Macquarie Securities, told CNBC Wednesday.
“We identify a handful of banks which would need more capital in a base case stress scenario; these are: all Greek banks, Bankinter, Postbank, Banco Popolare, BCP, Commerzbank andSabadell,” a report from Macquarie Securities said.
Even though the number of banks likely to fail the test is relatively small, it may not allay fears onthe health of the overall European banking sector, the note said.
Of the 46 listed banks being tested by the EU, only eleven will have insufficient capital, but of the total 91 banks, including non-listed banks, the number will be greater, Roccati said.
“The key concern and the key differentiating factor is actually the cost of credit and not the decrease in revenues due to a slowdown of the economy,” he said.
European banks may need a minimum of 6 percent tier-1 capital ratio in order to pass the stress tests, according to a Dow Jones report Wednesday. Roccati pointed out that the current regulations require a 4 percent tier-1 capital ratio.
Banks that do fail the stress tests may have some breathing space in which to raise capital as they are unlikely to need to issue debt in the very short term, according to Roccati.
If the troubled banks can’t recapitalized themselves or be funded by their sovereign governments, it will fall to the EU’s central backstop fund to bail them out, he said.
Given the concerns over the sector, Macquarie said he favors BNP Paribas, UBS, SEB, DnB NOR, Nordea, and Erste Bank. Macquarie recommended caution on Iberian and Greek banks.
– Watch the full interview with Alessandro Roccati above.

© 2010

June 4, 2010

Debtors’ Prism: Who Has Europe’s Loans?

IT’S a $2.6 trillion mystery.
That’s the amount that foreign banks and other financial companies have lent to public and private institutions in Greece, Spain and Portugal, three countries so mired in economic troubles that analysts and investors assume that a significant portion of that mountain of debt may never be repaid.
The problem is, alas, that no one — not investors, not regulators, not even bankers themselves — knows exactly which banks are sitting on the biggest stockpiles of rotting loans within that pile. And doubt, as it always does during economic crises, has made Europe’s already vulnerable financial system occasionally appear to seize up. Early last month, in an indication of just how dangerous the situation had become, European banks — which appear to hold more than half of that $2.6 trillion in debt — nearly stopped lending money to one another.
Now, with government resources strained and confidence in European economies eroding, some analysts say the Continent’s banks have to come clean with a transparent and rigorous accounting of their woes. Until then, they say, nobody will be able to wrestle effectively with Europe’s mounting problems.
“The marketplace knows very little about where the real risks are parked,” says Nicolas Véron, an economist at Bruegel, a research organization in Brussels. “That is exactly the problem. As long as there is no semblance of clarity, trust will not return to the banking system.”
Limited disclosure and possibly spotty accounting have been long-voiced concerns of analysts who follow European banks. Though most large publicly listed banks have offered information about their exposure — Deutsche Bank in Frankfurt says it holds 500 million euros in Greek government bonds and no Spanish or Portuguese sovereign debt — there has been little disclosure from the hundreds of smaller mortgage lenders, state-owned banks and thrift institutions that dominate banking in countries like Germany and Spain.
Depfa, a German bank that is now based in Dublin, is one of the few second-tier European banking institutions that have offered detailed disclosures about their financial wherewithal, and its stark troubles may be emblematic of those still hidden on other banks’ books.
Despite boasting as recently as two years ago of its “very conservative lending practices,” Depfa, which caters primarily to governments, has flirted with disaster. It narrowly avoided collapsing in late 2008 until the German government bailed it out, and today its books are still laden with risk.
DEPFA and its parent, Hypo Real Estate Holding, a property lender outside Munich, have 80.4 billion euros in public-sector debt from Greece, Spain, Portugal, Ireland and Italy. The amount was first disclosed in March but did not draw much attention outside Germany until last month, when investors decided to finally try to tally how much cross-border lending had gone on in Europe.
Before Greece’s problems spilled into the open this year, investors paid little heed to how much lending European banks had done outside their own countries — so it came as a surprise how vulnerable they were to economies as weak as those of Greece and Portugal.
“Everybody knew there was a lot of debt out there,” said Nick Matthews, senior European economist at Royal Bank of Scotland and one of the authors of the report that tallied up Greek, Spanish and Portuguese debt. “But I think the extent of the exposure was a lot higher than most people had originally thought.”
Concern has quickly spread beyond just the sovereign bonds issued by the three countries as well as by Italy and Ireland, which are also seriously indebted. Private-sector debt in the troubled countries is also becoming an issue, because when governments pay more for financing, so do their domestic companies. Recession, along with higher interest payments, could lead to a surge in corporate defaults, the European Central Bank warned in a report on May 31.
Hypo Real Estate has hundreds of millions in shaky real estate loans on its books, as well as toxic assets linked to the subprime crisis in the United States. In the first quarter, it set aside an additional 260 million euros to cover potential loan losses, bringing the total to 3.9 billion euros. But that amount is a drop in the bucket, a mere 1.6 percent of Hypo’s total loan portfolio. Hypo has not yet set aside anything for money lent to governments in Greece and other troubled countries, arguing that the European Union rescue plan makes defaults unlikely.
The European Central Bank estimates that the Continent’s largest banks will book 123 billion euros ($150 billion) for bad loans this year, and an additional 105 billion euros next year, though the sums will be partly offset by gains in other holdings.
Analysts at the Royal Bank of Scotland estimate that of the 2.2 trillion euros that European banks and other institutions outside Greece, Spain and Portugal may have lent to those countries, about 567 billion euros is government debt, about 534 billion euros are loans to nonbanking companies in the private sector, and about 1 trillion euros are loans to other banks. While the crisis originated in Greece, much more was borrowed by Spain and its private sector — 1.5 trillion euros, compared with Greece’s 338 billion.
Beyond such sweeping estimates, however, little other detailed information is publicly known about those loans, which are equivalent to 22 percent of European G.D.P. And the inscrutability of the problem, as serious as it is, is spawning spoofs, at least outside the euro zone. A pair of popular Australian comedians, John Clarke and Bryan Dawe, who have created a series of sketches about various aspects of the financial crisis, recently turned their attention to the bad-debt problem in Europe. After grilling Mr. Clarke about the debt crisis in a mock quiz show, Mr. Dawe tells Mr. Clarke that his prize is that he has lost a million dollars. “Well done,” says Mr. Dawe. “That’s an extraordinary performance.”
On a more serious front, Timothy F. Geithner, the United States Treasury secretary, visited Europe at the end of May and called on European leaders to review their banks’ portfolios, as American regulators did last year, to separate healthy banks from those that need intensive care.
Others say that if such reviews do not occur, the banking sector in Europe could be crippled and the broader economy — dependent on loans for business expansions and job growth — could stall. And if that happens, says Edward Yardeni, president of Yardeni Research, the Continent’s banks could find themselves sinking even further because “European governments won’t be in a position to help them again.”
LENDING practices at Depfa may have seemed conservative before its 2008 meltdown, but its business model had always been based on a precarious assumption: borrowing at short-term rates to finance long-term lending, often for huge infrastructure projects.
From its base in Dublin, where it moved from Germany in 2002 for tax reasons, Depfa helped raise money for the Millau Viaduct, the huge bridge in France; for refinancing the Eurotunnel between France and Britain; and for an expansion of the Capital Beltway in suburban Virginia. Depfa was also a big player in the United States in other ways, like lending to theMetropolitan Transportation Authority in New York and to schools in Wisconsin.
Before the current crisis, Depfa was proud of its engagement in Mediterranean Europe. In its 2007 annual report, the company boasted of helping to raise 200 million euros for Portugal’s public water supplier and 100 million euros for public transit in the city of Porto. In Spain, it helped cities such as Jerez refinance their debt and helped raise money for public television stations in Valencia and Catalonia as well as raise 90 million euros for a toll road in Galicia. And in Greece, Depfa raised 265 million euros for the government-owned railway and in 2007 told shareholders of a newly won mandate: providing credit advice to the city of Athens.
Depfa said it performed a rigorous analysis of the creditworthiness of its customers, including a 22-grade internal rating system in addition to outside ratings. More than a third of its buyers earned the top AAA rating, the bank said in 2008, while more than 90 percent were A or better.
The public infrastructure projects in which Depfa specialized were considered low-risk, and typically generated low interest payments. Yet because long-term interest rates were typically higher than short-term rates, Depfa could collect the difference, however modest, in profit.
To outsiders, Depfa still looked like a growth story even after the subprime crisis began in the United States. Hypo Real Estate, which focused on real estate lending, acquired Depfa in 2007. After the acquisition, Depfa kept its name and its base in Dublin.
But when the United States economy reached the precipice in September 2008, banks suddenly refused to make short-term loans to one another, blowing a hole in Depfa’s financing and leaving it with a loss for the year of 5.5 billion euros and dependent on the German government for a bailout.
As Hypo’s 2008 annual report said of Depfa: “The business model has proved not to be robust in a crisis.”
Even with Depfa’s myriad travails, most investors weren’t aware of the extent of its cross-border problems until it disclosed them this year.
The question now hanging over Europe is how many other banks have problems similar to Depfa’s, but haven’t disclosed them.
On May 7, the cost of insuring against credit losses on European banks reached levels higher than in the aftermath of theLehman Brothers collapse in the United States. Officials at the European Central Bank warned that risk premiums were soaring to levels that threatened their ability to carry out their fundamental role of controlling interest rates.
Three days later, European Union governments joined with the International Monetary Fund to offer nearly $1 trillion in loan guarantees to Europe’s banks. At the same time, the European Central Bank began buying government bonds for the first time ever to prevent a sell-off of Greek, Spanish and other sovereign debt.
The measures, widely regarded as a de facto bank rescue, restored some calm to the markets, but critics said that the aid merely bought time without reducing overall debt load. Europe’s major stock indexes and the euro have continued to fall as investors remain dubious about the ability of Greece and perhaps other countries to repay their debts.
Even so, figuring out which banks may be most exposed to those countries largely remains a guessing game.
Regulators in each country know what assets their domestic banks hold, but have been reluctant to share that information across borders. Lucas D. Papademos, vice president of the European Central Bank, which gets an indication of banks’ health based on which ones draw heavily on its emergency credit lines, said at a news conference Monday that a small number of banks were “overreliant” on that funding.
But Mr. Papademos, who retired last Tuesday at the end of his term, wouldn’t be more specific. He said European banks would undertake a vigorous round of stress tests by July.
It’s obvious that Greek and Spanish banks hold large amounts of their own government’s bonds. Spanish banks hold 120 billion euros in sovereign debt, according to the Spanish central bank. But a central bank spokesman said that those holdings were not a problem because, thanks to the European Union’s rescue plan, the prices of Spanish bonds have recovered.
Guessing also falls heavily on public and quasipublic institutions like the German Landesbanks, which are owned by German states sometimes in conjunction with local savings banks. Five of Germany’s nine Landesbanks required federal or state government support after they loaded up on assets that later turned radioactive, ranging from subprime loans in the United States to investments in Icelandic banks that failed.
According to the Royal Bank of Scotland study, banks in France have the largest exposure to debt from Greece, Spain and Portugal, with 229 billion euros; German banks are second, with 226 billion euros. British and Dutch banks are next, at about 100 billion euros each, with American banks at 54 billion euros and Italian banks at 31 billion euros.
“Banks continue to not trust each other,” says Jörg Rocholl, a professor at the European School of Management and Technology in Berlin. “They know other banks are sick, but they don’t know which ones.”
DEPFA and Hypo Real Estate, meanwhile, face continued setbacks as they try to steer back to health. Hypo reported a pretax loss for the group of 324 million euros in the first quarter, down from 406 million euros a year earlier.
At the end of May, the German government raised its guarantees for Hypo to 103.5 billion euros from 93.4 billion. Some analysts say they think the bank may need more aid in the future.
“I don’t think it’s over yet,” says Robert Mazzuoli, an analyst at Landesbank Baden-Württemberg in Stuttgart.

Raphael Minder contributed reporting from Madrid.

The MasterBlog

Confidence in Greek Debt Sinks Again

April 26, 2010

BERLIN — Chancellor Angela Merkel kept up the pressure on Greece on Monday, demanding deeper cuts over three years in exchange for approval of an international bailout. At the same time, her finance minister, Wolfgang Schäuble, was preparing the ground for quick passage in the German Parliament, saying the stability of the euro was at stake.
Amid the uncertainty, investor confidence in Greek assets sank to a new low, and the euro fell as well.
On top of questions about when the aid package of up to €45 billion, or $60 billion, might be delivered, fears are increasing that even with funds in place, Greece will have to restructure its debts, with investors liable to book losses and see the duration of the assets they hold extended.
“Germany wants to help,” Mrs. Merkel said in Berlin. But she insisted that any agreement by Germany to lend its share of the package — €8.3 billion — depended on Greece’s meeting new conditions set out by the International Monetary Fund and the European Union.
Greece has to accept “hard measures,” and that does not mean adopting a program for only a year, Mrs. Merkel said. “The International Monetary Fund’s program is for three years. I think that is right and important.”
“When Greece accepts these tough measures not for one year but several, then we have a chance for a stable euro,” she added.
When the idea of a Greek bailout was first floated this year, the assumption had been that an international aid package would buy Greece the time to pay down its debt — estimated by the European Union at 115 percent of national output.
That confidence has now slipped as investors focus on the long-term debt pile, which continues to grow as the cost of refinancing mounts. Investors appear unwilling to wait the months that it would require to see an improvement in Greek budget deficit from the austerity measures being implemented.
Despite Athens’s official request for an aid package from its euro-zone partners and the International Monetary Fund on Friday, the yield on 10-year Greek bonds rose again Monday — to 9.4 percent. That is yet another record since Greece joined the euro.
“There’s an assumption that €45 billion will be inadequate,” said Robin Marshall, director of investment management at Smith & Williamson in London.
He estimates that Greece will need to refinance up to €60 billion in bonds that are maturing during the next three years in addition to meeting interest repayments.
Also, the lack of a plan for Greece to either leave the euro area, which might help the situation by allowing it to devalue its currency, and the absence of a formal mechanism for the transfer of funds inside the Union has laid open the structural weakness of the euro area.
On top of that, domestic political wrangling in Germany ahead of an important regional election next month has led to doubts about how swiftly the aid will be transferred.
“The negotiations are still going on,” Mrs. Merkel said. They might be wrapped up by early May, she added.
Mr. Schäuble said Monday that it might be possible to complete legislation granting Greece financial aid on May 7, in time to enable Athens to refinance €8.5 billion in bonds that mature May 19.
There is added danger for Germany and France in delaying financing: Banks in those two countries retain significant holdings of Greek debt so any default by Greece could have broader implications.
Politicians from across the spectrum in Germany have demanded that private lenders participate in the financial assistance package for Greece.
Mrs. Merkel had wanted to postpone any decision about the financial aid package to Greece until after the elections in North Rhine-Westphalia on May 9.
There, as at the federal level, the conservatives are in coalition with the Free Democrats. But opinion polls show that the coalition will not win enough votes to form the next government, meaning it may need the support of a third party if it wants to remain in power.
The German public has opposed any major bailout of Greece, something which Mrs. Merkel has had to accept. Still, after adopting a hard line toward Greece, the German government seems reconciled to the idea of lending Greece around €8 billion. That would make it the biggest contributor of the total loan package.
At the federal level, Mrs. Merkel’s coalition has a comfortable parliamentary majority, so it is highly likely that she will be able to push the measures through. Still, her coalition partners, the pro-business Free Democrats, said over the weekend that they would not support any “blank check” for Greece.
Mr. Schäuble spent Monday morning explaining to finance experts from all the political parties the details of the financial aid package and what legislation would be needed. Later at a news conference, he referred repeatedly to the stability of the euro.”
“Our national responsibility is connected to Europe and will be guaranteed,” said Mr. Schäuble. He even asked Germans to be “more friendly” to their European partners. “It is not about judging the individual behavior of people in individual countries. It is about the question of one currency. This common European currency must remain stable.”
On Sunday, in an interview with the German newspaper Bild am Sonntag, Mr. Schäuble had warned that Greece could lose financial aid any time it failed to meet E.U. demands on fiscal discipline.
Away from Berlin there were more conciliatory comments toward Greece on Monday.
President Nicolas Sarkozy of France released a statement after a bilateral meeting in Paris with the president of the European Commission, José Manuel Barroso, highlighting the need for “rapid and resolute action against the speculation that is targeting Greece, in order to ensure the stability of the euro zone.”
Speaking Monday in New York, the French economy minister, Christine Lagarde, said the possibility of restructuring Greek debt was “off the table,” according to Reuters.
While most European stock markets were higher in afternoon trading — the CAC 40 indicator was up 1 percent in late trading in Paris — the main benchmark index in Athens was down 2.9 percent.
The yield on Irish and Portuguese debt also climbed amid concerns that those countries would also struggle to pay down their mounting debts.

Matthew Saltmarsh reported from Paris.

Bloomberg News, sent from my iPhone.
Zapatero’s Bid to Avoid Greek Fate Hobbled by Regions
March 18 (Bloomberg) — Prime Minister Jose Luis Rodriguez Zapatero’s drive to show Spain can avoid Greece’s fate is being held hostage by the country’s regional governments.
As Zapatero tries to cut the euro area’s third-highest budget deficit, regional chiefs facing elections over the next year are refusing to trim spending. The European Commission said yesterday Spain may need deeper budget cuts to meet its deficit goals, and the regions’ performance is “an additional risk.” Zapatero’s room to maneuver is limited by the 17 regions that control 37 percent of public spending.
Zapatero is being hobbled by a 30-year shift in power to Catalonia, the Basque country and other territories that now control almost twice as much spending as the Madrid government. The risk is that Zapatero won’t be able to move fast enough on a deficit that climbed to 11.4 percent of gross domestic product last year. That may prompt investors to consider dumping Spanish bonds along with their Greek counterparts.
“The pressure is on, but I think some regions will resist,” said Angel de la Fuente, an economist at the National Research Council’s Institute of Economic Analysis in Barcelona and the author of several books on regional economics. The Greek crisis is a “useful scare” showing what may happen to Spain if it doesn’t get its finances in order.
Additional Measures
Spain may need to adopt additional budget cuts to meet its goal of bringing the shortfall back within the EU’s 3 percent limit in 2013 as the government’s economic forecasts are too optimistic, the commission said yesterday in a report.
With government forecasts showing the regions will account for more than half of Spain’s 7.5 percent deficit in 2011, Finance Minister Elena Salgado will try to forge a pact with local politicians this month after a push by Zapatero failed in December.
Zapatero’s struggle to break the stalemate is shining a spotlight on a country whose economy is four times the size of Greece and has a jobless rate of 18.8 percent, the euro region’s highest.
The extra yield investors demand to hold Spanish debt rather than German equivalents is 77 basis points. While that’s about a quarter of Greece’s spread, it’s still almost double what it was two years ago. Spain sold almost 5 billion euros ($6.9 billion) of 10- and 31-year bonds today at yields lower than those of existing securities.
‘Next Greece’
“No country wants to be the next Greece,” said Olaf Penninga, a senior portfolio manager at Robeco Group in Rotterdam, which manages 140 billion euros ($192.5 billion). It has sold most of its Spanish government bonds, replacing them with Italian equivalents. The Greek crisis “has clearly put more pressure on Spain to take credible measures to reduce the deficit.”
The government will have to contend with opponents such as Madrid President Esperanza Aguirre from the People’s Party, who called on March 10 for a “rebellion” against a proposal to raise sales tax to 18 percent from 16 percent.
Even Zapatero’s allies are showing resistance. Angel Agudo, economy chief in the northern Cantabria territory, was quoted by newswire Efe last month as saying the deficit-cutting burden needs to be shared and he won’t “pick up other people’s bill.” Fourteen regions will probably hold elections by the end of 2011.
Property Tax Slump
Regional governments, which control health and education spending, are reluctant to join the deficit-cutting drive as the recession reduces the flow of funds they receive from the central government. Taxes tied to property sales, which accounted for as much as 20 percent of some regions’ revenue in the boom, have declined to half of that, Standard & Poor’s estimates.
“The key problem is that the regions have been given power over spending without the responsibility of having to go to the taxpayer to ask for money,” said Luis Garicano, an economics professor at the London School of Economics. “They don’t have the right incentives to spend in line with their revenue capabilities.”
Spain’s atomized structure, which has evolved since the death of General Francisco Franco in 1975, contrasts with the more centralized powers of the Irish government. While Zapatero needs to curry favor with regional rulers to make sure cuts are made, his counterpart in Ireland only needed a majority in the national parliament to pass unprecedented austerity packages.
Ratings Concern
The deficit stalemate may start to weigh further on credit ratings. S&P, which cut Spain one notch to AA+ last year, says regional governments may see downgrades this year.
Spain may be “over-optimistic” on revenues, said Myriam Fernandez de Heredia, head of the company’s European local and regional government team. Catalonia is one of the lowest-rated Spanish regions on AA-, and the Madrid region is rated AA. Fitch Ratings, which has an AAA rating on Spain, is skeptical that regions can cut spending growth to 2.6 percent this year as budgeted, compared with an average of 9 percent in the five years through 2007.
Nor can Madrid claw back the power it has ceded and assert its authority. The government’s lack of control was clear on Jan. 29 when it presented a plan to save 50 billion euros by 2013 that left the section on regional finances blank.
“Everybody still remembers the initial presentation with the holes,” Penninga said.
Debt Sales
The one measure of control the government does have is that it has to sign off on regions’ debt issuance. Carlos Ocana, the deputy finance minister responsible for budgets, said on Feb. 24 that the central government would be “rigorous” this year when assessing borrowing needs.
For Zapatero, the challenge will be to cajole regions into cutting spending without losing support in the national assembly, where he lacks a majority and needs the backing of parties such as Catalonia’s Republican Left, the National Galician Block or the Nationalist Basque Party.
“Politically, it’s difficult because the government also needs the votes of certain parties to govern,” said Alfredo Pastor, a former deputy finance minister and a professor at IESE business school in Madrid. “Cutting expenditure is harder than it looks.”
To contact the reporter on this story: Emma Ross-Thomas in Madrid at
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