Leadership - the eurozone version

We find Nicolas Sarkozy's recent clinging to Ms. Merkel's leg with respect to a strict and centralized eurozone fiscal policy... charming.

Puzzling, on the other hand, is why any country, let alone Germany, would be willing to cede protagonism to France on the matter.



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It's that time of year

The very sharp chap that writes España Economia y Noticias thinks that Spain should leave the euro - no ifs, ands or buts. We don't agree with that, but we do with his insistence that the task that falls on to president-elect Mariano Rajoy's shoulders is one of leadership - not only in Spain, but also in the eurozone. That writer expresses our sentiments perfectly (translation ours):

'It has to be explained to Ms. Merkel that Spain, like Germany, has prepared a plan to exit the euro, a plan that can be put into effect in any moment in which circumstances recommend it and if the long- and short-term legitimate interests of Spain are not taken into account.'

Rajoy has received an indisputable electoral mandate to enact promised reforms within the Spanish economy. Once in progress (and taking the short odds bet that Germany won't budge), he will have the right to question a northern Europe that uses his country to pluralize pork. We hope he's got the guts to play hardball.

Partly in this regard, the following headline appeared on Reuters today:

'Exclusive - Spain's new government mulls outside aid'

The map at the top shows what we, barring inclement weather, will be occupying ourselves with over the next couple of months - starting tomorrow. To derive acres, multiply the figures by 2.5. Posting may be sparse. Or perhaps merely terse.

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When events don't toe the line

Last weekend, we were mildly impressed by the quaintly devious fashion in which The Guardian once again contrived to keep their Hispanic heartthrob, Francisco Franco, alive and well in the hearts of their readership. Referring to a historical police-conducted burning of a Casas Viejas farmhouse occupied by 120 (if we remember) anarchists:

Even in Benalup (same place, ed.), where the Socialists once won 90% of the vote and which still remembers the bloody suppression of an uprising by local anarchists in the 1930s, the vote is now sliding to the right.

Readers could be forgiven for thinking the obvious (and The Guardian is obviously counting on it), given the juxtaposition of the decade, modern voting preferences and 'bloody suppression'. In fact, the year was 1933... and the government at the time, headed by the republican Alcalá-Zamora, was most assuredly of the left.

But that's nothing compared to the pile of garbage that appeared in today's edition in which Sunday's massive PP election victory is interpreted as a clear victory for the Spanish precursors of the Occupy Wall Street movement - the indignados. Here's the clincher:

...the number of spoiled ballots on Sunday was double that of the last election in 2008 – numbering, with abstentions and blank votes, 11 million: more than voted for the rightwing victors,...

Unless our command of English grammar has suddenly failed us, the unfortunate halfwit that wrote the piece, Katharine Ainger, is actually saying that 'spoiled ballots' numbered 11 million.

Actual election results, (with 2008 numbers in parentheses) are as follows:

Participation - 71.7% (73.85%)
Abstentions - 9,710,775 (9,172,740)
Destroyed ballots - 317,866 (165,576)
Blank votes - 333,095 (286,182)
Partido Popular - 10,830,693 (10,278,010)
PSOE - 6,973,880 (11,289,335)

An alternate interpretation might suggest that turnout was impressively high for an election the results of which had been a foregone conclusion for months.

Hat tips to Trevor (with a chart of historical voting patterns in Spain that gives him tenure at Ibex Salad) and David Jackson.

Election statistics from Wikipedia - 2008 & 2011.

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Time Machine

Sorry Mr. Wolfe, but apparently one can go home again.













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Election day

Those that believe that the economic portion of the Partido Popular's election platform consists in an attempt to implant 'neo-liberalism' on Iberian soil may not be entirely wrong. But we have a hard time believing that Mariano Rajoy, nurtured as he was in the monopolistic cabal of the Spanish property registries, is actually capable of being a true believer in any extreme form of that notion.

The program (available here in English) seems to us to correctly, if unconsciously, identify the problem facing Spain - too much foreign debt causing a collapse in internal demand - and to outline a reasonable, we believe, long term course of action to remedy it. In short form, the country cannot afford to repay all that money with internally generated earnings.

Essentially, the PP intends to foment this end of attracting money from abroad by:

1). Making Spain a more inviting place to in which to invest by simplifying paperwork, by undermining the anachronistic two-union dominated, Franco-era monolith of collective wage negotiations and by reducing impediments to workforce reorganization;

2). Providing incentives to companies willing to enlarge themselves beyond the circled wagons of the Spanish family business - so that they can then avail themselves of the ample assistance to be made available to firms wishing to sell their production internationally.

One way or another, be it through increased exports and foreign investment or through default and bailout, the money must come from outside. Running with the hands down winner of the last few years, the currently too small to carry the load export sector, is the appropriate course of action.

It's also interesting how the party attempts to deal with the banking/real estate morass. As if to write off internal growth for the foreseeable future, the platform proposes reducing the tax burden on personal savings - which are defined so as to include principal residences. Encouraging hoarding in a recession is more than a touch pro-cyclical, but tracing a direct tax route from term deposits to home purchases will eventually take some load off the banking sector.

The chart at the top shows the age distribution of employment over the last number of years. A change of regimen is probably not going to be very well accepted by those in the middle. But at either extreme - the fortunate oldest because they're set up and about to retire anyway, and the unlucky youngest because the current plan just isn't working, resistance might be less than imagined.

On a personal level, voting for a party that is a coalition of about a dozen groups, ranging from pure franquista to modern centrist, united only by their being not-left pains the writer considerably.

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Meanwhile, back in the real world

Something to think about when considering if France, being core Europe, would actually be interested in subscribing to the turbo-charged currency that would be the result of the casting off of the periphery...

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No news is bad news

The unsettling curiosity of the current spike in Spanish sovereign yields is that it does not appear to be news driven. In fact, the babble in the noise-o-sphere, by no means yet verging on flattery, recently seems to have it that maybe Spain is being keelhauled by events that are neither within its control nor are its responsibility, The question here is that if news is not driving bond prices down, can we expect other news to revive it? We suspect that George Papandreou's declaration, and then withdrawal, of the Greek referendum proposal was the end of the line in that regard. Shame he backed down, say we.

The instigator of all this, in our opinion, might be the ideological structure of the European Union itself. Just as Malta and Germany each have one vote on EU matters, the Union itself is underpinned by a philosophy that it will not be permitted that any country lose from the deal. There is more than a passing similarity to the paradox of thrift in all this.

One interviewee (we can't remember where) noted that a miniscule 10 million euro sell order for a given Spanish government bond is currently capable of moving the price four basis points. If the cause of all this volatility is a buyers' strike, as the above indicates, then there is no reason for us to believe it will end until the EU comes out and makes a choice.

Has anyone failed to notice, by the way, that there are now two European nations being led by non-elected officials?

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Sentiment change?

Seems that around about the end of August the house rant suddenly was deemed a bit more interesting.










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La Mancha can't catch a break

A couple of weeks ago we mentioned that the dormant Ciudad Real Central Airport was built with the intention of reselling it to some greater fool or another. That notion, not entirely dead apparently, was given a body blow by the Policía Nacional's recent dismantling of a very large cocaine smuggling operation.

Aside from the 27 million euros in cash found in a house in Rivas-Vaciamadrid, a reported 75 million in other patrimony and 300 kilos of the substance of interest - also in a certain abeyance are the gang's ongoing negotiations to buy the airport's cargo terminal. The plan, according to police, was to use it to bring in '8 to 10 tonnes' a month.

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Dumb idea meets its maker

A theme that got some traction over the summer had the euro splitting into two currencies - one for the north and another for the south. Neat and cute for those who (not entirely correctly, as long time readers know is our opinion) assume that the fundamental problem in the eurozone stems from its multi-sided currency peg, our immediate reaction was to ask ourselves:

Who in his right mind would enter into a currency union dominated by a country that was never able to concoct a stable government until someone enlisted Bozo the Clown to lead a political party?

The above chart of certain sovereign yield spreads registered today shows how the idea might be expected to work in real life. Pardon us if we feel vindicated.

In other eurozone zero sum news, we read somewhere that the Spanish government was fighting back against the European Commission's attempt to expand the list of sanctionable imbalances to include things like current account deficits. Although with the Spanish version of this measure heading for the three percent level (approximately in line with France and Italy and down from 10 percent in 2008) it is less of an issue, the local argument is that there is no way this flies unless there's a countervailing suppression of surpluses.

Just between the reader and ourselves... is Germany not a little like a wife that insists that her husband go to a marriage counsellor - alone?

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On the other hand

...no one seems too concerned about Intesa San Paolo or Unicredit.

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Good morning

...and good luck.

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A good blog on Spain

We've come across, thanks to a hit registered by Site Meter, a truly excellent blog written by a Spanish-resident American historian. Offering takes and advice on living in Spain, illuminating commentaries on Spanish society and customs, travel suggestions, cuisine and anything else that might be interesting to an outsider wishing to acquaint himself better with a country that generally gets reduced to beach, sangría, flamenco, the civil war and (more recently) membership in PIIGSworld in the eyes of foreigners, the great writing eases visitors through what are often detailed looks at whatever topic is at hand.

Although we're not exactly convinced by how they've decided to categorize their link to Ibex Salad, Not Hemingway's Spain gets our full 5 garbanzo rating.

Sorry, SP. Ain't gonna happen. For reasons like this, we like to know something about whomever is reading us.

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Silk purse from sow's ear

In the wake of the MF bankruptcy, there's been a bit of noise-o-sphere banter about the Jeffries Group's exposure to eurozone debt. The investment bank in question has had the gall to answer critics with a claim that their 104 million dollar long exposure to Italian sovereign debt (with lesser amounts to Greece, Portugal and Ireland) has been offset by a 178 mn short position in the Spanish version.

Assuming that this is an outright short position put on prior to the August ban (and that readers know that yields move opposite to bond prices), the chart shows the change in Italy-Spain 2-, 5- and 10-year spreads since that date.

A look at the yield chart in the side bar will also reveal that the strategy could only be described as working from May, 2010 to February, 2011. At that maturity, it's lost 100 basis points since then. In the case of a 2-year - nearly 200 bps.

Of course, without knowing the ratios and the entry points it's hard to jump to conclusions. But there's lots of scenarios in which these hedged positions just turn out to be a bunch of bad trades.

Then again, there's probably a lot of folks that covered their long SocGen with a short Santander, as well.

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Silvio does sovereign debt

EurActiv is reporting that Luca Cordero di Montezemolo, chairman of sportscar maker Ferrari, has called for Silvio Berlusconi to step down as prime minister of Italy in favour of a government of 'national salvation'.

What Italy is to save itself from is concisely illustrated by our chart on the left - a home rolled combination of spread and curve designed so that no one misses the point. The Italian short end, the point at which investor fears of default express themselves, is starting to go spastic. The Italian 2-year is currently yielding a mere 20 bps below the Spain 10.

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Minor signs of intelligent life

Making a wild guess that the ECB, in the case of Spain, had targeted the 5 to 5.5 percent, post-Merkel burden sharing 10-year yield range with its secondary market bond purchases - and then noting on this right stressful day in the debt markets that the upper limit more or less held, whilst the Italian version tagged an all-time high of 6.34 - we'll pass on a couple of observations we've made recently courtesy of the pages of FT Alphaville.

The table on the left, grabbed from an October 27th entry, show Albert Edwards' calculation of total - on the books and off - net liabilities as a percentage of GDP for various of the world's larger economies. For those wishing to have the obvious pointed out, Spain is second from the left.

Then, earlier today in a good, long piece on the complications involved in realistically calculating a nation's indebtedness, Lisa Pollock pops up a Deutsche Bank table outlining the bond redemption liabilities for eurozone countries in 2012 through 2014. For the first of those years we've retooled it all as percentage of 2010 GDP.

Spain can be seen third from the left.

Today's banking sector carnage, by the way, repeated a pattern to which we have drawn the reader's attention before. Spanish banks BBVA and Santander ended the day off an average of 4.37 percent. The remainder of the top 9 euro banks averaged down twelve-point-five.

Another interesting tidbit is that the Italy 5-year is now yielding 54 bps more than the Spanish 10.

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The day of the dead

Nine a.m. on the Day of the Dead, and following an interminable full 2 or 3 minutes for the equity market auctions to arrive at certain opening prices:

SocGen, DB, BNP Paribas, Credit Agricole and Allianz down over 9 percent;

EUR/USD off 2 cents;

Bund yield down about 200 bps;

The Italian 10-year paying 6.2 percent.

Funny, isn't it, how markets assume that Greek voters will reject the bailout terms if given the opportunity in a referendum? We would suggest that prime minister George Papandreou is not nearly that stupid... if he's not diplomatically ploying to lead his country out of the eurozone. Also curious is how it comes after a few days of a notable increase in the euro racket* on the noise-o-sphere.

Ibex Salad suspects this is a buyable event. Now to find a bookie that'll take pocket lint as collateral.

*An always reliable measure of this is the frequently amazing flotsam to be found bobbing about the seaweed, jellyfish and bloated carp at Seeking Alpha, for example. But our current favourite is here.

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