Peter B Meyer lives and writes out of Spain. He has followed the story of corruption in high office in Spain and has kindly forwarded this assessment.

On special request, by Peter B. Meyer – 3rd of February 2013

In short; Spanish society is riddled by corruption, at every level, from government down to the municipalities and below. Most of those scandals were initiated by payments from constructions companies to obtain favours, licences and contracts for large projects.

Since about 2005 when the first investigations started, thousand of high-ranking bureaucrats and top managers are implicated. Dozens important noise making investigations were undertaken, under coded names, by the judiciary that discovered the fine threat of interconnection between one and another cases.

In Valencia started the Gürtel case, which dragged on for many years implicating high-ranking PP functionaries. The case was started by Supreme Court judge Baltasar Garzón who launched Operation Gürtel, as his investigation into a kickbacks-for-contracts scam that implicated many senior Popular Party figures, including Bárcenas -the then Treasury of the PP for many years- who also was about to be called to face charges of money laundering and fraud.
Four years after the Gürtel case was uncovered, questioning the honesty of Rajoy and the party's leadership, Señor Bárcenas continues to face charges. The PP, which, like Bárcenas, believed it was out of the woods after its landslide victory in 2011, is now fearful that its former treasurer's Swiss bank accounts containing €22 million, will taint the PP once again, and undermine the PP’s credibility at a time when it is imposing unprecedented, and unpopular, austerity measures while doing nothing to improve the economy or generate jobs. The question now is whether Bárcenas will tip the balance by revealing all he knows about the PP's finances?
The ruling Popular Party’s internal accounting between 1990 and 2008 published by the newspaper El Pais, shows that the PP’s leading members were paid regular sums of money aside from their official salaries. The files comprise a series of incoming items in the form of donations from companies, especially construction firms, and outgoing expenses, which include the payments in cash to party leaders.

“What is under judgment today is the name of the prime minister of Spain,” said Rubalcaba the opposition leader of the PSOE the labor party. “He needs to come out and clarify all of this, now.” He continued; if the claims of side payments made to Rajoy and other leading PP officials over several years be “confirmed,” it will be “simply scandalous and implicate the prime minister.”
Rajoy didn’t want to either confirm or deny that he or some in his party received cash bonuses that, according to reports, amounted to up to 15,000 euros in some cases and were given out between 1989 and 2009 by Bárcenas and his predecessor Álvaro Lapuerta. And said: “When justice is handed down, then others will have to respect its decisions.”
Rajoy further said he could not remember the last time he spoke with Bárcenas, who is under court investigation for tax fraud and allegedly having 22 million euros stashed away in Switzerland.

Most of the donors who show up on the books are individual tycoons and companies from the construction sector, as well as regular recipients of government contracts. In some cases, the identity of the people on Bárcenas’ list is clear; in others, there is only a first name or a surname.
“Juan Miguel Villar Mir, chairman of OHL, and Luis del Rivero, former chairman of Sacyr Vallehermoso, is perhaps the best-known of construction magnates on the list. Both categorically denied having donated 530,000 euros and 480,000 euros, as shown on the handwritten ledgers.”
“Yet even they are not the most generous donors on the list. The top position goes to José Luis Sánchez (who is sometimes listed with his full name and others simply as J. L. Sánchez or José Luis). Over the course of five years, this person gave the party 1.15 million euros. So who is he? The individual in question could be the Málaga developer José Luis Sánchez Domínguez, founder and president of the Sando Group.”
The second most generous donor is Manuel Contreras (sometimes listed as M. Contreras), with close to a million euros. Contreras is head of AZVI, a family-run construction group from Andalusia. Other donors are harder to identify, but large sums of donations were registered too.

The opposition parties have not yet decided to calling for Rajoy’s resignation and early elections.

Senior PP leaders say Bárcenas did not want to break the story about the payments, knowing that this would hurt the few senior figures left in the PP who still supported him. Bárcenas has stated that he remains loyal to Rajoy.
The former treasurer has kept quiet so far, seeking to avoid a permanent break with the party. He would prefer not to destroy the PP by revealing his vast inside knowledge of its financing, say those who know him.

Bárcenas' enemies know that as the former treasurer of the ruling PP party currently in government, has enough information about their finances to damage everybody, from the prime minister down.

‘Where smoke is must be fire’ is the saying let’s see where this corruption case ends.

More here

By Peter B. Meyer – 20th of July 2012

We are 45 months into this economic crisis and there is no end in sight. In fact, thanks to globally coordinated rounds of "easing", it is clear we are no better off now than we were then. Despite the bailouts, the half-cooked stimulus schemes and the promises that things will get better, nothing changed but the days on the calendar.

Spanish banks have dragged the EU economy to the brink and are going to receive a €100 billion bailout. In a letter, published by the German daily, Frankfurter Allgemeine Zeitung, economists said: “(Spanish) Banks’ debts are nearly three times higher than government debts...the taxpayers, retirees and savers in the so-far solid countries of Europe must not be made liable for backing these debts, particularly since gigantic losses are foreseeable from financing the southern countries’ inflationary economic bubbles.” For which reason Finland was so clever to require Spain to submit a collateral to cover the money provided to protect Finish taxpayers. Why aren’t Germany and The Netherlands so clever?

For sure, like in Greece, this latest Spanish bank bailout will not be the last one. Are our leaders crazy? They seem to have learnt nothing. How do we get a stable currency, which is a prerequisite for capital formation? Not by printing more money at every debt calamity. Apparently there is no understanding how an economy has to work. The trouble is that our leaders’ brains are taken over by Keynesian baloney; it was already nonsense when first implemented in the 1930s. The ones in charge are imposters, charlatans, yet nobody complains or pays attention to it.

There is no way to cure a debt deflation by adding more debt. Presumably the leaders do know that, but by admitting, they destroy their reputation, and generous paid jobs.

For well thinking people, it is obvious what is wrong and the solution is obvious too, there is just too much debt. Too many careers, businesses, and budgets depend on all this bad debt. It never made sense to lend debtors more money under the pretention that their debt is ‘good’. That’s where economic corrections are for; to get rid of debt, the sooner the better. The debtors are already notably broke. So let those happen and don’t play ‘hide and seek’.

For a genuine recovery real money is required, put in the hands of people who can make it happen. Like entrepreneurs, family operations, business people, but not the government. Governments are wealth consumers; they only can produce a phony recovery.

For a honest recovery let people keep their money so they can pay their bills, save, invest and spend, whatever they want to do with it. When governments take their money away it is wasted on matters without return on investment, only spent on boondoggles. The worst to do is to raise a tax, which makes people poorer. Wealth is created by capital formation, investment, production and eventually consumption.

Per definition governments are consumers and not producing anything. So what should be done; stop austerity, cut taxes and curtail government spending, eliminate all the bailout commitments, subsidies and whatever more is related. Necessary are balanced government’s budgets, leaving more money in private hands.

The solution: No austerity and no tax increases as are applied nowadays that only lengthen the crisis and let people unnecessary suffer. Those measures and not much else will produce the true resolution for this crisis.

“The longer we have to wait for the final resolution to the global financial crisis, the bigger and more devastating the final leg lower will be. I have an extremely high level of conviction on this point... My personal recommendation is to sit in gold, and non-financial high quality corporate credit, and blue-chip big cap non-financial global equities. Bond and currency markets are now so rigged by policy makers that I have no meaningful insights to offer, other than my bubble fears.” Says, Bob Janjuah, Nomura’s International Investment Strategist.

Tags: Solving the EU crisis, EU crisis, Spanish debt, European debt, EU debt crisis, solve EU crisis, Europe

By Peter B. Meyer – July 16, 2012

Rajoy is committing political suicide: Announcing his 4th austerity package since Nov. 2011, when he came to power. This 4th time he raises VAT sales tax from 18 to 21%, further scrapped tax rebates for home buyers, and reduced unemployed benefits, with further cuts for students and pensioners. These measures are double the previous ones. Now the average household in Spain pays an extra of €900/annum related to the increased sales tax, no doubt that these measures will hamper economic growth and increase the number of layoffs. Everything Rajoy promised he wouldn’t do is now put in practice. Soon he will discover that his actions are counterproductive, but then it will be too late. It’s obvious that Spain goes further down the drain, facing revolution and eventually civil war!

Why didn’t he stick to his tax promises? The surge in yields on Spanish bonds is exposing the underlying challenge of monetary union, where countries lose direct control of natural economic stabilizers, such as the value of the national currency and interest rates. Spain now has to consider defaulting, or more bailouts. As part of the European Union, Spain cannot devalue its euro currency to fix its debt problems. There is no turning back; the problems faced today were created over decades of ignorance, laziness, greed and stupidity. Exit the EU, devalue, and rebuild, looks a better option, for the long-term health of the Spanish economy.

Additional austerity is necessary to bailout the banks for which €100 billion indirectly will be printed by the ECB. Rajoy said, “They (measures) aren’t agreeable but they are essential. We are in an extraordinary serious situation.” Instead of cutting taxes as promised before his election, he now is raising them. His argument: “Circumstances have changed, and I have to adapt to them.”

However the banks need a lot more than €100 billion to become solvent again, very likely three times that amount, if there are no financial restructurings and only solved by cash infusions via EU loans to the Spanish government/banks, the needed cash will ultimately amount to far more than a few hundred billion Euros, politically an unacceptable amount.

But “Austerity” actually is a foe meaning for these spending cuts and tax increases to shore up government and banks’ balance sheets, because the last were stupid to lend to the first. However, the hidden truth is that the banks discovered how easily it was to fill their pockets from the public treasury.

With a worsening recession, 25% unemployment and a government shut out of the private credit markets, Spanish banks have run out of time. The banks are just starting to recognize long-delayed loan losses in the real estate that could amount up to €270 billion.

Proud Spain humbles itself again on behalf of the Euro Bureaucrats. The UK Telegraph described it as follow:

“The eurozone’s appetite for self harm knows no bounds. With one in four Spanish workers out of a job, output contracting by the day and Asturian miners marching through the capital, the Spanish prime minister, Mariano Rajoy, has determined to push through a further €65bn of austerity measures, as if deliberately set on a strategy of economic death by a thousand cuts. To say “determined” is possibly not the best way of putting it, for this is more like forced with a gun to his head; the latest austerity package is part of the conditionality attached to the eurozone loans for banking bailouts, thereby giving the lie to Mr. Rajoy’s proud insistence that the Spanish bailout is in some way less of a subjugation than the others.”

Once severely indebted every EU nation has to play the game dictated by EU – ECB rules. That is; keep the game going, in other words keep the money flow flowing from the people who earn their money earnestly to the people who control the system. Squeeze the maximum out of hard working citizens to pay creditors for debts on the banks’ books. Of course this is self-defeating due to the fact that the economy will shrink, causing debt deflation, which makes the debt burden even less payable. Apparently our leaders are idiots, morons, no less moronic since the last three times of increases - after they came to power. But still they claim to know what they cannot know and do the things they cannot do. Just to keep the money flowing in, until the next blow up.

When the money flow stops, they think the economy will blow up, and that exactly is going to happen. Then most ordinary people will be better off. Bad debt must be written off. Mismanaged businesses must go broke. Stupid investments should disappear.

Thereafter honest people pick up the pieces and get back to work. But don’t count that it is going to happen, the ones at the receiving end of the money flow keep this game going as long as possible. So no end to the suffering, the day of revolutions and eventually civil war is getting nearer.

Then scared political leaders turn on their own people. They confiscate their wealth and destroy their freedoms, because when they can no longer borrow money, it will have no other choice but to immediately slash spending.

Convert now your wealth in gold and silver and hide it out of sight.

Tags: Spain, pain, Euro, Rajoy, political suicide, Madrid protests, crisis

By Peter B. Meyer –  June 17, June 2012

It is hardly possible to keep up with the accelerating events. Amazing how quick a government can waste €100 billion. Just days after the European Union agreed to float Spain's financial sector, the yield on Spanish 10-year debt breached the all-important 7% mark – its highest yield since the euro was created in 1999. Yields jumped after Moody's cut Spain's credit rating. For the record: Portugal, Ireland, and Greece were all bailed out after their government debt yields climbed above 7%. In Spain's case, this is the point at which the country will need another bailout soon.

The Spanish government may announce additional fiscal cuts and structural reforms. Bolstered by funds from the ESM, Spain remains financially afloat for several months. But the Spanish economy continues to deteriorate and unemployment heads towards 30%.  

The financial world is watching with disbelief and shock as the European banking and political elites do the daily shuffle in a veiled attempt to hold together a forced, non-elected European Union. While it continues to come further apart at the seams due to excessive sovereign debt and failing austerity measures, rendered meaningless by an explosion in fiat currency creation, not seen since the days of the German Weimer Republic.

"The EuroTitanic has now hit the iceberg and sadly there simply aren't enough lifeboats." Says Nigel Farage, from UK Independence Party.

The next scenario: Violent protests against Prime Minister Mariano Rajoy’s austerity measures, will lead him to call for a referendum. His government fails to get the necessary support from voters and resigns, throwing the country into full-blown political chaos. Likely another Guerra Civil, as the one of the thirties may occur.

Merkel cuts off further support for Spain, saying that hard-working German taxpayers have already done enough. In a hastily arranged mini-summit, Germany, Finland, Austria, and The Netherlands announce that they will not renounce the euro as their joint currency. This only increases financial pressure on France, Italy, and the other members. As the reality of the partial dissolution of the EU sinks in, the financial meltdown spreads from Europe to the United States and Asia. 

Investors should study history and get ready for a fast replay of a new version of European history during1919, 1931 and 1933 that could transpire quickly over the next year.

Whether the effects of a worldwide depression will again be countered by another world war (WW3) is the only open question facing the world today. The failed European Union is going down. Of course the power elites will attempt to use the real or manufactured crisis as a pretext to expand the EU, but don’t believe they will succeed. The speed of events and flow of alternative news renders their old style propaganda powerless to keep up with and control public opinion today.

“We are indeed seeing a latter-day replay of the infamous Treaty of Versailles debt load forced on a defeated German nation in 1919 now levied on the entire European Union and this time Germany will be the winner. Maybe the turnabout is fair play but the long-term consequences could be as tragic as what the victorious allies did to a prostrate German nation that led to the rise of National Socialism and Adolf Hitler back in the 1930’s.”

“As was the case in 1919, 93 years ago, the banks and the power elite are seeking profits, gold and wealth at the expense of bankrupt and defeated nations but this time Germany is getting it’s revenge. In 1919, the victorious and "righteous" allied politicians that had earlier forced the United States to enter the war in 1917 in order to forestall a German victory so the American banks and arms industry could get their loans repaid and avoid bankruptcy, are this time on the receiving end. Germany might bailout the EU nations, at the last minute, but at the price of their gold reserves, control over economic policies and veto threat even over elections in the individual nations.”

“In May of 1931, the historic Credit-Anstalt Bank in Vienna, - now called UniCredit and based in Italy- founded by the Rothschild family in 1855, collapsed, - as will UniCredit do-. This in turn caused banks and companies across Europe to go under in a domino inspired panic. This collapse destabilized Europe far more than the Wall Street Crash of 1929 and over time destroyed European confidence and belief in political and financial institutions. The result was the rise in nationalism, fascism and ultimately World War II.”

“Americans don’t really know European history but the people of Europe do and this is why the elites are so determined to avoid another banking panic and collapse at any price. The problem for them is the expensive bank bailouts may well bring an even more destructive threat to Europe hyperinflation. Again, we know what happened in Germany.”

“The EU and the banking elites may well succeed in their efforts but the losers will ultimately be the sovereignty of individual nations and the wealth, freedom and prosperity of Europe. This problem will likely jump the Atlantic and an inefficient fascism like what took place in Italy combined with a nationalistic foreign policy like the German Reich does not bode well for the United States.”

Count on; European bank and stock exchange closures, private gold confiscation, limitations on ATM and bank account withdrawals and international wire transfers, that also will happen in the United States. The people of Europe and America will lose their wealth-security and preservation of purchasing power. Only precious metals and none exchange traded private equity opportunities will provide unique market opportunities.

Suggestion: Take action today and buy gold and silver, because this wil not end well for Europe or the United States.

Note: Many years later, Merkel, who has withdrawn from politics and become a recluse, is asked whether she thinks that she should have done anything differently during the EU crisis. Unfortunately, her answer comes too late to change the course of history.

By Peter B. Meyer – 15th of June 2012

Prior to the global economic downturn of 2008, Spain ran a budget surplus and was not guilty of excessive public spending like in Italy and Greece. However, the country bet heavily on the real estate sector, and when the housing sector went bust, the country was forced to borrow heavily to prop up its banks that were burdened by bad loans. Now; “The big problem for Spain is how they’re going to finance both their fiscal deficit and the rollover of the debt that’s coming due. Those two together will be some 20% of GDP of Spain this year.”

The bailout will help Madrid recapitalize those banks, although letting them go under would have been better, says Jim Rogers. "Let them go bankrupt. The way the system is supposed to work, when you fail you fail. Competent people come in and take over the assets, reorganize and start over. What we are doing in the West, we are taking the assets from the competent people and giving them to the incompetent people and say 'now you compete with the competent people with their money.' It's absurd economics. It's absurd morality."

With €100 billion for the Spanish banks the rescue funds will quickly disappear into air, as rescue funds tend to do. Again another EU crisis isn’t fixed, so there is nothing new about this latest action. Besides, Spanish banks already have been fed by the ECB for months. By accessing the ECB long-term refinancing operation (LTRO). Spanish Banks have obtained about €300 billion of emergency financing during the last six months. The only place Spanish banks can turn to replace this lost funding is the ECB. “Spanish banks have taken up 30% of the LTRO loans issued thus far.” Ridiculously Spanish banks are the ones buying Government debt, while the Spanish Government has to solve the banks’ debt. It is as the Lame is leading the Blind!

As recently as May 28, Rajoy said Spanish banks wouldn't need a bailout. And on May 11, Economy Minister Luis De Guindos said $15 billion would solve the problem. On June 5th, Emilio Botin, chairman of Spain's biggest bank, Banco Santander, told the world, "There is no financial crisis in Spain." Once again, the world's government leaders and financial executives prove they can't be trusted.

The key problem; “Once entering the bailout shelter, there is no returning to private-sector bond markets.” “Loans from the ESM (European Stability Mechanism), which is expected to be ratified by July, act to subordinate other lenders.” That is, in the event of a blowup, the ESM gets paid first. That gives other bondholders no incentive to buy Spanish bonds.

“For starters, Spanish officials claim this €100 billion bailout is a credit line with no strings attached. That’s simply not true. There will certainly be strings attached, because German public opinion will not stand for an unconditional Spanish bank bailout.”

At the other hand: “Spain must convince its voters that this bank bailout will not result in an EU-administered austerity program like the one in place in Greece. The best way to do that is to promise to the EU that bank shareholders and debt holders will suffer losses, which would make the €100 billion go much further toward shoring up the banks.”

That’s important, because the banks need a lot more than €100 billion to become solvent again. “Otherwise, if there are no restructurings and we just see cash infusions via EU loans to the Spanish government, the needed cash will ultimately amount to several hundred billion Euros — a politically unacceptable amount.”

The EU is degrading because there is no such thing as a European Union as there never was one. The EU is a fictional construct that only politicians and bureaucrats do love.

Nigel Farage, leader of the UK Independent Party, heartily agrees. Farage, who has been an outspoken critic of the EU since its inception, remarked recently: “One of the ironies of the European project is that this project that was set up to make us all love each other is actually beginning to make us hate each other... Far from Europe coming together, Europe is being torn apart and we are risking stirring up the very kind of nationalisms that the project was supposed to stop in the first place."

Europe’s political crisis is evidence of deep structural problems in the European Union that can’t be solved by more central bank liquidity. Europe went for monetary union ahead of political union when it started down this path many years ago. The common currency allowed European governments to borrow at low interest rates and run up large deficits.

The trouble now is that there’s no way to impose a political solution on the economic problem. Clearly, the EU architects failed to account for the fact that the national identities/personalities of Europe are as diverse as in any extended family. They ignored Europe’s heterogeneity in order to impose an artificial homogeneity. For a while, this imaginary uniformity worked, or appeared to work. But it never really worked, as the expanding crisis demonstrates all too clearly. Even though the EU structure enabled the PIIGS to borrow money as if they were Germans, they didn’t require to repaying their debts. Europe is revolting against “uniformity” — the enforced equality of the common currency is causing a backlash.

“Control of the world’s economy has been placed in the hands of a banking cartel, which holds great danger for all of us. True prosperity requires sound money, increased productivity, and increased savings and investment. The world is awash in US dollars, and a currency crisis involving the world’s reserve currency would be an unprecedented catastrophe. No amount of monetary expansion can solve our current financial problems, but it can make those problems much worse.” Says Jim Rogers.

Adding more money to solve the debt crisis is the same as extinguishing a fire with petrol that only turns the monetary situation from bad to worse. All Europeans are suffering under the incompetent leadership of our leaders; only in this respect we all are equal! The cherished growth by our politicians won’t come back until all existing debt is eliminated. The chronic budget deficits require growth, while without budget deficits under a sound monetary system -based on gold- growth wouldn’t be necessary as inflation wouldn’t occur.

Watch Nigel Farage in action at:

By Peter B. Meyer – May 10, 2012
Friedrich von Hayek, wrote in his book, ‘The Road to Serfdom’, "By giving the government unlimited powers, the most arbitrary rule can be made legal; and in this way a democracy may set up the most complete despotism imaginable." It's hard to ignore Hayek's prescient warning.

“This is the first time in history that all central banks have printed money at the same time. The central banks of Europe, the UK, China, India, Japan and the US are all adding to their holdings, increasing the base money supplies of their respective countries, which never before occurred. This is a coordinated, worldwide effort to inflate the money supply, and state-sponsored counterfeiting of money. But all this money printing is not bringing a worldwide recovery. Instead it is “failing miserably.” The economics behind it is a scam. The way it is lent out is a scam too.”

The problem, especially in the EU, is to facilitate the money that comes from nowhere goes to nowhere. The ECB lent it to the banks. The banks lent it to the government. And, what happens next? It is back to where it came from, more specific nowhere. The more things don’t change, the more they remain the same. 

Now, The Financial Times reports that the banks are down to their last few billion. They better save their last billions to pay themselves bonuses. That’s what they’re thinking too. They’re not buying government bonds the way they used to. Trouble is, the governments of Spain, Italy and others need the money. So, they go to the ECB and ask for more of that ‘nowhere money’: Otherwise, they default, and say goodbye to the EU.

Whether that is good or bad, is not known. Its just a question where that money came from, where, is nowhere? The conclusion is, that this is a scam. Not only the money is a scam, as well as the economics behind it. The way it is lent is a scam too. In short, the insiders that scam the outsiders use it for themselves. The Elite who control the government scam all the others. It goes to zombie industries, defense contractors, finance, health, education and the military. 

The EU-leaders pretended to fix Greece. Now they do the same fix for Spain. But nobody believes the fixes will result in a fix. “Europe’s Rescue Plan Falters,” says The Wall Street Journal. It was widely reported that Spanish banks held more delinquent loans than at any time since 1995. The world is recognizing that when good money is thrown after bad money, finally there is no money.

The ECB provided €1 trillion worth of loans into their member banks supposing to end the liquidity problems. Meanwhile investors learnt that borrowers could get more money. The ECB lends to the banks. The banks lend to the governments, and no one goes broke, as long as the money keeps flowing.

“After months of using that cash to buy their government’s debt,” reports the WSJ, “banks in Spain and Italy have little left.” The banks have a lot of bad debt, left over from the real estate lending during the bubble years. Spain severely indebted has to rescue its banks with billions of euro’s they don’t have. Bankia, the country’s third-largest lender has got to be bailed out with €10 billion as its chairman announces his resignation.

Led by Ireland, the governments bailed them out. But that put the governments themselves in jeopardy. They didn’t have any real money to lend the banks. They had to borrow. They just gave the banks money that they had borrowed themselves. So then investors began to wonder about Ireland, Greece, Portugal, Spain and Italy. And now they see that they go broke too.

And than the central bank came to the rescue. The idea was to bail out the banks and the governments at the same time. The LTRO program implemented by the ECB was the solution, for a while. The plan was simple enough: lend the money to the banks; make sure the banks lend to the governments. And after a while the banks use it themselves.

It is the same in the US where they try to fix a debt problem with more debt. The Fed buys US government debt, effectively financing the government with freshly printed cash. While in the EU, the ECB lends to banks that then lend it to the sovereigns in need. Finally they all have more debt than they can pay back. 

Consequently bond yields are rising in Spain back to 6%, while the Spanish banks are in worse shape than ever before.

The Italians are suffering under the same kind of weight. To get financing last year they promised to balance the budget next year, and so on. Resulting in no balanced budget forever in the future. Mario Monti says, maybe the year thereafter! 

To make matters worse, credit ratings agency Moody's is about to downgrade 17 Italian banks. Shares of UniCredit Bank, the cheerleader for beleaguered European banks, fell more than 5%. Trading was halted to stem the bleeding. But don’t worry, Mario keeps spending and borrowing as before and tells the ECB to keep printing. Why keep Central Banks printing? They want to prevent change. And they do that with counterfeit money, piling layers of debt on top of older debt. These are the cans that are kicked down the road. And no change is coming!

“Japan, Denmark and Switzerland are among the countries to rally this week to [IMF chief] Lagarde’s call for a bigger lending capacity beyond the current $380 billion to shield the world economy against any deepening of Europe’s debt turmoil.” The loans are not shielding the world economy. The loans are shielding the private banks from their own mistakes at the expense of the world economy. It shows how the media is involved in forcing ordinary people to subsidize private bankers.

So what’s changed? Nothing. Change only will come, when all are broke. 

Peter B Meyer May 3, 2012


Spain today is like Argentina in 2001, it is the latest and biggest casualty in the European debt crisis. Spain has a debt of €709 billion and is larger than the debt of Ireland, Greece and Portugal combined. The government of Mariano Rajoy has cut cost in education and health care. Spanish citizens are protesting in the streets. Demonstrations could turn violent if more is cut in the federal budget. Last year, the budget deficit under the socialists was 8.5% of GDP. Tax revenue is down sharply. And the IMF projects that this year's deficit is going to be another sensation.

Germany and France want Spain to bite the bullet and implement more austerity that hurts job growth. The Spanish government is very much aware that its people don't want austerity, they want growth. They want jobs. 

“Austerity” actually a foe meaning for the people spending cuts and tax increases to shore up government and banks’ balance sheets, because the last were stupid to lend to the first. However, the hidden truth is that the banks discovered how easily it was to fill their pockets from the public treasury.

 “With a worsening recession, 24% unemployment and a government on the verge of being shut out of the private credit markets, Spanish banks have run out of time. The banks are just starting to recognize long-delayed loan losses. As they do, they will need fresh equity injections to remain solvent. Many depositors are fleeing Spain because they are worried that the banks are insolvent, and not addressing their capital shortfalls.” Says Dan Amos.

Now the country is back in recession, with a negative GDP growth rate of -0,3% and worsening. A housing market going down put banks balance sheets down too. Monetary union over the past ten years meant that all the EU economies have pegged their currencies to the German currency. This cheap credit, led to a real estate bubble in Spain, perhaps even larger in relative terms than the one in the U.S. Cause Spanish banks a shortfall of estimated €78 billion, which actually will rise when the value of their real estate holdings is marked to market value. 

This makes the real estate failure far worse than widely is believed, while Spanish banks are hiding their losses. Spain can be viewed much like subprime where all the banking results looked good, until they didn't. As many unsold houses in the U.S. but at only one-sixth of the population, and these homes are on the books of banks at unsalable prices.

Spain, and the rest of the European community, can solve their problems either through massive productivity gains, which is highly unlikely during a recession, or through a reduction in wages and prices in the order of 20-30%, which is what will happen slowly and painfully. A reduction of wages and prices is effectively an "internal devaluation". Such an internal devaluation will imply large losses to domestic banks and to external creditors. Writing off mortgage debt will be massive. It is estimated that Spanish real estate losses will be over €250 billion when all is said and done.  Clearly Spanish and foreign banks are unwilling to admit to the size of the problem and write off the debt. That is why the losses are being hidden.

The magnitude of the Spanish problem is staggering, and will overwhelm all the benefits of made provisioning. Spain has over 1,000,000 unsold new homes from which over 50% aren’t even finished. Unfortunately, many of the homes are in the wrong place on the coast, and without a return of overleveraged tourists, they are likely to remain unsold. 

Yet at this moment the key problem is Spain’s outstanding debt of €149 billion that has to be refinanced in 2012. Add the rising interest payment over unpaid previous debt, which is about €29 billion up from €22 billion in 2011, as consequence of the rising bond yields, to complete the debt picture.

The surge in yields on Spanish bonds is exposing the underlying challenge of monetary union, where countries lose direct control of natural economic stabilizers, such as a national currency and interest rates. Spain will have to consider defaulting, or a bailout from the club of three. As part of the European Union, Spain cannot devalue its euro currency to fix its debt problems. There is no turning back, the problems faced today were created over decades of ignorance, laziness, greed and stupidity, all what is left are painful and bitter solutions. 

Once the Spaniards won’t accept more austerity, the final alternative for Rajoy is to exit the Euro, under the slogan “Don’t blame me! Blame the Euro!” For which move Rajoy likely will receive his citizen’s support. Otherwise it is political suicide for Rajoy. And the chance of civil war still engraved in the Spaniards memory is looming. 

As result of the implemented austerity Spain's unemployment level is heading towards 30%, by the end of the year, add the debt deflationary dynamic, and how can the banks be paid back? Who will earn the money to pay the mortgage payments, and how will housing be affordable when wages have been deflated?

If all that is put together, Spain has no other choice than to return to its Peseta, and devalue by whatever is necessary. Because devaluation is politically the easiest way out, such could happen before the end of this year. Let’s assume this decision has been taken. On the day of the exit, Spain will initially value the New Peseta at par with the euro, but devaluation will happen immediately thereafter. 

The Spanish government would have to make sure that nobody has knowledge about this decision until after the revaluation is put into practice. Foreknowledge of a Spanish exit of the EU and a return to a local currency would cause a bank run of tremendous proportions: People would realize that the government was going to devalue the currency, so they would rush to their banks to withdraw their money and either send this money out of Spain or else hold it in cash under their mattresses. Either way, such a bank run would crater the entire banking sector instantly, because the banks certainly do not hold reserves to meet such a run. 

So secrecy and surprise would be key. This is the reason that, if and when there is in fact a Spanish exit of the EU, no one will hear about it until after it is carried out. When the exit is made, shortly thereafter the new currency will be devaluated, which in effect is a default. The Spanish economy would basically be reset; with at once a healthy banking sector, a reignited export-driven economy, and instantly-attractively priced capital goods.

Bondholders, and those living on a fixed pension will suffer. The purchasing power of their pensions would be reduced by the amount of the devaluation, which reached 75% in Argentina. 

Exit the EU, devalue, and rebuild. The more you look at the situation clinically, the more obvious it is that this theory could be the best thing for the long-term health of the Spanish economy. Take care you have gold and silver coins in your possession, at home.

Tags: Spanish Debt, EU crisis, Euro, Spanish bonds, yields, monetary crisis, Spain