What about Italy?
The question has also interested Frankfurter Allgemeine Zeitung:
Exclusive: York Capital to wind down European funds, spin out Asian funds
York Capital Management has decided to focus on longer-duration assets like private equity, private debt and collateralized loan obligations. The firm also plans to wind down its European hedge funds and spin out its Asian fund. Q3 2020 hedge fund letters, conferences and more York announces structural and operational changes York Chairman and CEO Jamie Read More
What are the consequences of the Spanish solution?
It is difficult to say: In a compromise both sides need to hail the result as a victory – which generally means that neither party is telling the whole truth. Now most compromises does have a winner – if on nothing else than points. In a boxing match where the result is notoriously rigged the best way is often the amount of blood spilled and the general condition of the contestants at the end of the game.
Judging by these standards Rajoy’s demonstrative jubilation – heavily propped up – indicated a victory that had cost more than it was worth. Schäuble has shown an uncharacteristic lack of gloating – tact never was his strong suit anyway – which could indicate that he doesn’t really need to emphasize his victory.
The point seems to be that the ECB will gain control over the Spanish banks – and the Basel III standards for evaluation of assets will be implemented. In banking both profit, balance and equity are deliberately poor measures of bank performance as they both are a function of admitted losses – and bank losses are the least reliable figures in the shady world of financial reporting.
Thus it is vital to gain access to the books of the banks. The Rajoy victory of separating the reconstruction of the economy from the banking sectors demise/suspended animation is thus somewhat pyrrhic. What Rajoy really wanted was to carry on with a banking sector entombed like the Japanese – but for the money the Germans put up. This is unlikely to happen.
Rajoy couldn’t care less about his work force being out of a job, about three generations huddling together in a condominium hovel – what he worries about is avoiding taxation and reforms of the pensions. Now taxation of income and VAT and higher taxation of petrol leads absolutely nowhere. Those with income are the ones with consumption – pensioners are generally over the spending hump in their lives, so neither measure are liable to hurt pensioners appreciably – nor the tax-evaders. The fundamental rule of politics: The problems must be solved by any means – except the ones that work.
This means that the bank rescue will serve as a lever on the Spanish government to institute reforms – particularly aimed at tax-evaders and pensioners. Characteristic of the current crisis is that the traditional coup de grace of a bank – the bank run – is avoided at all cost! What will kill the banks is the slow suffocation of insolvency. Spain is now in the position of Greece where there are no alternative financers to the ECB (EFSF/ESM or whatever fancy construction they might come up with). This means that Spain cannot run at a continued deficit as it cannot be financed irrespective of the solvency of the banks (thus the clear earmarking of the rescue funds to the banking sector).
This is the scary scenario put forward to the Italians by the Spanish example.
The ugly fact is that these countries cannot keep running a deficit and they can’t tax the working population – either through income tax nor taxes on consumption. Higher income taxation will mean reduced
consumption. Taxation of consumption will mean less consumption for a given level of income. The lover the consumption the lower the taxation –and so on: A Keynesian spiral of death.
As to the investment part of the GDP – with an interest rate of zero – in real terms negative, there IS no investment (unless you are a Chinese propaganda official calling building empty cites an investment): It is sheer consumption.
As there is no investment productivity cannot increase, so wages and salaries must come down – or export prices will not be competitive. The obvious way of increasing competitiveness and maintain consumption is to reduce wages AND cost of living. The only obvious candidate for reduction in cost of living is reduction in housing cost. This will however mean banks taking losses, which they won’t or taxing income that is not spend – such as pensions and pension funds. Thus we are back to where we started.
The economies of southern Europe are reminiscent of the German economy after WW2, where there were huge funds of money in the banks from war profiteering. The way that totally useless stack money was killed was through making the Deutsche mark which with one stroke confiscated the war profiteering deposits. Today there are more subtle means of destroying money: Confiscation of pensions and pension funds to cover bank losses.
The reference to Euro Bonds from Italian politicians is just as murky. The Italian intension is clear enough: Germany has to pay for the Italians doing nothing. Or rather the Italians are ready to put two – or even three – Thursdays into a week – even every week – at tight fit; but they just might pull it off: If only they can be left doing nothing. The only trouble is that though the Germans are not totally opposed to Euro Bonds they just might have other ideas for their application: Investment of a common nature.
Infrastructure has many forms: Roads, railroads, telecommunication, power transmission. They all have one thing in common moving stuff to and from Germany more efficiently and cheaper – i.e. increased productivity and competitiveness. If Italy and Spain think Germany will let them drag Germany down in their sewer – well then they have another thing coming.
Breaking up the Euro? Come on be your age!
Those contemplated to leave the Euro-zone are all countries running a deficit any which way you turn the phrase:
A) Reintroducing the lire, the peseta or whatever they would call monopoly money on those latitudes they might devalue their currency, which would only make imports more expensive – and if you already import more than you export then getting this deficit financed will mean an insurmountable problems.
B) Defaulting on debt would make even the feeblest minded investor (and there are really some whose light of intelligence is far from blinding out there) take precautions – all good things come to an end – only misery persists.
C) The only place the PIIGS can borrow money is in the ECB or IMF; but then back to square one: These cruel and unjust black suits attach strings to the loans no matter how pitifully babies mope.
A lesson in German: “Vertrauen is gut, Kontrolle ist besser!