04.10.2012
Economy: Troika demands yet more austerity
The euro crisis could trigger nationalist disintegration, warns Eddie Ford
Amidst a relentless barrage of grim economic data concerning the euro zone, attention is currently focused on Madrid. It seems only a matter of time before Spanish prime minister Mariano Rajoy requests a full sovereign bailout - or has one thrust upon him by an anxious Brussels, keen to stop Spain from effectively being forced out of the bond markets. That would substantially increase the risk of contagion spreading to Italy and beyond - the nightmare scenario that could possibly see the total collapse of the euro and the triggering of a deep, worldwide recession, perhaps even something far worse.
Piling on the bailout pressure, on September 28 a ‘stress test’ report revealed a €59 billion black hole in the Spanish banks - caused, of course, by the dramatic bursting of the housing bubble, leaving them saddled with toxic real estate assets. The report, carried out by consultancy Oliver Wyman, lists seven banks that will certainly need bailout money or must raise further capital themselves by the middle of next year. Bankia, the country’s fourth-largest lender, topped the list with capital needs estimated at €24.7 billion.
It is one of several that sold their own clients diabolically complex preference shares, which will now see hundreds of thousands of investors seriously out of pocket. In fact, some put their life savings into these dodgy preference shares - and the courts are dealing with thousands of cases where banks are accused of conning them into buying those shares.
As part of the terms, those banks that receive bailout money will offload their toxic debt onto a new ‘bad bank’, which will pay prices well below the stated value. The ‘bad bank’ will sell its newly acquired ‘assets’ if and when the real estate market recovers - quite a hope, it has to be said. Though the details are still a bit hazy, it seems the ‘bad bank’ will be given up to 15 years to do its job.
Secretary of state for the economy Fernando Jiménez Latorre estimated that overall Spain’s banks would eventually need some €40 billion of the €100 billion bailout money on offer to cover the bad loans. Rather unconvincingly, he added that this marked the beginning of the end of the country’s banking crisis - “With this process capitalisation and restructuring needs will all be met.” Indeed, “all doubts should be dispelled”. If you say so, Fernando.
Humiliation
Formal acceptance of an ‘official’ euro zone rescue programme would automatically see, at least in theory, the European Central Bank buying up unlimited amounts of Spanish government bonds in order to increase demand and in turn drive down the yield (interest rate). According to reports in the financial press, euro zone officials are considering a so-called ‘enhanced conditions credit line’ that would keep Spain in the credit markets with support from the euro zone rescue funds (European Financial Stability Facility/European Stability Mechanism) and the ECB.
Even now, at the 11th hour, Rajoy is still denying that he is about to go cap in hand to Brussels. At a press conference on October 2 following a tense meeting with Spain’s increasingly rebellious regional leaders - nationalist/separatist sentiment is rising fast - Rajoy answered in the negative when directly asked if a bailout request is imminent. His public disavowal of what seems to be all but inevitable is easy to understand, of course. Rajoy’s Popular Party is already massively unpopular, and the September 27 budget announcing a fresh round of cuts guarantees that he will become even more unpopular - the highly militant anti-austerity demonstrations in Madrid last week conclusively proved that (showing what is surely to come, the police went on the violent rampage in the Atocha railway station and elsewhere).
Therefore Rajoy is desperate to avoid the further political humiliation of having International Monetary Fund, European Commission and ECB inspectors - the hated men and women in black - crawling like locusts all over Spain in the same way as they did in Greece, Ireland and Portugal. Indeed, in a September 12 TV interview he haughtily declared that he could not accept “anyone else telling us what our policies should be” or “where we have to make cuts”. But they do say that pride comes before a fall, because in the same interview he also said he had no intention of applying for “what people like to call a bailout” - so expect that clip to be run and rerun in the near future.
Yes, there had been considerable speculation that Rajoy was stalling a bailout bid until after the October 21 regional elections in his home state of Galicia and the Basque country - obviously not an impossibility. However, it does appear that Spain will now submit the request at the weekend, so that euro zone finance ministers can discuss it at their next regular meeting on October 8. Failing that, Madrid could make the application before the European Union summit in Brussels on October 18-19, but countries such as France and Italy are strongly pushing for an earlier decision - concerned that chronic uncertainty is beginning to grip the markets again.
For instance, Spanish bond yields are creeping once more into dangerous territory - currently hovering just below the 6% mark. Maybe ominously, Moody’s rating agency has said that some time this month it will publish the results of a review of Spain’s sovereign debt rating - just one notch above junk status at the moment. A further downgrade could well scare the horses, especially when you consider that rating agencies tend to hunt in packs. Meaning that a definite statement or commitment from Rajoy regarding the bailout would be extremely welcome in many quarters.
But there is just one problem - Berlin. There is every indication that Germany fiercely objects to a full Spanish bailout. Finance minister Wolfgang Schäuble maintains that Spain is “taking all the right steps” to overcome its fiscal problems and therefore does not need a bailout at this time - arguing that investors will “reward” Spanish reforms in due course. Let the market work its magic.
According to participants at the euro zone ministerial meeting in mid-September, there were sharp exchanges when Schäuble told his peers that the German government could not take yet another bailout request to the Bundestag so soon, when only in July it had approved up to €100 billion in financial aid for dysfunctional Spanish banks. Unsurprisingly, Angela Merkel prefers to avoid putting more individual bailouts for distressed euro countries to her increasingly reluctant parliament - not to mention the German electorate.
Eager to please the insatiable Euro-bureaucracy, the Rajoy government has promised to enact 43 “structural reforms” over the next six months - cuts, cuts, cuts. In an approving statement, Brussels said the detailed timetable provided by Madrid “goes beyond” what the EC had originally asked for and represents an ambitious “step forward”. Well done, what a good boy. Naturally, watching his popularity ratings plummet, Rajoy has pledged that pensions would be the “last thing” to be cut, as he takes his axe to the social security system. Hardly reassuring, given his previous comments about introducing a “new law” on pensions before the end of the year.
Yet things are going from bad to worse for Spain. It needs to refinance some €29 billion in maturing debt, including €9 billion in short-term paper, by the end of this month. And, with the tourism season ending, unemployment rose by 1.7% last month to 4.7 million, as service-sector lay-offs accelerated - with the reasonable expectation that the figure will keep rising. Furthermore, as from September 1 VAT rose from 18% to 21%, further hitting consumer spending and adding to the recessionary spiral.
Collapse
Inevitably, Spain’s social fabric is starting to fray - 500,000 homes have no breadwinner, while half of all under-25s and migrants are jobless. And, with one-third of them not qualifying for unemployment benefit, despair is setting in amongst large swathes of the population. One telling consequence of this breakdown is the removal of old people from care homes, with families either unable to pay the fees or just desperate to have the stable - albeit meagre - income provided by a pension ‘relocated’ back home.
Almost all welfare sectors can tell similar stories. Hospital wards are being closed. Madrid’s state schools have started the term with fewer teachers and some secondary schools have closed their science laboratories. The Catholic church’s Caritas charity, which hands out food packages, says it is now aiding one million people. In some neighbourhoods of the capital, increasing numbers of people root through bins at night hoping to find food - a pattern being replicated across the country. As austerity and poverty envelops greater parts of Spain, squabbling over increasingly scarce resources is bound to intensify - potentially threatening breakaways from national minorities. Bluntly, Spain could disintegrate. If so, a break-up of the euro zone’s fourth largest economy - and the world’s 12th biggest economy - could kindle nationalist feelings in the rest of Europe. Numerous unresolved national questions still remain on the continent.
Rajoy has bullishly stated that the various regions have agreed to a “fiscal consolidation path” and insisted that there was no prospect of Catalonia separating from Spain - but no-one seems to have told that to the Catalan parliament or people. After a pro-independence rally in Barcelona last month involving at least 1.5 million people, Catalan president Artur Mas called snap regional elections for November 25. This was followed by a Catalan parliamentary motion exhorting whatever regional government that emerges to hold an independence referendum - with or without central government permission. Needless to say, opinion polls clearly suggest that parties opposed to Catalan independence are heading for a heavy defeat.
Madrid has reacted with fury. Deputy prime minister Soraya Sáenz de Santamaría warned that the government would halt any attempt at a unilateral referendum - there are “legal instruments” to stop it, she said. One enraged Popular Party MP went further. Alejo Vidal-Quadras told Spanish TV that if Mas continued down the secessionist path, then Madrid should send in the country’s civil guards to impose central control - the government “should think of intervening in the rebellious region if they persist”. Of course, such comments have an immediate and jarring resonance in a country that experienced a failed coup attempt by civil guards in 1981. Similarly, a former PP interior minister, Jaime Mayor Oreja, compared Catalan nationalists with the Basque terrorist group, Eta. He even hinted at a separatist conspiracy, claiming that Eta is “seeing a historic opportunity that Spain will break up” and that we are witnessing a “break-up plan that has been implanted both in Catalonia and the Basque country.”
As the economic crisis continues and as the cuts are deepened and widened, it is not too difficult to imagine the existing state system - and structures - in Europe coming under severe strain. And not just in the euro zone. The UK economy is at best flat-lining. Were the euro to tank, the economic fall-out for Britain would be devastating - the euro zone accounts for about 40% of all British exports. Under such conditions, the call for Scottish independence could well find far more receptive ears.
Misery
Greece had its first official general strike on September 26, though in reality there have been almost innumerable unofficial nationwide actions. The strike was backed by the country’s biggest private sector union, the General Confederation of Greek workers (GSEE), the union of civil servants (ADEDY), and PAME, the coordinating centre set up by the Communist Party (KKE). There were huge demonstrations in Athens and some 65 urban centres, with 350,000 protestors marching on parliament. The police fired tear gas at crowds throwing rocks and petrol bombs.
The governing Pasok-New Democracy-Democratic Left coalition, coming under immense pressure from the troika to impose yet more cuts, ordered bulletproof barriers to be erected around the parliament. So much for the motherland of democracy. The general strike almost brought the country to a complete standstill and was hailed - not without good reason - as a “triumph” by the unions. Ilias Iliopoulos, ADEDY secretary general, described it as a “warning to the government not to pass the measures” - if it “pushes us further into a corner, we will react”.
Much of the anger is directed at spending cuts worth nearly €12 billion over the next two years, equivalent to more than 5% of the country’s entire GDP. But that is what the Greek government has promised the troika in order to secure its next tranche of bailout aid. The bulk of those cuts will come from slashing wages, pensions and welfare benefits, heaping a new wave of misery on ordinary Greeks, who are being pushed to the absolute brink. Unemployment is at a record high of almost 24% and Greece now has the dubious distinction of having the highest levels of youth unemployment in the euro zone at 55.4% - surpassing Spain’s 52.9%.
Yet even the butchery envisaged by the Greek government, which becomes more despised by the day, does not appear to have satisfied its international lenders. Negotiations aimed at unlocking the bailout money appeared to hit deadlock on October 1, after troika officials flatly rejected €2 billion-worth of cost-cutting measures as “unworkable” - they do not go far enough. Interior ministry figures indicate that there may well be as many as 180,000 civil servants fired if the troika gets its way.