Spain Is a Real Ticking Time Bomb

It seems that currency wars are heating up. The US dollar has been depreciated by FED activities and Japan confirmed depreciation of yen last week. Now Swiss Finance Minister Eveline Widmer-Schlumpf told reporters that Swiss franc is too strong and more depreciation is needed. Swiss franc is still 9.1 % stronger than its five year average as investors still turn to it as safe haven money investment. Investors probably still do not get that strong currency is not Swiss aim. China urged other G-20 nation on Davos-meeting to improve coordination and to avoid currency wars. Japan representatives explained that their activities have nothing to do with currency war; they allegedly only fight with deflation. So everybody agreed that currency wars are road to hell. But once they are home they will continue with the trend. It is definitely easier than policy of lower taxes, lower public expenditures and appropriate business environment.


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Spain has definitely become a time bomb. The official GDP is predicted to decline 2% in each of the two following years pushing unemployment probably over 28% and public debt from 88% to 110% of GDP. The black picture of country is stressed by the fact of falling industry activity and banking sector problems, especially with housing market. Portugal is back on financial markets. The country was able to borrow € 2.5 bn. but the Fitch warned that it expects that the country will need more aid from Troika as a consequence of the biggest recession since 1970s.

Sometimes it happens that politicians tell the truth and nothing else but the truth. The same did France Labor Minister Michel Sapin when he said in a Radio interview that “There is a state but it is a totally bankrupt state. That is why we had to put a deficit reduction plan in place, and nothing should make us turn away from that objective.” The statement was eased by other official representatives but the fact is that France had last balanced budget in 1973 and the public debt of the country is slowly reaching 100% level; right now it is 91 % of GDP, which means 28,000 euros per inhabitant. Hopefully, no EU country will end as Zimbabwe did. The Finance Minister Tendai Biti said that country balance in cash stood at $217 on Tuesday. I know that you are accustomed to millions, billions and trillions. Zimbabwe has just $217. Zimbabwe’s government has also warned that it does not have enough money to fund a referendum and elections expected this year. It is actually a very clever idea for politicians how to preserve the power. Spend everything and have no money for election; it is a pure flesh of genius.

The Bank of Italy allegedly knows that the oldest European bank Banca Monte dei Paschi di Siena was involved in the derivate deal with Deutsche Bank worth €1.5 billion to disguise its loses. The president of the Bank of Italy was nobody else than Mario Draghi at that time; yes, the same one who is now president of the ECB. He was in a quarrel last week with German Finance Minister Wolfgang Schäuble about Cyprus. Germans think that Cyprus is not systemically relevant contrary to Draghi, Commissioner Oli Rehn and Klaus Regling chief of the ESM. They jointly claim that two big Cyprian banks have many branches in Greece and the bankruptcy of Cyprus could therefore cause problems within Eurozone. Some German politicians agree with David Cameron´s last week speech to reform the EU, to make European institutions more transparent and to let more responsibilities on national parliament. As usual, nice words but no real implementation possible.

European unemployment did not change too much. It is still 11.7 % and the most problematic countries are still the same – Greece (26.8%), Spain (small improvement of 0.1% – 26.1%), Portugal (16.5%) and fourth position is held by three nations by 14.7 % Ireland (saved by EU funds), Cyprus (before bailout) and Slovakia. I almost forgot. Greece and Spain have still unemployment of young people over 55 %.

US non-farm payroll data were expected at 155 000 and ended at 157 000, the unemployment rate was essentially unchanged (7.9%). But what was surprising from the US was the GDP data. The economy unexpectedly contracted in the fourth quarter of 2012 when GDP fell 0.1 % on annual base. The reasons behind were hurricane Sandy and the biggest drop in military spending for 40 years. Expectations about 2.5% GDP growth for 2013 remained unchanged. The US does not only have a problem with its spending or debt. There are many other problems on the table. Student’s loans are good example. 27 million borrowers have two or more outstanding loans and delinquency rate has risen by 47% since 2005. Present and former students owe an average of $27,253. Students’ loans hit the record high of $870 billion which exceeds credit card debt ($693 billion) and auto loans ($730). It is therefore appropriate to ask. How much debt is sustainable for the US and its citizens and how long could financial markets believe the country?

Matus Posvanc