Spain back on the agenda

So, having had a few weeks off from EU worry, the market now seems to be back in fear mode with Spain being at the top of the agenda.  The pattern seems to be to go from one country to another, things seem to be quite with Greece for the moment so look at who is next on the list.  This type of fear is probably better than worrying about all of the potential black spots of debt crisis as a whole, but there is the impression that nothing ever gets resolved and how can it be?  The problem of debt that has built up over the last 20-30 years is so big that there is no overnight solution to it and markets tend to like solutions that resolve crises quickly.




Part of the debt problem, whether it be public or private, is that an enormous amount of dishonesty is attached to it. No one ever seems to want to come clean about exactly how much they owe.

"Europe is definitely a drag on risk assets again this week as investors are worried that Spain's debt burden could be bigger than expected and that a full bailout may be required," said Peter Esho at CityIndex in Australia.

Bigger than expected?  Should anyone be surprised?  Whether it is the banks or sovereign states they have all tended to downplay the extent or size of the problem only to eventually come back with the begging bowl asking for more money, future taxpayers money that is.

The reason for this lack of honesty is the fear of the response.  Markets tend to respond violently to the downside, politicians don't want to see that.  Even worse for the politicians is the response of the public, which can be violent in other ways.  So, we end up with elections, as we did in the UK a few years ago, where politicians are only talking of £6 billion of cuts, when anyone with an understanding of the real problems would know that it was going to be many times that.  Other countries have voted against the austerity packages, or at least the people have, but short of voting in fascists or communists, none of the main parties in countries like Greece and Spain want to leave the Euro or EEC and if polls are to be believed the people don't want to leave either.  They just don't want what they see as the bankers and financiers austerity being imposed on them.

Spain is spooking the markets now that the borrowing on their 10 year bonds is well over the unsustainable 7% level, at 7.50%+.  If Spain gets a full bailout, that will probably be Europe's all-in play, because next on the list for market fears will be Italy and that one is too big to bailout.

You can also understand why Germany doesn't want to do these full bailouts.  It isn't just a case of Germany feeling that it should not have to bankroll the debtors, it's also the case that once Germany makes these commitments, the markets will then focus on Germany itself.  Any slight fall in economic performance by Germany would be seen as a disaster, after all, if Germany were to fail in some way then the rest who depend upon it would be seen as finished.

And for those in the UK that feel this is just a European problem think on.  Because the UK isn't in the euro there may not be the need for any bailouts because having our own currency we can print and we can also use IR policy by totally ignoring price inflation as the BoE has done for most of the last five years.  But printing money, QE, reflation and higher taxation isn't a good answer to the crisis, it just creates further potential problems and loads the burden not just on us now, but also future generations.  Britain seems to be kicking the can down the road to 2061.

the Office for Budget Responsibility (OBR) said at least £17bn of extra tax rises or spending cuts will be needed in 2017 to get Britain's debt back to pre-crisis levels by 2061.

Britain's ageing population will increase the deficit by £65bn in today's money if nothing is done, the OBR said, wiping out more than half the current round of hard-fought for savings by the Coalition government.

OBR Chairman Robert Chote said that "if you look at the Government's balance sheet, you might think that we're bust, but an important thing to remember, the most important asset the Government has financially, is it's ability to levy taxes on us in the future.  

Perhaps what he should have said is the power to tax future generations to pick up the tab. That's what an inflationary money system does and simply adds to the dishonesty at work here.


Sources


http://www.telegraph.co.uk/finance/financialcrisis/9419722/Debt-crisis-Markets-and-euro-slide-as-Spain-woes-deepen.html


http://www.telegraph.co.uk/finance/financevideo/9395282/OBR-Britain-is-bust.html