Look at Greece, think of Spain

While most analysts are looking at the Greece theater, the real and much bigger problem is rising in Spain. After series of stupid political decisions, with most important of them - stopping the even not started reforms, the country as expected is heading a catastrophe. The interest on 10-year bonds rose again to 6,5%, that with the enormous Spanish debt means almost a default. Instead of making reforms and cutting spending the prime minister Rajoi is just praying on the icon of Draghi to start printing money.

But Draghi is not a God, he is a fake icon, as the money print up to now has brought a very weak result. So Draghi can do nothing. Even if he prints another 1 billion Euros he will win just a month or two, and after that Spain will be again in catastrophic situation. Every 1 billion printed means increasing the balance sheet of ECB by 30%. Up to now a 30% new inflation is already sowed. Obviously it is not worth to pay 30% inflation in all Euro zone, for just winning 2-3 months for a defaulting government. So for ECB it will be stupid and useless to repeat the money-print experiment with so called LTRO or with purchasing bonds on free market.

The Greece drama is accelerating these processes. But the Greece problem is easily manageable, as Greece is a very small country. The Spain and Italy problem is entirely unmanageable. There are no means to save Spain, so the only way to salvation are the deep austerity measures. The salvation of Spain is in its own hands. It is a job needed and not praying to fake icons...

Europe is fleeing left with the symbolic as margin, but decisive as result victory of socialists in France. But at the moment there are no resources for left policy. Left policy is possible only after a long time of right policy that had accumulated resources that can be spent. Up to now France and entire EU politics was not right, even while right governments were in power. The general policy was leftish and this led to an enormous indebting that is the base of current crisis. So although Hollande has become a President, there is no way Hollande's ideas to go real. Therefore there is no alternative to austerity, and therefore the dreams of some kind of magical solution in Spain will crash in a "concrete" wall.

In addition to this an erosion in salvation funds is coming. After the Greece second and more official default, some impressive losses will hit the taxpayers-backed EU bailout funds. Even at current moment there is very low enthusiasm in participating in these funds. Up to now they are giving not aid, but loans that are to be repaid back in future. If losses are imposed to this money it is doubtful if any government will remain participating. There is very strong public opinion against this. So if salvation funds lose entirely or partially support, so their size will decrease. So EU will have a weaker "bazooka" to shoot against the market panic and speculative attacks.

So at the moment it is funny to look the Greek show, but is wise to take care of Spanish reality. Much bigger bomb is ticking there...

And we must also not forget of some smaller bombs like Portugal, Ireland and Belgium that are orbiting around EU stability...

May 17th 2012

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