Spain's Problem is Europe's, Too
By Staff News & Analysis - May 13, 2013

Spain is officially insolvent: get your money out while you still can … I'd not noticed this until someone drew my attention to it, but the latest IMF Fiscal Monitor, published last month, comes about as close to declaring Spain insolvent as you are ever likely to see in official analysis of this sort. Of course, it doesn't actually say this outright. The IMF is far too diplomatic for such language. But that's the plain meaning of its latest forecasts, which at last have an air of realism about them, rather than being the usual dose of wishful thinking. – UK Telegraph

Dominant Social Theme: Be afraid, at least somewhat. But, heck, don't worry …

Free-Market Analysis: This analysis over at the UK Telegraph is probably accurate as far as it goes. Spain is technically broke and, more importantly, it seems something of a broken society.

The monetary inflation that created a building boom on Spain's southern flank is long past, leaving behind a string of shattered properties that still have not been absorbed financially or physically. They prey on Spain's prosperity like a cancer or an open wound, draining vitality.

They say that 50 percent of Spain's youth cannot find work, and now there is a terrible outflow of young people, mostly to South America … Argentina, Chile and even Uruguay.

But it is probably worse than that. Government figures always downplay the truth. Chances are that total unemployment is well above 25 percent. How do people survive? Probably there is a good deal of gray and black market activity, with people doing whatever they can to avoid the IMF's voracious austerity-induced tax hikes.

And now we see in this Telegraph article that its banks are insolvent as well.

In the past, the IMF has been guilty of being far too optimistic about Spain, both on the outlook for growth and the public finances, so it's possible it is now committing the reverse mistake of undue pessimism. Yet somehow I doubt it. Spain is chasing its tail down into deflationary oblivion.

All this leads to the conclusion that a big Spanish debt restructuring is inevitable. Spanish sovereign bond yields have fallen sharply since announcement of the European Central Bank's "outright monetary transactions" programme. The ECB has promised to print money without limit to counter the speculators. But in the end, no amount of liquidity can cover up for an underlying problem with solvency.

Europe said that Greece was the first and last such restructuring, but then there was Cyprus. Spain is holding off further recapitalisation of its banks in anticipation of the arrival of Europe's banking union, which it hopes will do the job instead. But if the Cypriot precedent is anything to go by, a heavy price will be demanded by way of recompense. Bank creditors will be widely bailed in. Confiscation of deposits looks all too possible.

I don't advise getting your money out lightly. Indeed, such advice is generally thought grossly irresponsible, for it risks inducing a self reinforcing panic. Yet looking at the IMF projections, it's the only rational thing to do.

This is a tough but honest article that doesn't go far enough, in our humble opinion. The PIGS generally share Spain's dilemma and sooner or later we figure France will, as well. The article doesn't go far enough when it comes to causation, either.

The disaster afflicting Europe is an equal opportunity provider, and the Cyprus bank confiscation has immeasurably increased nervousness throughout the continent. So the question becomes whether or not this anxiety is simply an evolution of circumstance or some sort of planned escalation of financial misery.

Such paranoid questioning might be seen as conspiratorial were it not for available commentary by various powerful Eurocrats going back decades, stating that an economic crisis was necessary to create a more substantial political union.

In other words, a kind of financial warfare is being waged against the citizens of Europe designed to make them miserable enough to welcome an even more formal centralization.

After Thoughts

No matter what the intention, the state of Europe is a grave one and probably not getting any better. Spain's situation is Europe's.