Don’t Believe Spain’s Deficit Numbers

Last week, Spanish Prime Minister Mariano Rajoy gave investors and analysts a pleasant surprise, announcing that his country’s budget deficit had fallen to 6.7 percent of gross domestic product in 2012, far below the European Commission’s estimate.

Unfortunately, the lower number is probably wishful thinking on Rajoy’s part, because he excluded the costs associated with recapitalizing Spain’s banks. The European Commission’s estimate was much higher, at 10.2 percent of GDP, because it included them. Read more of this post

The Real Threat from Spain’s Corruption Scandal

Investors worried about Spain’s political stability have been dumping their Spanish holdings and pushing up the country’s borrowing costs after the eruption late last week of a corruption scandal involving Prime Minister Mariano Rajoy.

Until now, the government’s durability had been one of the few advantages that Spain held over fellow euro-area problem- case Italy, a country that has seen almost as many elections as Christmases over the past few decades and is about to stage another.

In reality, the likelihood that the Rajoy scandal will force the collapse of the current right-of-center government is slim. But investors are right to be concerned, because political stability involves more than the survival of a country’s government — it also requires the trust of the electorate in the institutions that govern them. Allegations of corruption at the highest level are corroding that trust in Spain. Read more of this post

Spanish bailout inevitable, but not necessarily imminent

It is a rule of thumb among eurozone crisis observers that the more something is denied by officials, the more likely it is to happen. With Spain’s borrowing costs at euro-area record highs, its officials insist it will not need a full bailout programme. To most of us, however, it seems no longer a question of if, but when a bailout will come. Market panic this week seems to suggest it is imminent, but I think it will be put off as long as possible. Read more of this post

Spanish bank bailout unlikely to succeed

It has been abundantly clear that Spain would need a bailout for its sick banking system, and rumours have emerged that this could happen as early as this weekend. I doubt that the details of a plan will be agreed so soon as an independent stress test of the Spanish banking system is still being carried out by Oliver Wyman/Berger (results due June 18th). Much more likely, EZ leaders will once again to plan to make a plan to make a plan to bail out the Spanish banking system. What are EZ policymakers trying to achieve with a Spanish bail bailout, and can they succeed? Read more of this post

Get ready for the Spanish bailout

No one can pretend to know whether Spain is illiquid or insolvent without gauging the size of the black hole that is the country’s banking sector. The Spanish government is finally starting to do this: Bankia and other banks are reportedly set to receive a capital injection from Madrid. With the Spanish economy contracting sharply and with unemployment soaring, it was inevitable that the government had to bail out the banks. But this only deals with one piece of the puzzle. Without growth, the Spanish sovereign will need a bailout as well. Read more of this post

Spain Following in Ireland’s Footsteps

Watching developments in Spain since the beginning of April has been source of non-stop déjà vu for anyone who spent 2010 watching events unfold in Ireland. There are a number of striking similarities between the position in which the Spanish government now finds itself and the Irish government’s situation in November 2010, just before it was forced into an EU/IMF bailout programme. Based on Ireland’s experience, a bailout for Spain seems inevitable. Read more of this post

Why Spain Won’t Regain Market Confidence

Spain is back in the limelight in the EZ crisis, where it has always belonged based on its fiscal, financial and economic fundamentals. Throughout this crisis, the liquidity or solvency of various sovereigns has been determined to a large degree by market sentiment. For Spain’s borrowing costs to recede again to sustainable levels, Spain needs to regain investor confidence. Looking ahead at the calendar of events in Spain and the EZ over the next few months, from where is the good news going to come? The answer isn’t at all obvious. Read more of this post

Big Bazooka II–Updated!

The crisis has spread to the core. Not only have Italian and Spanish bond yields shot up to unsustainable levels, but Belgian, Austrian and French spreads over the comparable German bunds have risen sharply in recent days as well. If the EU, the ECB and the IMF do nothing and allow the markets to continue to drive this crisis, then the eurozone is likely to unravel in the next few months. Given that it is unlikely the ECB will step in as a lender of last resort (LOLR), the next best option for keeping the eurozone intact is to cobble together enough real, hard cash to create a Big Bazooka II. Read more of this post

ECB bond purchases won’t really help

I have discovered a new leading indicator for when the eurozone is going to go into full meltdown mode: my holidays. The good news is I’ve just returned from a holiday that spanned the second half of last week. The bad news is I’m only back for a few hours before flying off again for a whole week. This does not bode well for the euro crisis, but neither does any recent policy making at the EU level. This includes the ECB’s announcement on Sunday that it will intervene actively in the markets through its Securities Markets Programme (SMP), indicating it will purchase significant amounts of Italian and Spanish government debt. This move alone is very unlikely to offer lasting reprieve in the euro crisis.

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September will be a perfect storm in the euro crisis

The August holidays are about to set in. Given the consistent pressure placed on Italian and Spanish debt over the past few days pushing yields to record highs, we may skip the annual August lull in Europe this year. But even if we don’t and news on the euro crisis grows quieter this month, September promises to be a perfect storm in the euro crisis for a number of reasons.

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