WELL SPOTTED, BRAVO!, by François Leclerc

Guest post. Translated from the French by Tim Gupwell

As already highlighted the Spanish government is already benefitting from a de facto rescue plan under another name. To save appearances, the new austerity measures put forward for vote in parliament have not been the object of a memorandum jointly signed with those providing the funds, as had previously been the case for other countries. In fact, the announcement of these measures came the day before that of the banking bail-out!

One major difference with the preceding rescue plans can be observed: the entirety of the 100 billion Euros loans provided – whose planned repayment schedule is staggered until June 2013 – is destined for the banks. The State will merely pass on the funds, something which has not prevented the Government from imposing austerity measures on the Spanish, even though the two things are not strictly connected.

An additional year has been given to reduce the deficit ( to 2.8% of GDP in 2014, rather than 3% in 2013), but public debt is going to be burdened with guarantees for the repayment of this 100 billion – if, in the meantime, the direct aid to the banks which was initially promised is not put into practice. It would need to be before the end of November, which is the due date for a second payment of 45 billion Euros, to avoid having three-quarters of the sum already accounted for in the public debt? But given the speed of events…..

The Spanish government has claimed that only 62 billion Euros will be needed, and that the amount of 100 billion has only been requested to provide a “safety net”, attempting once again to look like good managers. “We are responsible for its repayment. I am convinced there won’t be the slightest risk for lenders”, declared Luis de Guindos, the Finance Minister. For once, it is difficult to be any clearer.

But that is not all. Under the pretext of penalizing shareholders and creditors rather than taxpayers, the mass of small investors who had been incited to purchase hybrid products in order to reinforce the banks are going to be hit heavily; is the government going to be able to avoid the sort of compensation that has already been touched upon? Finally, the agreements concluded with the European authorities envisage the creation of a bad bank, a measure which will allow the losses generated by the banks’ toxic property assets to be discretely transferred to the state over the long term.

In every respect, the general direction remains the same: debt reduction is and will remain the responsibility of the state. But the more the states are burdened with debt, the more they look likely to sink.

The rating agency Moody’s was not far from acknowledging as much, judging by the grounds it cited for doing so, when it degraded Italy’s rating by two notches, from A3 to Baa2, “Italy is more likely to experience a further sharp increase in its funding costs or the loss of market access” and it detailed its reasoning as follows, “the risk of a Greek exit from the euro has risen, the Spanish banking system will experience greater credit losses than anticipated”, this at a time when a combination of weak growth and higher unemployment could well prevent it from meeting its deficit reduction objectives; all of which is contributing to this loss of confidence. Inevitably, the 10 year bond rate, which is the reference, rose sharply on the markets and once again passed the 6% threshold.

The agency goes even further in pointing out that a recourse to European support mechanisms – envisaged for the first time by Mario Monti – would not be particularly helpful since “there is a limit to the extent to which these support mechanisms could be used” (mainly due to the limited means at their disposal). In other words, either the ECB will be required to intervene in a big way, or the entire box of matches will go up in flames.

According to Giorgio Squinzi, who heads the Confindustria (the Italian Employers’ Federation), the Italian GDP will shrink by 2.4% this year in a best case scenario, a prediction even worse than the Bank of Italy’s. The IMF had already revised its predictions downwards. According to the Italian Bankers’ Association, the banks are faced with a reduction in deposits, which on a year on year basis were down 20% in April. Ignacio Visco, the Governor of the Bank of Italy, has warned the country’s banks that they must “raise more capital and better manage credit risk and liquidity.” In a nutshell, to prepare for the storm, since they are holding vast quantities of sovereign bonds whose value is diminishing as the rate increases, and are only kept afloat by the ECB.

The icing on the cake is that Silvio Berlusconi has put in an appearance and his return to affairs is taking shape, with surveys putting him in first place in the forthcoming elections in 2013, ahead of the Five Star movement and the Democratic Party… He is campaigning on the issue of a possible withdrawal of Italy from the Euro.

To the contagion which is spreading, by virtue of a domino theory which no longer needs to be demonstrated, can be added the powerful effects of a recessionary policy being applied in the name of a debt reduction strategy. Nothing seems likely to break this chain of events.

All round us we hear that the solution is to be more competitive. Some propose a reduction in labour costs; others merely beat about the bush. Everyone is reaping the fruits of a globalization which is now met with rejection and even with nationalistic tendencies. After the denunciation of the danger of a rebirth of populist movements which has amalgamated with a gulp of horror the extreme right and the extreme left, our public officials would also like to resist that of protectionism, but can’t seem to come up with anything other than an illusory reduction in the salaries of wage-earners. Ireland and Cyprus are trying to extricate themselves through tax dumping, and the whole of Europe is getting stuck in a new impasse, the reign of the continually less: less state and less salaries. If one understands correctly, the objective seems to be a change of tack – by maintaining production in Europe and selling to the emerging countries. Bravo!