Spain Seeks Another Bailout as Deficit Skyrockets

Mish

Spain needs another rescue. Its deficit and debt violate Eurozone treaty rules.

Deficit rule violation is across the board. At least Spain admits it.

As translated from El Mundo, Spain Needs a New Era of Adjustment. 

In simple terms, Spain admits it needs another bailout. This is a Mish-modified translation. 

An economic collapse is underway. Spain officially sent to the European Union a request for a bailout this year and a new era of adjustments starting in 2021 in order to make sustainable the gigantic jump in public debt.

The forecast is the budget deficit will skyrocket to 10.3% of the Gross Domestic Product this year and for the debt to jump from 95.5% to 115.5% , a level that exceeds the worst ...

Spain in Deep Fiscal Trouble

The rest is behind a paywall, but you get the idea:

Spain admits it is in deep fiscal trouble. 

Also from El Mundo (but not behind a paywall):  The Government anticipates a recession of 9.2% and an increase in unemployment to 19% 

The budget plan that the Government sent to Brussels last night includes an economic debacle as a result of the crisis that has unleashed the coronavirus: according to its estimates, the Gross Domestic Product (GDP) will collapse 9.2% this year, while the rate unemployment will skyrocket from 14% to 19%.

In addition, the Government now maintains that the recovery will be asymmetric,  in 2021 everything lost will not be recovered.

All the jobs created in the the last four years will vanish. And the recovery will only return to the level in 2017.

Eurozone Outlook

Italy is in worse trouble. 

In fact, every Eurozone country will be in severe violation of Stability and Growth Pact rules regarding both debt and deficits.

The Rules

  1. Budget deficit must not exceed 3% of gross domestic product (GDP).
  2. Public debt (government debt & that of public agencies) must not exceed 60% of GDP.

Excessive Deficit Procedures

The Eurozone has never really enforced any rules, but it does pressure countries with periodic threats of Excessive Deficit Procedures.

EU Recovery Plan

Eurointelligence comments Thinking Through the Details of a Recovery Fund.

In our assessment of the economic impact of the agreed way forward, we know most of what we need to know right now. The European Council has agreed on Angela Merkel’s version, not the coronabond or the Spanish proposal. As FAZ reports this morning, the plan is for the EU to increase its budget capacity from the current 1.2% to 2%, for a period of two to three years. This increase will not come in the form of direct contributions from the member states, but of guarantees. The paper puts the annual volume at €100bn per year, which would be be approximately 0.6% of EU-27 GDP on our calculations. The total borrowed could be in the order of €250-300bn over the period. 

If we assume total borrowing of €300bn, half of it in the form of grants, the average macroeconomic impact would be 0.4% of GDP for three years running. 

As ever, beware of headline totals. Ursula von der Leyen said last night that the size would be measured in the trillions, not billions. As we scour this morning's headlines, we find plenty of gullible journalists impressed by that number. We think it is an illusion. So was the eurogroup’s €500bn package, because it conflated into a single round number the ESM’s outstanding capacity plus the estimated lending capacity of two levered funds.

Assume Spain is granted 0.4 percentage points of GDP for three years.

What does that do in comparison to the numbers above?

EU’s Trickery of a Fake MFF

The EU will not enforce any rules, of course. Instead it will respond with magic solutions as it always does.

In a follow-up article, Eurointelligence discussed The EU’s Trickery of a Fake Monetary Fund Facility MFF.

Return of the German Professors

Also consider the Eurointelligence article on the Return of the German Professors on March 24.

We have been waiting for the German professors to wag their fingers, or to threaten legal action against the ECB or national governments. But so far it has been mostly quiet on that front. This morning, however, we saw an article by Otmar Issing in FAZ, in which he argues that emergency was no excuse for law-breaking. He accuses the ECB of monetary financing and says that a mutualised eurobond is illegal unless formally accepted by national parliaments. 

Issing’s comment is likely to matter not only only because of his former role at the ECB. He carries enormous weight among German conservatives.

Issing argues that, if countries had followed the EU fiscal rules and built up fiscal surpluses in good times, they would not be in the position to needed a bail-out now.

It is not the role of the ECB to prevent a collapse of national public finances. And Art 125 TFEU, the no-bail out clause, is still there. It says the union must not take over the liabilities of member states, and that member states must not take over one another's liabilities. Even as advocates of a mutualised eurobond ourselves, we must acknowledge that there is no firm legal basis for it under EU law.  

Issing’s article is likely the beginning of a legal discussion about the future course of policy. We saw it during the euro crisis. The legal fall-out from that period is still not over. The German constitutional court has yet to rule on the legality of QE. We expect the next phase of legal arguments to arise before the old one has come to an end. 

Huge Political Battle Brewing

A huge political battle is brewing. 

Spain wants another bailout and Eurobonds, Germany wants neither.

The EU responded as it always does, with magic proposals and fake leverage. 

Solidarity?

  • Sure. Solidarity is between German and the Netherlands.
  • Solidarity is also between Spain and Italy. 
  • France is somewhere between the extremes depending on the French president, now Emmanuel Macron.

Creditors vs Debtors

More accurately, view solidarity as a battle between the creditor states and the debtor states. 

Italy vs the EU

Please note that Italian politician Fabio Rampelli removed the EU flag from his chambers and replaced it with the national one.

Eurozone Collapse: V-Shaped Recovery Mirage Is Gone

Please note the Eurozone Collapse: V-Shaped Recovery Mirage Is Gone.

If by any chance you were wondering why the US dollar has been firm despite all the Fed shenanigans, you now know. 

Inflation or Deflation?

Meanwhile, the debate over inflation or deflation continues.

Will it be Inflation or Deflation?

If you believe the answer is inflation, then you do not understand the importance of credit and demand shocks. Click on the link for discussion.

Mike "Mish" Shedlock

Comments (56)
No. 1-21
Captain Ahab
Captain Ahab

Let me have a stab:

With the Fed throwing 'money' (and low interest rates) at the stock/bond markets, inflated prices in those markets became the norm. It overflowed into related markets, such as housing--also inflating prices. Subsidiary effects included mal-investment, corporate buybacks etc.

Yields were driven primarily by price appreciation, not by dividends/earnings or coupons. Yields, which arguably should reflect such price 'inflation' under competitive pressure, declined--i.e. deflation. Risk also declined because the Fed became underwriter. Risk and return entered a false 'equilibrium'. (R-R tradeoff drops to zero% for risk-free, and remains close to horizontal)

The apparent Fed-caused increase in stock/bond prices induced money to flow from elsewhere in the economy into those markets--gotta get me some stocks before the DOW goes to 40K--inducing more price inflation. The net drain of money from other markets (not Fed supported), reduced prices in those markets i.e. deflation.

The net result of meddling are bubbles in several key markets, all pressurized by the Fed. Any change in the investment environment affects the perceived risk/return relationship. Covid-19 is a shock to the risk/return relationship. KA BOOM.

Will we see inflation in CPI items (oil not included)? Only when the gov't/Fed realizes they have a debt implosion on their hands, and no way of paying for it. That is when the US goes full-bore Weimar.
.

Six000mileyear
Six000mileyear

Spain and Italy are holding financial weapons to the unelected EU heads of state. "Bail us out, or we'll leave the EU."

xil
xil

@Mish, how does england leaving the eu look now from both an eu and an england perspective?

Jojo
Jojo

Can we put in a bid on Spain? Is it on a fire sale yet?

Maximus_Minimus
Maximus_Minimus

"Can we put in a bid on Spain? Is it on a fire sale yet?"

Not so fast, the Eurozone at least has vague budget rules, like 3% deficit.
When did you hear such thing this side of the Atlantic?

truthseeker
truthseeker

Hey Mish please remember that as busy as you are, not to forget to put your adoring wife first this weekend, no matter what happens, she is more important than being first as the big dog on worldwide economic, financial news you may desire to share to all of us!

tokidoki
tokidoki

Spain should produce toilet paper en masse and then use that as collateral for more ECB loans.

Bam_Man
Bam_Man

"If countries had built up fiscal surpluses in good times..."

ROFLMAO!!

Yes, that was a German speaking.

Of course, the "silver lining" here is that this debacle will allow the Fed to continue to print $Trillions monthly and the $USD will still look good vs. the Euro.

Bam_Man
Bam_Man

When will the Germans get tired of this?

Pretty soon, I think.

killben
killben

"Issing argues that, if countries had followed the EU fiscal rules and built up fiscal surpluses in good times, they would not be in the position to needed a bail-out now."

He is correct. The problem is the prudent and conservative ones follow it and save for the rainy day but the profligate ones spend with gay abandon during the good times and then spend some more, with the motto being beg, borrow or steal, when in crisis. The EU should be called a Union of ants and grasshoppers.

killben
killben

"The net result of meddling are bubbles in several key markets, all pressurized by the Fed."

Yup! The Fed's illusory virus (of debt being income) has spread across the world and except for a few fiscally conservative countries all others have been spending with gay abandon. In fact starting from Greenspan everyone deserves capital punishment for the destruction they have wrought. It is sad that they are not held accountable for the arsonists they are.

It baffles common sense to expect a good ending with such policies.

Webej
Webej

Solidarity will fray more and more in Europe.

Forced and divisive solidarity with hordes of imported Muslims have wearied people to solidarity. When things become serious, they will no longer be able to show any solidarity for anybody. In the US there is also no solidarity. It is virtually impossible in a socially multi-ethnic hodge podge where nobody recognizes fellow "citizens" as being like themselves or related in a we're all in this together kind of way.

Solidarity will make way for the rule of the jungle, everyone (and every nation) needs to survive for themselves, the hell with the consequences to others. Others are prey.

Tony Bennett
Tony Bennett

"Spain officially sent to the European Union a request for a bailout this year"

...

I'm all for "What happens in Europe, Stays in Europe" ... unlike the troika working with Greece that put US taxpayer potentially at risk (via IMF).

ColoradoAccountant
ColoradoAccountant

The problem is that the politicians' parents never read to them the story of the Ant and the Grasshopper.

RonJ
RonJ

"If the Coronavirus did one good thing, that was expose the European union for the inept bureaucrats they are."

Seems the CDC is inept as well.

Martin Armstrong had a video from someone saying she was nurse practitioner, posting a video on behalf of a concerned nurse in New York City.

Denninger posted excerpts from a PDF by EVMS Medical Group.

"It is our collective opinion that the historically high levels of morbidity and mortality from COVID-19 is due to a single factor: the widespread and inappropriate reluctance amongst intensivists to employ anti-inflammatory and anticoagulant treatments, including corticosteroid therapy early in the course of a patient’s hospitalization. It is essential to recognize that it is not the virus that is killing the patient, rather it is the patient’s overactive immune system. The flames of the “cytokine fire” are out of control and need to be extinguished. Providing supportive care (with ventilators that themselves stoke the fire) and waiting for the cytokine fire to burn itself out simply does not work… this approach has FAILED and has led to the death of tens of thousands of patients."

"Our treatment protocol targeting these key pathologies has achieved near uniform success, if begun within 6 hours of a COVID19 patient presenting with shortness of breath or needing ≥ 4L/min of oxygen. If such early initiation of treatment could be systematically achieved, the need for mechanical ventilators and ICU beds will decrease dramatically."

Sechel
Sechel

Looks like the United States is experiencing a similar story. Big cities like New York got hit with Covid-19 costs because the Federal government kept travel open from Europe long after shutting it down from Asia, that and New York is dense. New York contributes a great deal in Federal taxes but responding and helping out states has become partisna. States like Kentucky who receive more than they contribute to the Federal government want to leave NY hanging dry.

RonJ
RonJ

"Creditors vs Debtors"

In the way back days- ancient times, they had a financial procedure every 50 years called the Year of Jubilee. The debt cycle can only be run so far and at some point, the reset button has to be pushed. There isn't some magical way around it, the math hasn't changed in 5,000 years. "Experts" can come up with fancy new mantras such as Modern Monetary Theory, but they only "work" until their fatal flaw is exposed somewhere down the road.

Bam_Man
Bam_Man

How about a "Trillion Euro Coin"?

abend237-04
abend237-04

Good read on the European political train wreck in progress.

Jdog1
Jdog1

Europe is screwed. 4-5% of its GDP is tourism. It is so deeply in debt that defaults will be massive. Especially in the south. It is dependent on imports for most of what it eats, it's transportation needs, and energy. This will probably be the death blow for the EU as the poor and rich countries battle over debt default and bail outs.


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