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The Breathtaking Implosion In Spain…

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    September 8, 2012

    The Spanish implosion is breathtaking in every way – Human Flight, Capital Flight, Real Estate, Employment, and Taxes. The cost of a full bailout is now up to €300 billion, from a preposterously low €30 billion projection in June.

    €300 billion should not be shocking given my statements on June 9th in Bailout Lite? There’s Really No Such Thing; €30 Billion Needed? It’s Now €100 Billion; Contagion of Economic Idiocy.

    A few days ago Spain was purportedly going to need another €30 billion to €70 billion to recapitalize Spanish banks. I suggested the amount would be at least triple that…triple the upper end of the reported amount. Bear in mind I am just guessing. However, history shows that I am more likely to be on the low end than the high end.

    As with Greece, every economic number from Spain is revised to the downside, month in and month out. For now, the EU economic wizards will likely concoct a number just under that alleged “upper limit”. My best guess is €90 billion. Then within six months, possibly as soon as the money is handed over, more problems will surface, more meetings will take place, and still more money will be stolen from Spanish taxpayers and handed over to the banks and bondholders.

    Mish the Optimist

    “Within six months” I said. It took three months, proving once again that I tend to be optimistic on such problems.

    By the way, with revised sovereign bailout estimates already hitting my €300 billion target, it is best to start thinking in terms of half-a-trillion or more.

    Breathtaking Implosion in Every Way

    I get links from Bran who lives in Spain nearly every day. I do not have time to translate them all. Here are some links from the past few days with brief comments from Bran.

    • Social Security Fund Runs Out of Money: Social Security pulls from its reserve fund for the first time, using it up almost entirely. Article states there is nothing to stop the government from selling the main SS fund investment to meet payments. Article also notes the fund is invested heavily in Spanish sovereign debt, to the tune of €67.948 billion.
    • Cost of Unemployment Benefits Soar: Unemployment benefit cost predictions blow out. The government prediction was -5%. Reality was +5.4%
    • Price of Gasoline Soars: Gasoline prices up 75% in the last 4 yrs here and was not cheap to start off with!
    • Massive Mortgage Debt: Household debt is €848.222 billion, 76.9% of which is mortgage debt.
    • Capital Flight: Clients pull 15.6% of deposits at Novagalicia in the first half.

    Early this morning I posted Spain VAT Hike Largest In History; Stunning Ineptitude Will Make History Books.

    I have near-endless material on Spain. Here are some additional links, this time from mainstream media.

    Brinkmanship Over Bail-Out Terms

    Ambrose Evans-Pritchard at The Telegraph notes Brinkmanship as Spain warns over bail-out terms

     Spain has issued a veiled warning that it will not accept a full bail-out from Europe if the terms are too harsh, a move that would paralyse the European Central Bank and call the euro’s survival into question.

    In an escalating game of brinkmanship, Spanish finance minister Luis de Guindos said his country is not yet willing to sign a Memorandum giving up fiscal sovereignty to EU inspectors. “First of all, one must clarify the conditions,” he told German newspaper Handelsblatt.

    Mr de Guindos said the crisis engulfing the region is larger than any one country and warned north Europe not to scapegoat Spain.

    The warning comes as German Chancellor Angela Merkel leaves for Madrid for talks with premier Mariano Rajoy to thrash out the conditions of a full sovereign rescue of up €300bn (£238bn), beyond the €100bn bank rescue already agreed.

    It emerged today that Spain’s social security system has raided a rainy-day fund to cover state pensions for the first time as deepening recession erodes contributions.

    Meanwhile, official data shows that the toxic property loans of Spain’s four nationalised banks have reached €75bn and are rising faster than feared. Bankia’s “potentially problematic” loans are €42bn. The biggest surprise is a 50pc surge in bad debts to €9bn at Cataluyna Caixa since January. Non-payments on mortgages have doubled.

    Net claims on Spain through the ECB’s Target 2 payments system have reached 39pc of GDP.

    “The build-up in central bank liabilities is explosive,” said Nomura’s Jens Nordvig.

    Spaniards Pull Out Their Cash and Get Out of Spain

    The New York Times reports Fears Rising, Spaniards Pull Out Their Cash and Get Out of Spain

     “The macro situation in Spain is getting worse and worse,” Mr. Vildosola, 38, said last week just hours before boarding a plane to London with his wife and two small children. “There is just too much risk. Spain is going to be next after Greece, and I just don’t want to end up holding devalued pesetas.”

    In July, Spaniards withdrew a record 75 billion euros, or $94 billion, from their banks — an amount equal to 7 percent of the country’s overall economic output — as doubts grew about the durability of Spain’s financial system.

    The deposit outflow in Spain reflects a broader capital flight problem that is by far the most serious in the euro zone. According to a recent research note from Nomura, capital departing the country equaled a startling 50 percent of gross domestic product over the past three months — driven largely by foreigners unloading stocks and bonds but also by Spaniards transferring their savings to foreign banks.

    More disturbing for Spain is that the flight is starting to include members of its educated and entrepreneurial elite who are fed up with the lack of job opportunities in a country where the unemployment rate touches 25 percent.

    According to official statistics, 30,000 Spaniards registered to work in Britain in the last year, and analysts say that this figure would be many multiples higher if workers without documents were counted.

    “It seems as if everyone I know in Spain is getting on an easyJet to come to London and open a bank account,” said one such banker, who spoke on condition of anonymity, citing his company’s policy.

    That is what Mr. Vildosola did before he took the more drastic step of moving his family to England.

    “It’s sad,” he said. “But I just don’t think there is a future for me in Spain right now.”

    Key Question 

    The key question now regarding Spain is whether human and capital flight is excessively pessimistic or simply the recognition phase that things far worse are coming.

    Sadly, I believe the latter. The reason is Spain needs to do a number of things and it is on a track to do none of them.

    Five Things Spain Needs to Do

    1. Exit the Euro
    2. Institute major changes in work rules
    3. Revamp its pension system
    4. Lower taxes in general, especially corporate income taxes and the VAT
    5. Write off bad property loans

    How many of those things is Spain doing? The answer is zero. Actually, the answer is negative given Spain is foolishly hiking taxes, exactly the wrong thing to do.

    The situation in Spain is hopeless. Expect more capital and human flight.

    Mike “Mish” Shedlock
    Click Here To Scroll Thru My Recent Post List
    Read more at http://globaleconomicanalysis.blogspot.com.au/2012/09/full-sovereign-bailout-hits-300-billion.html#g2hGpvjf20RhIdXO.99

    Images: via Flickr (licence attribution)

    About The Author

    Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.  Visit Sitka Pacific’s Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

    You are currently viewing my global economics blog which typically has commentary every day of the week. I am also a contributing “professor” on Minyanville, a community site focused on economic and financial education.  Every Thursday I do a podcast on HoweStreet and on an ad hoc basis contribute to many other sites.

    When not writing about stocks or the economy I spend a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com.