Daily commentary: On Spanish and Irish austerity

I had intended my commentary here to be on US interest rates but I have already written that (silver level) post. So I will refer you there. Instead, I will mention Europe again because the links are filled with European stories. I think the thread running through these posts is that Spain and Ireland are to continue cutting this year to make their targets and that this will suppress demand in those economies. The logical question then is whether the cuts will be enough to meet targets. If not, why not? What are the consequences of not meeting targets?

In Ireland, the government is conducting a fire sale. I have been saying for some time that the logical outcome of the problems in Ireland are the same as in Greece i.e. a wholesale giveaway of state assets to foreigners. Moreover, that likely means a banking system that could be largely owned by foreigners as in New Zealand (see NZ central bank comments here). Is this a good thing? I would say no but that’s largely irrelevant. It’s happening. If it happens in a period of depression as it is now, it can only lead to nationalism and political extremism in my view.

In Spain, the government has just released a prodigious austerity budget, the most austere in three decades. This will certainly lead to economic contraction and civil disobedience as the labour reforms get enacted in an environment of 23% unemployment. With Spain the worry has to be that this confluence of events pushes down property and land prices enough to put it into the situation the Irish are already in, forcing the state to take on bank liabilities. This is the event to watch in the euro zone right now.

The question for the economy is whether the austerity and asset sales will help Ireland and Spain hit targets. My answer is yes but they won’t be enough because of the negative real economy effects of the spending cuts. I anticipate that Spain and Ireland will miss targets. I also believe this will come as a surprise, particularly the Ireland part. We’ll have to wait and see how this develops.

That’s it. Here are the links.

  • Record US profit margins showing signs of falling as government spending faces cut – Stocks & Markets, Business – Independent.ie
  • EconoMonitor : RGE Analysts » Financial Repression – Indian Style
  • Banana Republic status comes a step closer with Anglo promissory note deal « NAMA Wine Lake
  • Sober Look: Ireland for sale
  • Mitt Romney of 2004 mocked John Kerry for his wealth – latimes.com
  • Spain announces ‘extraordinary’ €27bn budget cuts | Business | The Guardian
  • Mike Norman Economics: Spending surges, but incomes lag
  • Was Quantitative Easing a Tax? – CNBC

    A tax takes dollars out of the private sector, leaving households and businesses with fewer dollars and the government with more dollars. When the government buys something for $10 and sells it back to the private sector for $12, the net effect is the same as if the government had taxed away those $2. Bernanke doesn’t come out and call quantitative easing a tax. But he comes close.

  • Michael Olenick: Housing Pundit Thomas Lawler and the Genesis of Lawlessness « naked capitalism
  • Dutch Downturn Cuts to the ‘Core’ – WSJ.com

    The European Union expects the Dutch economy to contract 0.9% this year: In the euro zone, only Greece, Portugal and Spain are expected to perform worse. And that contraction could turn out to be deeper after the government enacts about €15 billion ($20 billion) in new austerity measures to bring its budget deficit in line with European Union rules.

  • Bernanke Defends Fed’s Crisis Moves – WSJ.com

    Federal Reserve Chairman Ben Bernanke ended his college lecture series with a vigorous defense of the central bank’s two rounds of bond buying to bolster the economy after the 2008 financial crisis. The Fed’s purchases of Treasury securities and mortgage-backed securities were "generally successful" in lowering interest rates and helping to support economic growth, Mr. Bernanke said Thursday in his fourth lecture at George Washington University.

  • Junk Bonds Feed a Hungry Market – WSJ.com

    U.S. companies with junk credit ratings are piling into the debt markets at a record pace, seizing on some of the lowest borrowing costs in history and strong demand from investors craving higher returns. Companies and investors both have benefited. Many corporate borrowers have been able to refinance debt at much lower rates, and others have been able to raise money cheaply for investments. And so-called junk bonds, those with below-investment-grade credit ratings, have handed investors among the best returns of any fixed-income asset this year, according to Barclays PLC. Junk bonds pay higher yields because they are considered riskier investments.

  • Obama Shifts View of Executive Power – WSJ.com

    When he ran for president, Barack Obama promised to roll back President George W. Bush’s use of executive power, a defining point of the Bush presidency. The pledge was part of a broader pitch about Mr. Obama’s governing style, which he said would focus on solving problems in a pragmatic, cooperative way. The allure of executive power, it turns out, is hard to resist. Most every chief executive has found ways to escape the shackles of the legislature and expand the power of the presidency. Three years into his first term, Mr. Obama has developed his own expansive view of going it alone, asserting new executive powers and challenging members of Congress in both parties.

  • Sober Look: The escalation of Spain’s regional debt

    As the Spanish government spreads grind higher, it is becoming increasingly clear that Spain will have a difficult time reaching its target of 5.3% debt to GDP this year and particularly the 3% targeted for next year. Goldman’s latest report is forecasting this year’s number to be 6.8% and next year to be double the target

  • Finextra: EU Parliament votes through OTC rules

    The regulation – approved by an overwhelming majority in Parliament – lays down that OTC derivative contracts would have to be cleared through central counterparties (CCPs), and that all derivatives contracts would have to be reported to trade repositories. The proposal covers all segments of the OTC derivatives market, including interest rate, credit, equity, foreign exchange and commodities.

  • Brics nations threaten IMF funding – FT.com

    Dilma Rousseff, Brazil’s president, accused western countries of causing a "monetary tsunami" by adopting aggressive expansionist policies such as low interest rates, which are making emerging economies less competitive globally. "This crisis started in the developed world," Ms Rousseff said. "It will not be overcome simply through measures of austerity, fiscal consolidations and depreciation of [labour costs], let alone through quantitative easing policies that have triggered what can only be described as a monetary tsunami, have led to a currency war and have introduced new and perverse forms of protectionism in the world."

  • Goldman Sachs’ Conflicts at Center of Kinder-El Paso Deal – YouTube
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