Spain’s MoU Dealing with the Symptom and Not the Cause


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The Spanish newspaper El Pais has a story today on a version of Spain’s rescue package for the banks which has only been made available in Germany and the Netherlands but not in Spain. In it there are details which appear to allow Spain to use the ESM not only to deal with their banks, but to buy up to €100bn in secondary market debt. The version in the Netherlands also contains comment that suggests, the article argues, that they don’t believe that Spain can continue to refinance itself under current conditions.

“Provided it meets strict financial and macroeconomic conditions that were announced last week, the framework agreement allows Spain to apply the full arsenal available from the European rescue fund …

That includes following the changes made to the European fund last year, purchases of bonds in the primary market (ie at Treasury auctions) and the second hand to lower the risk premium Spanish, yesterday climbed to touch the 580 points. The EFSF could thus buy government debt and try to lower the pressure, though the figures used do not allow too many joys. The interests of the Spanish 10-year bond are dangerously close to 7%, unsustainable rates that suggest a full recovery or the possibility of intervening in the market.”

The increased flexibility to buy government bonds on the secondary market is significant and confirms Yanis Varofakis’s argument from the other day that the Eurozone’s monetary transmission system is broken. Putting money into the banks in order to get them lending again is useless because the interest rate is no longer fixed by the ECB’s overnight lending rate, and is certain not by Libor which had been the anchors that lending in the EU was based upon. Instead the interest rate of lending is dependent on the borrowing costs of the state where the banks are domiciled.

“In summary, borrowing costs in the Eurozone have lost their two anchors: the inter-bank lending rate (courtesy of the sad reality that the banks no longer lend one another) and the overnight ECB interest rate (which banks ignore when lending). The key to understanding this breakdown is governor Noyer’s phrase “the interest rate facing individual private banks depends on the funding costs of the state where they are domiciled and not on the ECB overnight interest rate”. In short, the fear of a disintegration of the Eurozone (that is aided and abetted by silly talk of Greece’s and Portugal’s expulsion) has broken the umbilical cord that normally connects the ECB’s overnight rate with actual borrowing costs of the private sector. Now, the later reflect the fear that the member-state in which the firm or the household are will not be able to refinance itself.

Once again the ECB is trying to deal with the symptom and not the cause.

In Spain there has been widespread reaction to Rajoy’s latest announcement of 65bn in cuts on top of what had been extremely draconian austerity. Last week there was the Black March, as thousands of Spanish miners and their supporters crowded through Madrid’s streets.

But it continues. Here’s an excellent translation of an article by Isaac Rosa, published in Zona Crítica, 18th July called OK, we support the miners, but… public servants?

Given that attacks on the public sector in Ireland, which have been ongoing since the beginning of the crisis in 2008, are part of the strategy to drive down workers’ wages across every sector in order to boost profits it is worth reading.

As Michael Burke notes in his comment on the recent CSO figures:

Taking the data at face value, there is one reported quarter where investment increased by €1.5bn in nominal terms. This apparently required a rise in profits of €6.3bn over the preceding two years, facilitated by a decline of €5.7bn in the remuneration of employees. The rise in profits is achieved by reducing pay and only a fraction of the profits’ increase has been invested. It is easy to see that any recovery based on this model will at best be very sluggish and require the immiseration of the mass of the population.

Rosa’s argument reinforces this reality:

“Yesterday we were all miners, today we are all public servants, in the same way that we are unemployed people (whom the Government cruelly uses to enrage), we are all carers for dependants (whose hopeful “right of dependancy” has vanished as soon as the good times began to end), and tomorrow if needed we will all be pensioners (since pensions are not safe from the next round of cuts). Join up the dots and you will find the common denominator of all those groups affected by the crisis and the policies of anti-crisis: it is not that of being citzens, since neither the crisis nor the policies of cutbacks affect all citizens equally (there are banker citizens, executive citizens, and citizens with great wealth). What unites all those groups being sacrificed is that they are workers. We can understand it better this way: mine workers, public workers, unemployed workers, workers who care for dependants, retired workers.

It may seem obvious at this stage, but miners and public servants take the streets and remind us of it once again: that the so-called crisis is a looting of workers on a historic scale: a pillaging of our labour, our salaries, our rights, our public services, a transfer of wealth from the emptying pockets of the working class to the armour-plated accounts of the champions of the crisis, those who pay no price for their mistakes and suffer no cutbacks.”

And all of it will lead to the unraveling of the Euro.

Read the full thing here on Cunning Hired Knaves.

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Donagh is the editor of Irish Left Review. Contact Donagh through email:

2 Responses

  1. William Wall

    July 19, 2012 9:20 pm

    Excellent article Donagh. Pulls the other articles together nicely. If YY is right, we may be facing the end of the Euro and possibly the EU.

  2. Donagh Brennan

    July 20, 2012 9:29 am

    It seems that way but if the Euro ends what will it mean for ordinary people? I’d say they’d be at the forefront of the worst effects – considering that the strategy being followed is one of wealth protection and forcing workers to carry the burden. Already we are seeing the response. Not in Ireland, perhaps, but certainly in Spain a much more significant economy in terms of the economic fortunes of the European Union.
    Eurointelligence provides a handy short summary of events of the previous day directly to your inbox everyday. The way they put it together you can’t help but feel, well, what a fuck up

    Spanish demonstrations turn violent in the early hours of this morning, as 100,000 march in front of the parliament in protest against cuts in wages and social spending, and a three point rise in VAT;26 people are reported to have been injured;Spanish unions are planning to call for a general strike;mood of protest is spreading to Italy, where CGIL, the largest union, announced a general strike for September;the protests in Italy concern a planned two point rise in VAT, other taxes and austerity measures;the Bundestag voted in favour of the Spanish package yesterday by 473 to 97, but Angela Merkel get her own majority;Wolfgang Schauble had to reassure the Bundestag that the Spanish government remains liable throughout the life of this package, saying there will be no possibility to sidestep this fact;the CDU’s deputy parliamentary leaders says Schäuble’s message was so clear that there is no way that any tricks can succeed (i.e. direct capital injections);a Spanish bond auction went badly yesterday, with yields now at over 7% and spreads at over 5.9%;Spain’s EFSF loan will carry a floating interest rates, in contrast to previous EFSF loans;Claus Hulverscheidt says the programme is not going to work, as Spain is likely to require another programme;Angela Wefer says the conditions for Spain are very tough, and it will take another Bundestag vote to change them;Heike Göbel says the Bundestag’s next vote will be on Italy;so does Marcello Sorgi, who blames Germany for making the crisis worse;Confidustria is complaining about the extraordinary increase in Italy’s tax burden, now one of the highest in the world;the Monti administration is now pondering a wealth tax;Fitch affirms Italy’s rating but says political risks remain;the Finnish opposition demands a No confidence vote over the latest collateral agreement;Germany, the Netherlands and Finland are reluctant to give ground to Ireland, which demands a renegotiation of some elements of its programme;the Greek government, meanwhile, scraps 200 state-controlled entities, and relaxes investment rules for private entities