The Automatic Earth
May 22, 2011
Back In February, I saw a Dutch docudrama, entitled 2011: The Year the Euro Falls (Sorry, no English version available as far as I can see). It’s nicely made, with cameos for many -prominent- Dutch politicians, newscasters and media pundits, and based on a screenplay by the former financial expert for Holland’s Greens, Groen Links (‘links’ means left), Kees Vendrik. It paints -potential, and more or less fictional- developments in Europe in 2011.
First: Spain falls in summer. Spanish bonds are dumped, interest rates on them rise to 9%. Seemingly endless EU/IMF negotiations follow. This is not Greece or Ireland, after all (?!). These negotiations end in a deal, against a background of large-scale protests across Europe, not the least of which take place in the rich EU nations, where people are sick of bailing out the poorer periphery.
Then, the government of Belgium (there actually is one in the screenplay!) abdicates. Belgium is now a serious threat to Euro -financial- stability, and it gets billions in loans from the European stability fund. The EU stabilizes for a short period of time.
However, next up are elections in Ireland. Sinn Fein win a large majority. They decide to leave the Eurozone -and the EU itself-. Which means that Irish bonds, denominated in Euro’s, will have to be paid back in a much weaker “new punt”, which can’t be done. In other words, those EU -and US- banks that have bought Irish bonds will have to write down losses, very substantial ones.
The markets then turn their attention to Italy; its bonds come under pressure. The first victims are the French banks, which have huge exposure to Italian debt. Somewhat surprisingly, PM Berlusconi refuses to be bailed out by the EU. This raises his domestic popularity beyond levels anyone could have imagined. Berlusconi then turns to China and Libya (it’s a 2010 scenario!) for financial aid. Italy closes its borders.
This becomes the start of the endgame. Germany and Holland -perhaps France- may still be able to sell some debt, but other EU countries are locked out of financial markets. Austerity measures even in Holland reach draconic levels.
The European leaders end up in a long drawn-out meeting in Versailles. The outcome is a full political and fiscal union: The Unites States of Europe.
Nice detail: first, Angela Merkel will lead Europe from Paris. Then, Sarkozy will rule for 2 years from Berlin.
So far Mr. Vendrik’s fictional scenario. And that’s just what it was meant to be: what might happen, not what will. Or was it?
Still, what brought this back to mind is what we see coming from Spain the past few days. Oscar Gutiérrez writes in – very mainstream- El País:
The demonstrations have broadened spontaneously, as was the case for those who rallied under the umbrellas of the “alternative globalisation” movements, and have evolved, one decade after the World Social Forum in Porto Alegre, Brazil, on a more modest stage than the one demonstrators faced in the past at the World Economic Forum of the global elite in Davos, Switzerland.
All this is happening at astonishing speed via the Internet, which has amplified the echo of discontent and opened the lanes of cyberactivism to groups such as Anonymous, notable for intervening against companies like PayPal and Visa during the advocacy campaign for Wikileaks chief Julian Assange. Yet it was also there at the beginning of the revolts in the Arab world, to help people get round the censorship of the Tunisian and Egyptian dictatorships.
Revolts that have grown and matured while French, Italian, English and Greek youth have been surging into the streets to oppose plans for the social welfare cuts that have been Europe’s response to the sharp economic downturn. Spain was waiting for its moment.
- A d v e r t i s e m e n t
The first to get off to a start was Nolesvotes (Don’t vote them in), an initiative calling on the electorate not to vote for Spain’s mainstream parties, accusing them of taking advantage of electoral law to perpetuate, in Parliament, “alarming levels of corruption in Spain.” There followed calls to parties from web movements such as Avaaz and Actuable to strike from their electoral lists all politicians indicted or convicted of corruption. [..]“When we grow up, we want to be Icelanders!” cried one of the leaders of the organisation during the march on Sunday May 15 before a column of young – and not so young – parents and children, students and workers, the jobless and pensioners.
Ilargi: And that’s sort of peanuts compared to what Jonathan House and Sara Schaefer Muñoz have in the Wall Street Journal:
Weekend elections that threaten to drive Spain’s ruling Socialist party from power in several regions and cities also promise a potentially nasty surprise: the revelation of piles of undisclosed debt in local governments that could undercut the country’s drive to avoid an international bailout.
Five months ago, a government change in Spain’s Catalonia region revealed a budget deficit more than twice as big as previously reported. Now, a growing chorus of economists, local politicians and business leaders say that new governments are likely to discover, as Catalonia did, piles of “hidden debt” owed to health clinics and other suppliers.
Economists, analysts and anecdotal reports from companies that supply local governments suggest there is widespread, unrecorded debt among once-free-spending local governments. Some companies are complaining that fiscally frail administrations are pressuring them to do business off the books and not immediately bill for goods and services.[..]
Such bills could add tens of billions of euros to the official debt figures reported by local and regional governments. If such skeletons come out of the closet in coming weeks, Spain’s cost of funding could continue to rise—throwing the country back into the limelight after it has struggled to demonstrate it doesn’t need to be bailed out like Greece, Ireland and Portugal. “Investors are worried about the regions, given that there has a been precedent in Spain and other countries of debt not being recorded properly,” said Luigi Speranza, a BNP Paribas economist.
Sunday’s elections, which will be held in 13 of the country’s 17 regions and its more than 8,000 municipalities, threaten to be hard on Prime Minister José Luis Rodriguez Zapatero’s Socialists. Polls show Socialist-led governments could be unseated in Castilla-La Mancha, the Balearic Islands, Asturias and Extremadura regions. Undermined by a 21% unemployment rate and a perceived slowness in reacting to the country’s economic crisis, the Socialists could also lose control of the municipal governments of Barcelona and Seville, the country’s second- and third-largest cities.The social fallout from the poor economic conditions is evident in Spain this week as waves of protests swept the country. Young people took to main squares in Madrid, Barcelona and Valencia on Thursday to protest unemployment among those in their 20s and 30s, which has reached 50% in some areas, and the government’s austerity program.
Ilargi: As you may recall, I’ve said forever that Spain will be the EU dealbreaker. And as we saw, again, not that long ago, for an entire decade, from 1997-2006, Spain built more homes than England, France and Germany combined, of which far too many to count now stand empty. Plus, much of the financing for all these superfluous homes was done through still seemingly healthy large Spanish banks like Santander and BBVA.
The debts involved have thus far remained hidden, in the same manner that Wall Street banks to date hide their losses, though a combination of long-stretched fake accounting (think FASB157) and multi-billion bail-outs in taxpayer funds. It’s hard to foresee, but the uncovering of hidden debts through this weekend’s Spanish local elections that the Wall Street Journal article talks about might be the first step in a cascading debt “truth-finding” that may well go way beyond Spanish borders. It’s certainly about time we figure out who owes what to whom.
Santander, for one, has conducted quite aggressive acquisition tactics in Britain over the past few years. And is connected to the entire global financial system in more or less the same ways that all of the too big to fail institutions are. If the squares of Madrid and Barcelona come to resemble anything like Cairo’s Tahrir square, it’s hard to say what will come out of this. What we know for sure is that the 20%+ unemployment rate (40%+ for young people) won’t be solved on Monday. Nor will the untold thousands of ghost homes be sold. And that means Spain is a bond market accident waiting to happen, be it tomorrow or a few months from now (it won’t take years). In that sense, the docudrama scenario painted above can never be that far off.