Sovereign debt bubble thread

[Iormlund]

They would rather destroy Europe than enact drastic reforms.

That's really not the situation at all.

Well, they have structural problems. But, in theory at least, the country as a whole should be able to operate without ruining itself. So, they are doing something wrong, in the context of their reality. And I am including euro membership in this reality for now.

They might not know how to undo those wrongs, or they are not willing to pay the heavy price to undo them, or undoing it in anything but the very long term is totally impossible. Either way, there are alternatives between
a) ruining the euro by not changing their failing model
b) ruining the euro by leaving it

You are making the same mistake as Germany does. You assume these magical reforms will fix everything. They won't. They worked in Germany 10 years ago because they had consumers (us) and low borrowing costs. We have neither.

The argument is that if you make hiring cheaper unemployment will go down. Yet hiring has been virtually _free_ since the 93 crisis* and businesses are still downsizing. In fact every reform results in the short term in higher unemployment, which leads to more saving and less demand and yet more unemployment in a vicious cicle. And there's no way out of there but a) inflation in the Euro core or b) exit from the Eurozone. Since the first is unlikely we'll have to go for the latter.

These reforms are necessary in the long term, but unless they come hand in hand with growth, they'll only lead to disaster. Take a look at Ireland, tell me how things are working out for them despite one of the most flexible eonomies in Europe.



* And the segment where it is not (workers with advanced education) is the only one with increased employment figures since the crisis started.

[Iormlund]

In related news, the Spanish government reveals the much denied Plan B does exist. It is indeed studying exit from the Eurozone as alternative to the likely intervention.

Most likely an empty threat IMHO. At least for now.

A threat against whom?

Against Germany. As the saying goes: 'O follamos todos, o la puta al río'.

[Tamas]

I understand your sentiment - bleak future for your country and the big boys enforcing rules on you are on a questionable path. But do you and other spaniards understand that if your bluff is called and your leaders decide to make good on it, it will destroy everything in Europe? Decades of progress in cooperation, a hope of remaining significant in the long run, and the economic prospects of a generation?

[Sheilbh]

I understand your sentiment - bleak future for your country and the big boys enforcing rules on you are on a questionable path

So Spain should take one for the team?  They lock themselves into a depression for the sake of Germany's current account surplus?

it will destroy everything in Europe? Decades of progress in cooperation, a hope of remaining significant in the long run, and the economic prospects of a generation?

Nonsense.

[Admiral Yi]

So Spain should take one for the team?  They lock themselves into a depression for the sake of Germany's current account surplus?

Spain should not take one for anyone.  It's a variation on the IMF conditionality theme.  Spain can accept the conditions and borrow 5% of GDP from Germany and friends, or it can reject the conditions, and borrow nothing from no one. 

[Iormlund]

I understand your sentiment - bleak future for your country and the big boys enforcing rules on you are on a questionable path. But do you and other spaniards understand that if your bluff is called and your leaders decide to make good on it, it will destroy everything in Europe? Decades of progress in cooperation, a hope of remaining significant in the long run, and the economic prospects of a generation?

If anything, exit is the only way to save whatever remains of a European project before we start seeing svastikas in Madrid or Rome.

I wouldn't even bluff about it. Some people think eventually the austeritarians will see the light and try another way before shit hits the fan in Italy and Spain. I doubt it. And even in that case, the cost is just too high.
If it was up to me I'd just take Spain out this very weekend.

[Sheilbh]

Spain should not take one for anyone.  It's a variation on the IMF conditionality theme.  Spain can accept the conditions and borrow 5% of GDP from Germany and friends, or it can reject the conditions, and borrow nothing from no one.

Spain's still borrowing from the markets.  The yields are increasing because of pressures on Spanish banks without further LTRO but there's not been a bailout yet.  The austerity measures are to meet with the conditions of the fiscal pact.

The worry for the Spanish is that LTRO's finished.  Draghi's said that in his view the ECB's done its bit to solve the Eurozone crisis and there's now worries about inflation.  The Bundesbank member of the ECB board has agreed and the Bundesbank has hinted at imposing national credit controls because they think monetary policy's got dangerously loose and too inflationary for Germany.

So the Spanish either have structural reform, severe austerity, probably an eventual bailout, no devaluation and tight monetary policy or they have structural reform, severe austerity, possibly an IMF bailout, devaluation and loose monetary policy.  I think there's more potential for growth in the latter scenario which could help avoid the need for a bailout.

Or the Eurozone could engage in massive QE as the Fed and BofE have and the Eurozone governments could increase the size of the bailout funds to (at least) the trillion Euro mark they've been talking about for the past 2 years.

[Admiral Yi]

Kay.  Doesn't change my position much though.  Spain is free to run its deficit through the roof and take its chances on the bond market.

[Sheilbh]

Spain is free to run its deficit through the roof and take its chances on the bond market.

No-one's proposing that (the Spanish government did announce that they'd only be reducing the deficit from 8.5% of GDP to 5.8% of GDP this year, instead of the 4.4% agreed) and Spain's not free to run its deficit through the roof.  That's the entire point of the fiscal pact.

[Admiral Yi]

No-one's proposing that (the Spanish government did announce that they'd only be reducing the deficit from 8.5% of GDP to 5.8% of GDP this year, instead of the 4.4% agreed) and Spain's not free to run its deficit through the roof.  That's the entire point of the fiscal pact.

What is Iormlund proposing?  I thought he was bitching about the failures of austerity.

[Sheilbh]

What is Iormlund proposing?  I thought he was bitching about the failures of austerity.

He is and I am.  Not because austerity isn't necessary but because it's basically all the Eurozone's come up with as a solution.  They haven't addressed the structural problems in EMU and austerity alone isn't helping, if anything I think it's intensifying Spain's problems.

Edit:  As an aside I think George Soros's proposed solution (or part of a solution) is very interesting and could be helpful.

[Iormlund]

What is Iormlund proposing?

EZ-wide automatic stabilizators, some sort of Eurobond, QE ... In essence, further economic integration of the EZ beyond the useless fiscal compact.

But since I think that's unlikely, the only other choice is dissolution of the Eurozone, the sooner the better.

[Admiral Yi]

EZ-wide automatic stabilizators, some sort of Eurobond, QE ... In essence, further economic integration of the EZ beyond the useless fiscal compact.

But since I think that's unlikely, the only other choice is dissolution of the Eurozone, the sooner the better.

That's fine.  I just don't want you to operate under the illusion that exiting causes Spain's fiscal issues to disappear.

[Iormlund]

Of course not. But it'd be easier to lower the trade deficit (since things like gas, BMWs or smartphones would become a lot more expensive) and we'd wipe out quite a lot of debt via devaluation (floating the Neopeseta) and inflation (due to high energy costs and such). It would also make our products a bit more competitive abroad.

[Admiral Yi]

we'd wipe out quite a lot of debt via devaluation (floating the Neopeseta) and inflation (due to high energy costs and such)

If Spanish debt is governed by Spanish law you could do that now, without exiting.  If it's governed by other law exiting won't help.

And of course devaluation and inflation get factored into nominal bond yields.  There's no running away from real interest rates.  That's why Latin American countries all issued dollar bonds.

Plus you would have to add the "fuckers changed the currency on my old bonds" premium.