Quick Spain thoughts

by on June 9, 2012 at 3:12 pm in Current Affairs, Economics | Permalink

Is there actually any news in the “deal”, summarized here?  It’s long been known that Spain would end up getting a chunk of ESM and/or ESFS (indeed they had a quota of 93 billion euros and this is barely more at 100 billion euros), and now they have, although the details still are not announced.  And Spain already had been given an extension on their austerity target, so not attaching “austerity conditionality” to this deal isn’t quite news either.  Their obligations are already “floating” in this regard, because even the previous target could not be met.

Did I mention there were already a trillion euros lent from the ECB since December (not all to Spain)?

Is the deal in some way a new signal?  I would think the new signal is that if you play a bit tough with the Germans you get a more relaxed deal, at least nominally in a way that you can take to your citizens.  Maybe you think the more relaxed deal is a better outcome, but in the longer run does this keep the Germans on board?  Does it keep Ireland on board?  Do Greece and Portugal now wish to renegotiate?  One hundred billion euros is unlikely to be enough, so what precedent is created when Spain negotiates for the next round?

Doesn’t this all mean that Netherlands, Finland, and Slovakia are getting somewhat rolled?  They feel less responsible for the rest of the eurozone than Germany does.

How senior will the debt be from this new package?  That seems like the key question to me.  Very senior debt will kill the Spanish bond yields, but very junior debt will make this pure aid.  How many eurozone countries are up for supporting pure aid on this scale?

Michael Heller June 9, 2012 at 3:26 pm

My gut feeling is that if they keep getting pushed and abused by the outside world as they are now the northern AAA countries will get up and leave. It’s their trump card as it were. Oh, and they have a responsibility to their responsible tax payers.

TallDave June 9, 2012 at 6:22 pm

The mechanics are very interesting — if a state like Greece leaves, the incentive is to move money out of the state before it is devauled into drachmas. But if Germany leaves, the incentive is to move money into Germany, so that it is revalued into the higher-value marks. That is going to be really weird.

That also creates a very odd situation where over the years to come, as the incentives for states to rely on bailout/default increases with each precedent of being sent gobs of money, the incentive for the fiscally sound states to leave gets larger and larger. The arrangement seems inherently unstable. What are German citizens going to say when one day in 2020 they realize they could double the worth of their assets by denominating them in deutschmarks instead of euros, rather than sending Greece and Italy another trillion?

ciaran June 9, 2012 at 8:08 pm

As a big exporting nation, this may not be the best course of action for the germans.

Firat Uenlue June 9, 2012 at 11:48 pm

We are a big exporting nation but happens at the moment could, at best, be described as vendor-financing with regards to periphery exports. We would actually like to get paid one day.

Ciaran June 10, 2012 at 7:06 am

The perspective from the periphery is that we getting “vendor financing “(whether we want it or not) to bail out German financial institutions .

dan1111 June 10, 2012 at 2:47 am

There is a big financial cost to any country leaving: a lot of disruption and uncertainty. For countries in economic disaster, it might become the only alternative, or the best one. For strong countries, it is unlikely to be.

If this becomes politically unpalatable in Germany, they have the power to stop the bailouts. The smaller countries could probably successfully refuse to contribute to the bailout fund. The Eurozone leaders have not been able to impose much discipline on the countries receiving money, despite the fact that they have a lot of leverage. It is unlikely they would be able to force uncooperative countries to contribute to the fund, because they have far less leverage in that case.

TallDave June 11, 2012 at 11:31 am

That’s a good point, but stopping the bailouts is sort of like launching the nukes — it’s game over, they can’t do anything but default at that point. It’s possible pre-emptive exit may seem preferable, especially since money would flow into those countries to offset the defaults that are coming either way.

It seems unlikely today, but I wonder what happens if in ten years, after many more bailouts and no growth, the PIIGS are all saying “give us more money or we default and leave the euro.”

derek June 9, 2012 at 4:01 pm

Two points.

This is optical. The money isn’t there yet.

Second, and with more import. Bond holders are now second in line. With greece that meant eventual default.

derek June 9, 2012 at 4:10 pm

It may not be official that sovereign bonds are subordinate to this stuff, but that in reality will be decided in some weekend crisis meeting probably this fall.

Jonas June 9, 2012 at 11:28 pm

Only news is that Spain officially requested it. Other details are not determined yet, like interest rate, and whether it’s senior or subordinated, so can’t tell if this will actually ease the pressure on the region. Will probably ease the stock market/currency market pressure on Monday though.

Vlad Nistor June 9, 2012 at 5:02 pm

EFSF money is pari passu, ESM money is senior. This explains the hurry in asking for the money before the audit of banks is completed later this month.

Mike June 10, 2012 at 9:05 am

Thanks, that explains a lot. They switch over later in the summer, correct?

John David Galt June 9, 2012 at 5:37 pm

The whole philosophy that underlies the EU and its institutions is “we MUST have a huge welfare state.” All the member countries, except maybe Britain and a few others that haven’t joined the euro, would rather go down with the ship than have to explain to their citizens that huge welfare states aren’t sustainable.

This is the situation Britain was in in 1901, but their unsustainable burden was their colonies. It wouldn’t surprise me at all if this situation leads to a world war as that one did — because there are always wannabe superpowers waiting in the wings, and when the big guys’ economy gets ruined they smell blood in the water.

Ciaran June 9, 2012 at 8:11 pm

I would rather say that the principle that underlines the eu is that we must destroy the welfare state. See draghis recent comments about the European social model being dead.

Cathal June 9, 2012 at 8:19 pm

Don’t let reality intrude on the mental machinations of an Ayn Rand devotee.

dan1111 June 10, 2012 at 2:50 am

“Reality” is that the welfare state is dead in Europe? That certainly isn’t true.

Someone from the other side June 10, 2012 at 6:24 am

It is in its death throes because of (financial) starvation… Just look on the off balance sheet pension liabilities of the Germans.

TallDave June 10, 2012 at 11:32 am

The problem isn’t so much the welfare state per se as the old de Tocqueville problem — the voters are demanding for more welfare than the state can afford.

ptuomov June 9, 2012 at 5:46 pm

I don’t understand why MR guys are so bearish on Spain. This year, Spain will have approximately zero current account deficit. This means that the country externally viable. The Spanish exports are growing as fast as German exports, this in a depressed economy. They have problems, but to me this means that their problems are solvable with Spain remaining in the euro zone.

Firat Uenlue June 9, 2012 at 11:50 pm

Regions in a mess, constantly revised upwards deficit numbers (or numbers in general), no leadership from politicians etc.

TallDave June 9, 2012 at 6:15 pm

The incentive now seems to be to spend so much that the country requires bailout, and with the Krugman camp telling these insolvent states that the real problem is they aren’t spending enough, I’m starting to think the bailouts will just go on and on until the fiscally sound states finally get fed up with sending them money and leave the euro to collapse sometime in the next decade or two. In the meantime, let the race to the bottom begin!

Matt June 9, 2012 at 6:44 pm

This may be a new phase in the crisis, in which “kicking the can down the road” is the explicit, rather than implicit justification for these emergency bailouts, and the idea that a euro doomsday is unavoidable is accepted by all parties involved but they think prolonging mere recession for 6months-2yrs sounds pretty good compared to the alternative.

Bill June 9, 2012 at 11:53 pm

This is revealing:

http://www.pewglobal.org/2012/05/29/european-unity-on-the-rocks/

Greeks consider themselves the hardest workers. All other polled countries chose Germany.

John Fistikis June 10, 2012 at 3:33 am

What does it reveal? Perceptions, prejudices, facts, bias …? What is it exactly that you learn from that?

Darren June 9, 2012 at 11:56 pm
ciaran June 10, 2012 at 7:01 am

Reality is that the ecb/European commission want to kill it in the name of “efficency” etc

forstena June 10, 2012 at 11:28 am

If this new deal isn’t all that new, it seems to me that some (many?) Spanish banks will go bankrupt. That will now be realized by the markets. A little healthy Schumpeterian destruction may do the Spanish banking system some good, perhaps a lot of good. Isn’t it time to stop coddling bad banks? Isn’t it time, four years after the financial meltdown in the US, to melt down som inefficient European banks? I say, stop the bailouts. Hopefully, the Spanish authorities will clean up their banks by sacrificing some of them, and forcing the asset holders to take losses. But this has to be done quickly and efficiently, lest panic may spread. The bottom lins is that there’s more than haircuts needed here. Some people will have to be pushed out of the lifeboats.

Jason P June 10, 2012 at 12:10 pm

Spain’s government’s problem stems from (pending) bank bailouts. Why not just let the banks go bust? After all, given the monetary union the Spanish people can open accounts at German banks and get mortgages from Dutch banks. Why does Spain need Spanish banks now that there is a monetary union? Isn’t that what it’s for … access to foreign institutions without currency risk?

Economically there is no reason unless it wants to push reckless lending and other government policies. Oh, I’ve let the cat out of the bag.

Mark Thorson June 10, 2012 at 8:03 pm

Greeks might actually be the hardest workers, if you include unreported work.

qsi June 10, 2012 at 10:15 pm

It’s long been known that Spain would end up getting a chunk of ESM and/or ESFS (indeed they had a quota of 93 billion euros and this is barely more at 100 billion euros)

My interpretation of that table is that is shows the amount the countries need to contribute, not how much they would receive. So Spain was on the hook to contribute 92 billion, and now i sreceiving 100 billion instead for a 192 billion swing in its favor. I base this on the elimination of Irish, Greek and Portuguese contributions in the table post-bailout. (Then again, the table and accompanying text isn’t entirely clear on this, so perhaps I am the one misunderstanding this).

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