Daily: On Spain’s death spiral and the exogenous threat of drought

Daily commentary

Two topics today: The first is Spain and the second is record high oil prices.

On Spain, I think what we are witnessing is a debt deflation death spiral that will see Spain in Greece’s corner soon. Spanish spreads are at a record high and still rising despite the existing bank bailout package. The ECB is not riding to the rescue here. So there are no catalysts which will put the Spain default genie back into a box. That means spreads will continue to widen until Spain collapses in a heap and gets rescued or defaults. Angela Merkel’s u-turn on the Spanish bank bailout is the direct cause of this crisis. As I wrote last Wednesday, Rajoy’s humiliating defeat to Merkel narrows options to sovereign bailout, monetisation or default for Spain. A sovereign bailout would be the ECB explicitly backing Spanish debt. Monetisation would be the EFSF buying Spanish debt. And default is default. In my view, monetisation does absolutely nothing and is just delays the inevitable choice between an ECB backstop and default. There are no other options for Spain or Italy.

Sober Look: Spanish spreads hit a record

Spain’s borrowing costs surge after sale – FT.com

The rise in commodity prices counts as a clear exogenous threat to the global economy. The worst drought in a half-century in the states has the potential to be the catalyst that takes this whole thing down. The eurozone is in recession and other economies are decelerating quickly. Unless, we can get a hold on corn and soybean prices, both now at record highs, there will be demand destruction and the global recession will begin. I think this drought-driven food inflation is a big deal because corn is at the very heart of the modern economy via foodstuffs for livestock, ethanol, corn syrup and a host of other uses. Corn is the most important crop in the world. Soybean is a less important but still vital crop as well. Watch this space because a global recession will happen sooner than later unless these prices moderate.

Corn price hits record high – FT.com