Debt Plagued Spain in Focus for More Pain

Category: Eurozone | Spain
September 26, 2012 | Comments Off |
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Debt Plagued Spain

Debt Plagued Spain in Focus for More Pain

Spain is again the centre of focus in the Eurozone debt crisis. Spain’s Prime Minister Mariano Rajoy said “If interest rates on Spain’s debt were “too high for too long,” thus harming the economy and raising the government’s debt burden, “I can assure you 100% that I would ask for this Bailout.” “Europe needs to move toward a banking union now,” he said. “That would be a very good message toward the irreversibility of the Euro. What I do alone is not really going to help Spain get cheaper financing,” he added. “That is where I need support and action from all. I’m in favor of the EU, but I think we should have a lot more union than we have. We need to work hand in hand. We’re a club.”

Spain in Focus:

The Euro slipped against the US Dollar along with a fall in stocks and commodities as investors grew cautious about developments in debt-plagued Spain. Protesters clashed with police in the country’s capital as Spain prepared for a new round of austerity measures in the 2013 budget. Equities and commodities as a result lost momentum, while the Euro again started downside movements against the dollar. ECB – European Central Bank President Mario Draghi’s vigorous defense of the bank’s bond-buying plan to a skeptical German audience on Tuesday had earlier underpinned the euro. Trading activity expected to be mostly subdued on Wednesday, ahead of the Jewish Yom Kippur holiday. The ECB will hold its next policy meeting on October 4 andU.S.non-farm payrolls data, a key monthly market driver, is due on October 5. The Euro could remain under pressure if Spain drags its feet over requesting an international bailout. This must happen in order for the ECB to begin buying its bonds and, until it does, the Euro is likely to weaken further. Worries about the size of Greece‘s deficit also weighed on the Euro, with Germany’s Der Spiegel magazine reporting it could be 20 billion euros, nearly double previous estimates. Investors are once again concerned whether the stimulus measures announced by ECB for the Eurozone & the Fed will have the desired effect of boosting the global economy.

Spain gets desperate:

Spanish Prime Minister Mariano Rajoy’s dispute with the leader of his country’s richest region erupted into the newest front of Europe’s effort to extinguish the financial crisis. Catalan President Artur Mas yesterday called early elections, with greater autonomy at stake, five days after Rajoy rejected his bid for increased control of his region’s tax revenue. Mas set the vote for Nov. 25, saying the time has come to seek “self-determination.” The move risks plunging Rajoy into a constitutional crisis amid a recession that has sent unemployment to over 25%. He’s struggling to persuade Spaniards to accept the deepest austerity measures on record and stoking frustration in Germany over his foot-dragging on whether to seek a bailout. As police clashed with protesters in Madrid yesterday, Rajoy didn’t respond to Mas’s defiance, reported Bloomberg. Rajoy has a majority in parliament and says he is doing what’s necessary to pullSpain out of the financial crisis. He says he was elected to a four-year term in November and he intends to complete it. Catalan nationalists are pressing for greater autonomy. Austerity is eroding Catalans’ willingness to keep subsidizing poorer parts of the country. The region contributes a fifth of the economy, more than any other. It’s home to some of the largest companies, including CaixaBank and Gas Natural SA. It transfers 15 billion euros, or 8% of its economic output, to the rest of Spain each year.

More Austerity Measures for Spain:

Spain is at the centre of the Eurozone Debt Crisis on concerns the government can’t control its finances, bitten by its second recession since 2009 which has put one in four workers out of a job and pushed up borrowing costs. Spain will announce another round of the hugely unpopular austerity measures in a 2013 budget on Thursday, already prompting protests from a public battered by attempts to put the country’s finances in order. The conservative government is now looking at such things as cuts in inflation-linked pensions, taxes on stock transactions “green taxes” on emissions or eliminating tax breaks, reported Reuters. The 2013 budget is the second one conservative Prime Minister Mariano Rajoy has had to pass since he took office in December. It must persuade Spain’s European partners that it can cut the budget shortfall by more than 60 billion euros by the end of 2014. Rajoy has already passed spending cuts and tax hikes worth slightly more than that over the next two years, but half-year figures show the 2012 deficit target slipping from view as tax income forecasts will not be hit due to economic contraction.

Protests against the cuts are gaining pace. More than 1,000 police barricaded Parliament inMadridon Tuesday against protesters who planned to form a human chain around the building later in the evening. Hundreds of demonstrators gathered in different points of the capital before marching to Parliament, saying they were angry that the state has poured public funds into crumbled banks while it is cutting social benefits. Meanwhile, Rajoy is holding back from applying for European aid, which would activate a European Central Bank bond-buying program and bring down Spain’s punishing debt premiums. Rajoy says he is mulling the conditions of a bailout application, but suspicion that he may wait until after regional elections October 21, pushed short-term yields higher at auction on Tuesday.

Spain runs out of Options:

After having weighed all possible options of higher taxation hikes & a selective reduction of tax breaks, it seems they aren’t enough to cover the potential shortfall. After slashing civil servants’ wages, raising value added tax by 3% – the main VAT has gone from 16% to 21% since 2010 – and cutting health and education spending, Rajoy is running out of options. More than 60% of government spending goes to pensions, unemployment benefits and servicing debt, making further cuts on the revenue side difficult without hitting 6 million jobless people. Under current rules the government must raise pensions in line with inflation in November. This VAT effect on consumer prices will cost the government an extra 3.5 billion euros in pensions costs, Conde-Ruiz says, wiping out the 2.5 billion euros it hopes to raise this year by increasing the sales tax.

“Its going to be difficult keeping the deficit to around 2% in the second half, when the first half was closer to 4%, especially since traditionally, the second half deficit is higher than the first,” said Juan Ignacio Conde-Ruiz, economist at Madrid’s Complutense University, reported Reuters. For 2012, the measures aim to reap savings of over 13 billion euros, but economists see the deficit missing the target by almost 1% implying further saving needs of up to 10 billion euros for this year alone. Rajoy has been careful to highlight the importance of next year’s deficit target of 4.5% of GDP though any shortfall this year will have to be carried through and will weigh on 2013′s accounts.

The Spanish government will restrict programs that allow people to take early retirement as part of overhauls to rein in the country’s debt and shore up its shrinking economy, Prime Minister Mariano Rajoy said on Tuesday. In an interview with editors and reporters of The Wall Street Journal, Mr. Rajoy said measures to be unveiled Thursday would also include the creation of an independent agency to monitor compliance with budget targets, new job-training programs and legislation to sweep away many onerous government regulations. Half-year deficit data indicate national accounts are already on a slippery slope that will drive Spain into a bailout. The deficit to end-June stands at over 4.3% of GDP, including transfers to bailed out banks, making meeting the 6.3% target by the end of the year almost impossible.

Gold and Silver Cautious Before Spain & Greece Developments:

A firm US Dollar and a shift in investor focus to the Eurozone debt crisis capped gains in Gold. Gold Bullion has rallied after central banks from the U.S. to Japan took steps to boost their economies, driving investor holdings in exchange-traded products to a record. A poor economic backdrop will keep global stimulus measures on the cards for a while and gold is set to profit from that. Spain will announce a new budget and reform plan on Thursday, while Greece will do the same later this week. We had alerted early this week that Gold movements may remain range bound for the week with an overall positive bias – For more read: “Gold Futures in Turbulent Times”. Gold Futures have been seen in a range of $1,753.20 to $1,790 an ounce over the last eight trading days. The consolidation suggests some near-term indecision about short-term direction, but also a preparation for a sharp next zoom upside. December Gold Futures are consolidating just above $1,750 & a move higher suggests that gold prices may have a slight upward bias. Where large Investors are already positioned long, there’s always an appetite to add more on dips. The $1855 upside barrier remains strong while the RSI (Relative Strength Index) remains overbought, suggesting the market may continue to consolidate or, possibly, pull back. Gold has seen a good run up from $1540 to $1787 in around 8 weeks & a loss of further momentum may very well frighten long term investors & fund managers and may give them cause to book some profits. I would suggest to take advantage of dips.

The Euro slipped yesterday against the US Dollar along with a fall in stocks and commodities as investors grew cautious about developments in debt-plagued Spain. Gold and Silver backed down yesterday from their day’s highs on some mild profit-taking pressure later in the session. Copper prices saw positive momentum & were lifted by encouraging U.S. economic data on consumer confidence and house prices. U.S. consumer confidence index rose to a seven-month high of 70.3 in September from 61.3 in August. Also, the S&P/Case-Shiller index showed U.S. home prices rose for the fourth straight month in July to their highest level in nearly two years. The go-ahead for infrastructure projects in China & positive development on the U.S. housing market, which among others, reflects the rising number of building permits and housing starts, should also prove stimulative for Base Metals.


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