Monday, June 20, 2011

Spain is following Greece and drowning in debt

The collapse of the Euro moves inexorably nearer.   Late last week, the Greek Prime Minister George Papandreou desperately reshuffled his Cabinet in the hope of keeping himself in office long enough to impose the almost £25 billion cuts his overlords in Brussels have ordered him to make.
Three more of his MPs quit, refusing to partake any longer in this shameful Quisling collaborationist regime which has reduced Greece to an EU-occupied colony. 

Meanwhile the growing quarrel between the two biggest eurozone economies, France and Germany, as to what to do now is coming to a head.

The Germans, whose taxpayers are footing the bill for the apparently endless bailouts to the euro-trashed Greek economy, are balking, demanding that a line be drawn, no more of their money thrown into the economic black hole and Greece allowed finally to default on its debts.

The French don’t like this because if Greece defaults their three biggest banks will go bust, and they are demanding the Germans keep on paying more and more. The German Chancellor Angela Merkel and the French President Nicholas Sarkozy are holding an emergency meeting to try and agree some way forward ahead of a European finance ministers meeting next week, which will need to agree the next £11 billion aid bailout for Greece. Or not.

If this further bailout cannot be agreed, or the Greek Government  falls - or as is looking increasingly likely is overthrown by the Greek people - Greece will default, followed very rapidly by Portugal and Ireland, a series of very big mostly French banks will collapse and the next phase in the death of the euro will begin. photo credit:

The global markets, who are increasingly expecting precisely this, continue to write on the wall for the euro. Friday trading around the World began with further sliding in their tops share indices such as London’s FTSE 100. The values of shares in the banks and other financial institutions most exposed to the risk fell fastest and the euro continued its inexorable slide downwards against other currencies.

Most ominously for the Euro, the next domino in its collapse, Spain, has started to sway significantly. Like Greece, Portugal and Ireland, Spain’s euro membership has landed it deep in debt. So far, unlike Greece, Portugal and Ireland, Spain has been able to raise the cash it needs to keep up on its debt repayments by borrowing on global markets via repeated auctions of Government bonds, essentially IOUs backed by the Government.

Sound economies have no difficulty doing this at low interest rates as the bonds are seen as, in the British case, literally “as sound as the Bank of England” - safe investments. As the markets get more worried about the state of a country’s economy the interest rates demanded on bonds start to rise: lenders are pricing in the increased result of them losing their money in the event of a default.  

The latest Spanish Government bond auction this week saw the markets demanding sharply higher interest rates, reflecting growing fears that Spain will end up like Greece, etc. This is what happened to Greek, Irish and Portuguese bonds in the early days of the present disaster. Interest rates on their bonds started to rise until in the end the markets simply wouldn’t buy their bonds at any price and the European Central Bank was forced to step in and begin the German-taxpayer-funded bailouts. It now looks likely the same slide into the abyss has started in Spain.

The problem for Brussels is that the Spanish economy is as big as that of Greece, Portugal and Ireland put together. The EU simply can’t afford to bail Spain out in the same way. The result would be a Spanish default, which would kill the euro in any recognizable form stone dead.

The icy waters of reality would at last have woken Europe from its EU-superstate nightmare. Market-savvy readers can enjoy the fun for themselves by monitoring the Spanish Government bond rate day by day. Every increase brings the euro one step nearer to its doom.