The EC-IMF-ECB cometh

Euphoria over the Spain bailout 'triumph' proved to be very short-lived, writes Eddie Ford

No longer able to avoid reality, the Spanish government finally bit the bullet on June 9 by formally requesting a bailout from the European Union possibly worth up to €100 billion or more. Even then, after many months - if not years - of pretending that it needed no external help to prevent its heavily toxicated banking system from collapsing, the central government in Madrid is still attempting to maintain the fiction that its finances are essentially healthy and there is no need to panic.

Actually, or so we are told, rather than receiving a bailout - perish the thought - the Spanish government has been granted a “credit line” to use if and when needed. A mere capital injection “for those banks that need it”, as suggested by Luis de Guindos, the finance minister - not a rescue of the Spanish economy as a whole. Do you understand? The amount eventually requested, stated de Guindos, would depend on the capital required by banks plus a “significant margin” - certainly one way of putting it. According to a very rushed International Monetary Fund report published on the day before the bailout - sorry, “credit line” - Spain’s largest banks had enough capital to “withstand further deterioration”. However, several of the smaller banks would need to “increase capital buffers” by a combined €40 billion and it went on to say that the actual requirement could be far greater - depending on “restructuring” costs, the “reclassification” of mortgages and so on.

Anyhow, the Spanish government has organised audits of the entire banking system’s capital requirements and the reports are due by the end of June. Then there will be further audits that will scrutinise each of the major banks in turn - which might take a little bit longer. Only once all these investigations have been completed - so goes the story - will the Spanish government put its hand out for the cash. EU sources have told the financial press that the provisional offer made by the euro zone’s finance ministers during a near three-hour telephone conference on the afternoon of June 9 (with the IMF’s Christine Lagarde also participating) was unlikely to be ratified before the June 21 meeting of the euro group in Luxembourg, and might even have to wait for the June 28-29 summit of EU leaders in Brussels.

Fredrik Reinfeldt, the Swedish prime minister and leader of the Moderate Party - in reality rightwing - openly conjectured that the Spanish deal will turn out to be “one of the biggest financial rescues in recent history”. He could well be right. Fitch, one of three horsemen of the credit-rating apocalypse (alongside Standard and Poor’s and Moody’s), which cut Spain’s credit rating by three painful notches on June 7, has estimated that the country’s banks will need up to €100 billion to stave off disaster, whilst JP Morgan has ventured that the “full requirement” could be as much as €350 billion. But remember, this is not a bailout.

Bailout lite?

Whether genuinely deluded or just plain desperate, Mariano Rajoy, the Spanish prime minister - who only two weeks ago was strenuously denying the ridiculous idea that Spain’s banks needed a rescue package - hailed the putative deal as a “triumph” that will reclaim the “credibility of the euro”. Maybe it will even - though this is probably stretching things too far - spur on the Spanish football team to replicate its World Cup success in the Euro 2012 championship.

Yes, Rajoy confessed, this “credit line” should have been made available three years ago - dumping the blame on the previous Socialist Workers Party government of José Luis Rodríguez Zapatero. He also warned that worse was to come despite the fact that Spain is already in a crippling double-dip recession with an unemployment rate of 24% - “this year is going to be a bad one”. Meaning, amongst many things, that GDP will contract by at least 1.7% and unemployment will definitely increase. Something to look forward to, especially for the country’s youth, given that unemployment among 15 to 24-year-olds currently stands at 51% - and that is without including the student population. Not to mention that 37% of all 25 to 34 year-olds in Spain still live with their parents due to the harsh economic environment.

Giving voice to the despair felt by many Spaniards, one 32-year-old unemployed worker said: “I stopped my life when I was 25 years old. I can’t set up a family, I can’t buy a house, I can’t do anything.”[1] This in a country where, thanks to the irrational and obviously unsustainable property boom that started in the 1990s, there are a million unsold properties going to rack and ruin and hundreds of housing developments left unfinished by construction companies and real estate brokers.

But, regardless of the promised misery, Rajoy insisted there were positive features to the June 9 deal. For him, far from highlighting the fundamental weakness of Spain - a country totally unable to prop up or control its own banking system - the EU’s ‘capital injection’ was instead proof of the “success” that his government has had since coming to power in December. Namely, the vigorous way in which his administration has implemented and imposed the vicious austerity demanded by Brussels and Berlin. Rajoy went on to claim that if it had not been for fiscal consolidation, deficit reduction, book-balancing, privatisation, ‘labour reforms’ etc, the situation would now be far worse - we would be discussing the failure of the central Spanish state itself and direct outside intervention by the Euro-bureaucracy and others. Thank god for Rajoy’s Popular Party. Indeed, Spain will press ahead and try to slash the deficit from 8.9% last year to 3% in 2013 - the target will be met, the plan fulfilled. Somehow.

According to Rajoy, there are other reasons to be cheerful. In contrast to Greece, Ireland and Portugal - under the iron thumb of the European Commission, European Central Bank and IMF troika - Spain’s financial package will come, apparently, without any humiliating strings attached (‘bailout lite’, as some have dubbed it). “No macroeconomic conditions” have been placed upon Spain, the prime minister declared. Whatever the terms and conditions of the EU loan, onerous or otherwise, they will be purely “on those who receive the loans” - and that means the banks, obviously. Furthermore, Rajoy made out that he came under no pressure from the EU leaders or anyone else to accept the money - another scandalous idea.

Of course, Rajoy is speaking utter rot - and everyone knows it, including the markets. The Spanish government came under intense pressure from the ECB, Germany, the Netherlands, Finland - and the US administration, it goes without saying - to make some sort of move to sure up its banking system before the June 17 Greek parliamentary elections. If truth be told, Rajoy’s telephone must have been red-hot during the days leading up to June 9 - do something now before it is too late.

What the EU leaders and the Obama government want to happen on June 17 in Greece is an outright victory for the ‘pro-bailout’ parties - ie, a coalition government comprised of New Democracy, Pasok and any other ‘sensible’ parties. Any other outcome is viewed as potentially disastrous. But only a visiting Martian, or a fool, could actually believe this is going to happen. Just about every opinion poll has ND and Syriza - pledged, of course, to tearing up the bailout ‘memorandum’ - running neck and neck. For example, as I write, the BBC has ND on 27.4%, Syriza on 26.2% and Pasok on 13.7%[2] - and some actually have Syriza scoring a relatively convincing victory, getting between 31.5% and 34.5% of the vote[3] (thus becoming entitled to the 50-seat ‘bonus’, legal shenanigans aside). Surely the very best that the Euro-bureaucracy can hope for, unless the Greek military have other plans, is a repeat of the May 6 election - another stalemate.

Unsurprisingly then, the EU leaders were terrified that the political chaos unleashed by the Greek elections could topple the Spanish banking system and effectively bring the euro crashing down. To have such a fear is not necessarily a sign of paranoia. In the words of one EU official, there is a “need to ensure that the euro area is properly ring-fenced” and “protected from possible Greek fallout” - which by definition meant strengthening the Spanish banks, or at the very least signalling to the markets that some sort of action is imminent. Nor does it help that Cyprus appears to be getting out its begging bowl too, various newspapers reporting that the island might request a bailout within days - Nicosia having being locked out of the international capital markets for a year. More contagion fear.

Rajoy’s contention that Spain’s bailout cash will come without strings is equally absurd - get real, Mariano. When the deal is finally written and signed off, the inevitable strings will look more like chains. EU and IMF officials will ‘invade’ Spain, scouring every government book, record and ledger for signs of fiscal incontinence or impropriety. Doubtless correctly, the Financial Times notes that the EC is “expected to impose tough new measures on Spain’s financial sector overhaul” - which “some officials believe has gone too slowly” and thus “contributed to market uncertainty” (June 11).

If any more evidence was needed, the EU competition commissioner, Joaquín Almunia, bluntly told Spanish radio: “Of course there will be conditions” - seeing how “whoever gives money never gives it away for free”. Have no illusion, he said, the IMF will be “fully involved in monitoring Spain’s programme”, even if it not contributing any funds. Similarly, German finance minister Wolfgang Schäuble declared that there will be “supervision to ensure that the programme is being complied with”.

In other words, it will be the Spanish masses who will have to pay the price for the ‘cheap’ EU loans to Madrid - getting hammered by a fresh round of austerity measures that will impoverish them still further.

Danger zone

Immediately following the announcement on June 9 that Spain will be asking for a “credit line”, there was a brief stock market rally. However, the Rajoy euphoria - if you can call it that - fizzled out within 24 hours. Recoveries ain’t what they used to be and by June 12 Spanish and Italian government bond yields were back in the danger zone, reaching euro-era highs. So the yield on benchmark 10-year Spanish government bonds hit 6.68% at one point - the highest since the mid-1990s - and Italian 10-year bonds climbed above 6.19%, levels not seen since Silvio Berlusconi’s government collapsed and the technocrat Mario Monti was appointed as prime minister. In turn, Fitch downgraded the ratings of 18 Spanish banks.

The reasons for the renewed crisis, which refuses to go away, are not too hard to discern: investors are spooked by the sheer confusion surrounding the June 9 deal. Who exactly is going to pay what and when? Critically, no-one is yet sure whether it will be the European Financial Stability Facility or the European Stability Mechanism that will dish out the money to Spain. If the latter, scheduled to replace the EFSF next month, then that has disturbing implications for the markets. Firstly, ESM rules prescribe - and Berlin is very keen on all euro member-states obeying the rules - that the “credit line” will take primary position in the event of default, therefore forcing those bondholders who thought they were first in line into a secondary and much more riskier position. Then, as sure as night follows day, the value of those holdings will immediately start to decline when it dawns upon the investors - who always check the small print - that Spain has done little if anything to improve its overall financial situation. Suspicion is also growing that Rajoy, maybe even the EU officials, were not aware of such an outcome when they agreed the deal - hardly inspiring market confidence.

Secondly, and much more obviously, is the brutal fact this new line of credit - no matter what the conditions turn out to be - is simply going to be added to the Spanish government’s debt: the country’s debt-to-GDP ratio has substantially increased overnight. In that sense, Spain’s ‘bailout lite’ has just acted to hasten the day when another - and larger - bailout will be needed by Madrid.

Meanwhile, feeding into the feeling of crisis, evidence of slowdown and recession in the global economy is everywhere. Italy’s latest GDP figures showed that the economy shrank 0.8% in the first quarter of 2012 and contracted by 1.4% year-on-year. As for the latest batch of statistics from the Organisation for Economic Cooperation and Development, they make for depressing reading. The OECD said its composite leading indicator (CLI) for China, which provides a measure of future economic activity, slipped to 99.1 from 99.4 in April - falling further below its long-term average of 100. Indeed, China’s slowdown worsened in May, as its factories saw a further deterioration in demand at home and abroad - and recent data revealed the fourth monthly decline this year in exports from South Korea, as shipments to the United States, Europe and China all fell.

The OECD’s CLI for India also showed signs of weakening, dropping to 98.0 from 98.2, again below the 100 average. Similarly, official data released last month showed that India’s economy grew at an annual rate of 5.3% in the first quarter - the slowest rate in almost a decade. And there was yet more grim news from the euro zone, with industrial production falling 0.8% in April, according to official statistics. Production was 2.3% lower than a year ago, pointing to the worst downturn since December 2009.

Nor did the UK fare any better. Figures from the Office for National Statistics showed that factory output fell 0.7% in April, following a very modest 0.9% rise in March - on the tail of the most recent official data which demonstrated that the economy as a whole shrank by 0.3% in the first three months of the year, and confirming beyond any shadow of doubt that the UK is back in recession. In the opinion of the Ernst and Young Item Club - a prominent economic forecasting group - these figures “suggest that the manufacturing sector will be a drag on growth in the second quarter”, which, of course, is “already expected to be disappointing due to the extra bank holiday in June”. Who said the monarchy was good for business?

Now more than ever, Europe is gripped by a seemingly permanent crisis that could shatter the euro and send the entire world economy - already suffering - plunging into a slump/depression the likes of which we have not seen since the 1930s. Meanwhile, the main powers - not least the USA - seem paralysed and incapable of any action to prevent it.



1 . http://nextgenjournal.com/2012/06/spain-bailout-provides-little-hope-for-unemployed-youth.

2 . www.bbc.co.uk/news/world-europe-18251531.

3 . www.publicissue.gr/en/1684/varometro-3rd-wave-may-2012.