On Spain’s death spiral, regional bailouts and Germany’s ability to profit from crisis

Daily commentary

Just a quick word here on three interlocking stories involving Spain and Germany that have come up via the US and European press. Right now, Spain is at the center of the European sovereign debt crisis. The spread between Spanish and German yields is at a record. Spanish yields on 10-year paper are at euro record highs as well.

This reflects not just distress in Spain but also a flight to safety for Germany. In effect, Spain is a ‘loser’ from the crisis while Germany is a ‘winner’. A story in Belgian daily de Standaard points this out with the headline "Duitsland profiteert van financiële crisis Europa" – Germany profits from the financial crisis in Europe. Accordingly, economist Jens Boysen-Hogrefe calculates that Germany has saved 10 billion euros in interest costs alone in this year because of the low interest rates. Some of the MMT crowd are saying this was predictable.

It has certainly caught me by surprise because last year Germany’s yields also suffered from the crisis. It was only in the past year that this intra-Euro flight to safety has developed. French and Finnish short-term yields are at negative rates for this reason. So they too have ‘profited’ from crisis in terms of lower borrowing costs at the short end. At the long-end, these countries are also getting record low yields as well.

Spain is in a death spiral. There is no escape from a sovereign bailout and the follow on monetisation or default. The Spanish press is openly talking about this and I have a couple of articles from El Pais below attesting to this. The critical problem that Spain is dealing with is not just private debt but the contingent liabilities of banks and regional governments. Apparently, six of 17 Spanish regions are poised to tap a Spanish bailout facility in return for giving the central government greater fiscal control. But of course, as with the bank bailouts, this puts the sovereign at risk of further contingent liabilities. And in the euro context, that’s clearly unsustainable.

At the beginning of the year, I predicted the ECB would make a backstop more explicit for this reason. Will they though? I am not as optimistic that the euro can or will be saved.

Duitsland profiteert van financiële crisis Europa – De Standaard

Los expertos advierten que el rescate total de España es cada vez más probable | Economía | EL PAÍS

La crisis del euro llega al euro | Economía | EL PAÍS

El día en que Alemania entró en pánico | Economía | EL PAÍS

Catalonia May Follow Valencia in Bailout Request, El Pais Says – Bloomberg

Seis autonomías se plantean pedir también ayuda financiera al Estado | Economía | EL PAÍS

Six Spanish Regions May Seek Bailout After Valencia, Pais Says – Bloomberg

La Comunidad Valenciana pide la adhesión al fondo de rescate autonómico | Comunidad Valenciana | EL PAÍS

Euro crisis deepens as time starts to run out for Spain’s banks and regions | Business | The Guardian



Note: the IMF has said that they support cutting Greece loose and allowing a re-default. That’s what the belgian article below says, based on information from Germany’s Spiegel. Also note that the Spanish situation will pull Italy in tow and so it’s a two’fer if you will. Spain’s crisis cannot be considered in isolation because of Italy and that’s originally why I though monetisation and an eventual ECB backstop was likely.

‘IMF wil Grieken niet meer steunen’ – De Standaard

France scraps tax breaks that symbolized Sarkozy era | Reuters

Italy’s economic crisis risks sparking ‘civil war’ in Sicily – Telegraph



Kodak Loses Patent Case Against Apple, RIM – WSJ.com

Freemium has run its course — Tech News and Analysis

Pocket Raises $5 Million for Read It Later Service – Peter Kafka – Media – AllThingsD


Other links

Wealthy May Hide as Much as $32 Trillion Offshore, Report Says – Bloomberg

America in denial: We’re number 29 (of 30) – Opinion – Al Jazeera English

Judge: Man Who Stripped Nude at Airport Not Guilty – ABC News

The Consumerist » Millions Of Older Americans Are At Risk For Losing Their Homes

President Cristina Kirchner orders state entities to buy from Argentinian companies – Telegraph

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