Wednesday, 11 July 2012

The Mean Old Investor : Spain's Punishment

Spain's Punishment

Posted: 11 Jul 2012 02:46 PM PDT

  Over the last few days, the EU's finance ministers have huddled in Brussels to determine the terms of the $120 billion bailout of Spain's banking system. Many people, myself included, thought that Spain would get off lightly, especially given the support new French President Hollande seemed ready to give them. It was not to be.

  Lets remember that Spain's unemployment rate is 25% and rising. For those under 25 years old, the unemployment rate is already 52%. Yes-- half of all young people are unemployed. Probably a third of the remaining half are under employed. Spain's economy this year is contracting, and their tax revenue is in decline due to lower and lower sales tax revenues.

  About an hour ago,. the Spanish newspaper El Pais leaked the EU's terms:

* EU takeover of the Spanish banking system
* Calls for $80bln in losses for junior & hybrid debt
* A "bad bank" to wind down the banks losses
* On site raids by "inspectors"
* Rise in the VAT tax from 18% to 21%
* $80bln in additional "austerity measures"

  I have no earthly idea what the EU thinks it's going to solve by this. These measures will further slow down the Spanish economy, especially the spending cuts. These cuts will result in further unemployment and bank losses as yet more businesses go under. Nevermind that these terms are actually quite humiliating to a proud nation and its people. Worse yet, many of the "junior and hybrid debt" people, who just got shafted, are working Spaniards who will soon find out that their "safe" investments are a memory. The Spanish people, upon hearing this, have begun rioting in Madrid as I type this.

  At some point, a nation must decide whether it is worth it to save the bankers at the expense of the people. Rather soon in their own crisis, the government of Iceland decided to side with its own people. In a nation with unemployment already at Depression levels, I have to believe that patience is wearing very thin in Spain. When it snaps, my "Worse Case Scenario" becomes disturbingly probable:

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