by Marshall Auerback / on 25 September 2012 at 11:17 /
The real weak link now in the Eurozone is Spain, where the data is a disaster. It is Greece writ large. And this is before Madrid, under Prime Minister Mariano Rajoy, has submitted to a new ECB program of agreed austerity in exchange for the ECB backstopping the nation’s bonds via a renewed Securities Market Program (SMP).
One can readily understand Mariano Rajoy’s reluctance to place Spain in the 21st century equivalent of a Victorian debtor’s prison. The country’s economy is a disaster. They just had 1.5 million people take to the street in Catalonia out of a total population of 7.5 millions.
Spain is still a relative young democracy. And today it is beginning literally to fray at the edges. It starts in Catalonia. Up until the EU was formed, it was clear that the Spanish military would fight and fight hard and that no one in Europe would herald a seceding Catalonia. The choice for Autonomy was rational—but it’s always been a Trojan horse for eventual secession. Would the EU accept Castilio-Spanish military action, or intervene to ‘stop the violence’ in the diplomatic sense? The Spanish military is scarcely in a state for a prolonged action. Civil disobedience, unlike the charry fringe insurgency of the Basques, has great potential there.
Being thrown out of the EU would be a boon for Catalonia if it meant severance from the euro straitjacket, but disastrous for Spain. Recovering fiscal control would make Catalonia one of the most prosperous regions of the EU over the long term. It is, has been, and always will be in Catalonia’s interests to dump Spain
Catalonia is a very wealthy region. It has been a net contributor to the Spanish federation for a long time. The region has a very pronounced sense of nationhood already. The people of Catalonia don’t think of themselves as Spaniards first. They are Catalonians first. The lingua franca there is Catalan, not Spanish. You haven’t, in other words, had 200 plus years of national consciousness the way you have in the US. It is more like the US in the early to mid-19th century, where the South had a decidedly different sense of nationhood than the north. Slavery was the ultimate proximate cause for a civil war. Here it might be externally driven by Draghi’s OMT program, through the agency of Rajoy. That is why he is so reluctant to submit to the program. He probably understands the risk.
If and when Rajoy submits to the ECB’s program, don’t be surprised if separatist sentiment in Catalonia hardens and spreads to other regions. The Basque separatist problem was there for years and has only recent subsided (but is certainly not extinguished). A potential change is always fretted over with the sheep huddling in the middle clutching their wallets, but a real program for severance met with violence from Madrid will make those hovering choose sides. Should that come, don’t doubt Catalans will choose Catalonia. Spanish bluster is extremely ill-advised; now is the time for concessions, but they won’t be made. When Catalans take their money out of Madrileño banks and stop transferring taxes, then push will come to shove.
Sounds far-fetched? Well, a resolution, on the right of the Catalan people to cut off ties with the Spanish state, will be voted on Thursday by the regional parliament. This statement of “the will of Catalan people to vote on the bond with the State of Spain” opens the way for forthcoming elections on November 25 to become a referendum on the sovereignty of Catalonia. In shades of the pre-Civil War America, the Spanish military are not taking this threat lying down, implying military intervention to prevent secession, according to El Economista.
Even without this mounting political train wreck, last week Bloomberg reported Spanish bank deposits declined by 224 billion euros or 10% in the twelve months ending July 31st. That is equal to more than 20% of Spanish GDP. When I started to warn about Spain as “the elephant in the room” last autumn, I could not have imagined a deposit contraction of this magnitude.
Spanish banking system borrowings from the ECB rose from 82 billion euros to 412 billion euros in the twelve months through August of this year, according to the Bank of Spain. Once again this amounts to lender of last resort financing equal to over 30% of GDP in a mere year. This is also unimaginable.
There can be no doubt that the run on Spanish banks has been ongoing, massive, and most likely devastating.
Spanish real estate prices have been falling for years. Retail sales are collapsing from very depressed levels. Likewise with industrial sales. Total employment has been crashing. Spain’s employment has been falling steadily year on year at a roughly 3.3% annual rate. That is equivalent to a 600,000 monthly fall in the U.S.
We all agree that would translate into something like a 4% or 5% or 6% rate of GDP contraction. Understandably, given this dismal level of economic activity Spain recorded a fiscal deficit of 8.56% of GDP in the first half of this year.
No wonder Rajoy doesn’t want to submit to the barbarism of the ECB’s programs. If you loved what was happening in Athens, just wait until this show moves full steam ahead into Madrid. It could make Greece seem like a harmless side-show in comparison.
A version of this post first appeared at New Economic Perspectives
About Marshall Auerback
Marshall Auerback, has 29 years experience in the investment management business, serving as a global portfolio strategist for Madison Street Partners, LLC, a Denver based hedge fund. He also has also worked as an economic consultant to PIMCO, the world’s largest bond fund management group. He is a Fellow at the Economists for Peace and Security, a Research Associate at the Levy Institute, and a non-executive director of Pinetree Capital in Toronto, Ontario, Canada.