Spain
A great concern for Spain is yet another huge credit
bubble caused by low interest rates on debt. The country has more than a
trillion USD of debt and the ECB had to bail out Spanish banks with USD 135
billion as recently as summer 2012. In the end the banks ‘only’ needed USD
54 billion.1
Chart 1
Fortunately, none of that bailout money went to the
government; its debt may not be anywhere near as high as that of Greece but
it has been rising since the economic crisis began and has yet to stop. It
has gone from 36.2% in 2007 to 86% in 2012; in 2013 Q3, the rate was at
93.4%.
Debt service is using up 30% of tax revenue and the
government had to borrow from its social security reserve to honour pension
payments.2 Unemployment has shown signs of falling;
yet these figures are hardly convincing given that the rate amongst
under-25s is still mounting (see chart 1). Added to that, the country is
still experiencing the fallout of its housing bubble, with repossessed
houses advertised all over Spain, yet 800,000 homes are empty.
An unconvincing recovery, corruption scandals, the unused
airport which cost USD 1.4bn3 and Madrid’s will to
spend public money on hosting the Olympic Games (the bid failed) has put
regional politics back on the front page: Spain’s richest region, Catalonia,
will hold a referendum on independence in November this year: the result is
difficult to predict.
France
France’s debt was downgraded one step to AA by S&P in
November 2013. Ten months earlier, Minister of Labour Michel Spain remarked,
“There is a State but it’s a totally bankrupt State,” explaining that public
sector belt-tightening measures have been put in place. “No siren must tempt
us off this path,”4 he said. In late December last
year, Socialist President Fran็ois Hollande received the constitutional
court’s green light to impose a 75% tax on salaries over €1m (USD 1.37m) - a
flight of top earners’ capital has already begun. Former investment banker
Richard Marin points out that France has the second biggest pension deficit
in Europe.5
Germany
Seemingly the economic engine that is keeping large parts
of the Eurozone afloat has seen its GDP growth drop between 2004 and 2012
from 1.16% to 0.68%,6 furthermore, the DAX has merely
doubled in value since 2004.7
Thanks to propping up other parts of Europe - not
forgetting its own reunification - Germany has a deficit to GDP ratio which
has hovered around the 80% mark over the last two years. It also has the
largest pension deficit in Europe, “Their pensions are less funded than
Detroit,” claims Marin.8
Cyprus
With a history of being a political pawn, Cyprus seems to
have become the guinea pig for what could happen to larger Eurozone
countries. With a mixture of attempts to offset non-performing loans and
pressure to bail out Greece by buying Greek debt, the island’s banks have
landed in a huge mess.9 So much so, that a strategy
called a bail-in has been employed, whereby taxpayers’ deposits are used to
ease the impact on… taxpayers!10
The haircut which bank depositors had to endure was said
to be 10% - it seemed more like an eisphora. This put the banking system in
on red alert; emergency parliamentary sessions were scheduled and then
cancelled. Fittingly, the head of the central bank’s first name is Panicos.
The haircut meant that depositors with over €100,000,
including many Russian offshore investors, stood to lose up to 60% of their
deposits. The oligarchs weren’t happy and London branches of Cypriot banks
were kept open to allow an escape route; those who lost more than €3m have
been slightly appeased with offers of Cypriot (therefore EU) citizenship.11
This haircut is particularly difficult to swallow for
some, as it was applied to all Cypriot bank accounts, regardless of whether
the bank had been bailed out or not.
Since all that, Cyprus has shut the door, imposing
capital controls to mitigate the outflow. Whilst this is understandable,
it’s worth remembering that Cyprus is in the Eurozone. Thus a German, for
example, can withdraw euros from his German bank account but may not be able
to do the same from his/her Cypriot bank account. Instead of monetary union,
then, we now have a euro and a restricted Cypriot euro.
Two of Cyprus’s main banks, the Bank of Cyprus and the
Laiki Bank merged and the bank now covers half the island’s lending market.
It is back out of administration and the new CEO is the former head of
investment banking at RBS. The number-three lender is Hellenic Bank, which
avoided a bailout thanks to a New York-based hedge fund, a local investment
house and a Belarussian-owned video game developer (if you made this up
nobody would believe you). In November of this year, supervision of the
Eurozone’s largest banks will be transferred directly to the European
Central Bank. This means that Cyprus’s top four banks will come under
Frankfurt’s watch, leaving little role for the Central Bank of Cyprus.12
For Cyprus to come back to monetary reality, banks need
to reduce the number of branches and staff, get a grip of the non-performing
loans and lift those capital restrictions. There have been calls for state
guarantees of all deposits in Cypriot banks to help restore confidence.
After what has happened, restoring confidence could be quite a task. That
said, even though the island’s banking system is now only half its previous
size, depositors from Russia and Latin America appear to be coming back,
preferring the more stable legal and tax systems to that of their home
country.13
United Kingdom
Whilst Northern Ireland was putting up fake shop fronts
in the village where a G8 summit was held in June,14
the rest of the UK was undergoing a housing bubble. The Bank of England’s
version of QE and government schemes such as Help to Buy are restoring
confidence in the credit market. Consequently demand in housing is on the up
- an economic forecasting group study measured average 2013 rates up 8.4%
this year, set to rise by 7.3% next year and up by another 5.5% in 2015.
This sounds like the shoots of an economic uplift; however, such a rapid
rise is sounding alarm bells of another property bubble. Furthermore, much
of this trend is caused by foreigners’ interest in luxury homes in London
and thus more like an upturn in an investment market, rather than the
residential market as a whole.
Pigovian economic theory tells us that subsidies only
work in the short term but that governments get addicted to them and use
them for much longer than is suitable. Any initial benefit is inevitably
outweighed by long term damage. The UK may well have already passed the
point of short-term benefit and with its current account deficit, alarming
levels of both sovereign and private debt and its unbalanced economy, the UK
may be about to cross some kind of fiscal Rubicon.
Next week: Asia & the Rest of the world
Footnotes:
1
http://www.spiegel.de/international/europe/end-of-bailout-programs-in-spain-and-ireland-signals-euro-crisis-recovery-a-933650.html
2
http://www.zerohedge.com/news/2013-07-22/insolvent-spain-forced-borrow-social-security-fund-pay-pensions
3
http://www.ibtimes.com/spains-14b-ghost-airport-ciudad-real-sale-just-140m-1501840
4
http://www.lefigaro.fr/conjoncture/2013/01/27/20002-20130127ARTFIG00150-michel-sapin-evoque-un-etat-totalement-en-faillite.php
5 Richard A. Marin, Global Pension Crisis
6 World Bank Databank
7http://finance.yahoo.com/echarts?s=%5EGDAXI+
Interactive#symbol=^gdaxi;range=20000103,20140102;
compare=;indicator=volume;charttype=area;
crosshair=on;ohlcvalues=0;logscale=off;source=;
8 Richard A. Marin, Global Pension Crisis
9 http://www.ekathimerini.com/4dcgi/_w_articles_wsite2_ 1_30/04/2013_496717
10
http://uk.reuters.com/article/2013/03/16/uk-eurozone-cyprus-idUKBRE92F02P20130316
11
http://www.zerohedge.com/news/2013-03-25/have-russians-already-quietly-withdrawn-all-their-cash-cyprus
12 http://www.cyprusprofile.com/en/sectors/Cyprus-banking
13 http://www.cnbc.com/id/101421968
14
http://www.reuters.com/article/2013/06/03/us-irish-g8-fakeshops-idUSBRE95210520130603
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