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Somehow Barclays Makes The Outcome Of The Spanish General Election Another Reason For
Started:November 20th, 2011 (01:00 PM) by Quick Summary Views / Replies:158 / 0
Last Reply:November 20th, 2011 (01:00 PM) Attachments:0

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Somehow Barclays Makes The Outcome Of The Spanish General Election Another Reason For

Old November 20th, 2011, 01:00 PM   #1 (permalink)
Quick Summary
Somehow Barclays Makes The Outcome Of The Spanish General Election Another Reason For

If Johnny Cochran was defending the global ponzi, his legendary line would be: "if the glove doesn't fit, the ECB must print." Because based on commentary from the banking cartel over the past two weeks which has made it abundantly clear the world will end any minute unless the ECB proceeds with backstopping Europe to a far greater degree than it already has (and with €1 Trillion a;ready handed out it is not very easy to make the case JCTrichet's regime was exactly frugal), it appears that according to Wall Street experts the "logical"outcome to any possible event in the coming months and weeks is nothing short of an outright monetizing onslaught: Initial claims missed by 1,000 -> ECB must print; people not digesting enough iPads -> ECB must print; a head on collision with an asteroid is coming -> ECB must print. While we mostly mock what is a certain outcome regardless (anyone who believes that the regime will willingly do the right thing even with Goldman now firmly in control of Europe should have their head checked... although one can surely dream) the narrative is now getting outright ridiculous: the latest case in point is Barclays' commentary on the November 20 general election, whose conclusion is that, we kid you not, the ECB must print. To wit: "Polls are signaling a clear victory for the Partido Popular (PP) in Spain. Another round of labour market reforms, banking sector restructuring and enhanced fiscal consolidation are the likely priorities for the new government. Those policies would undoubtedly be welcome by markets, yet may not be enough to stabilise the Spanish sovereign. Ultimately, we think it likely that the ECB will need to step up its support." In other news, the glove doesn't fit.

Full note from Barclays:
Spain: 20 November general election preview

Following rapid changes in Italy and Greece toward "technocratic governments", and the recently elected governments in Ireland and Portugal, it is now the turn of Spain, which is holding general elections this Sunday (20 November). Most of the polls published by the main newspapers (both pro-socialists and pro-conservatives) signal a clear victory for the main opposition party, the conservative Partido Popular (PP). Also, if the recent regional elections (end May 2011) serve as reference, the formation of a majority government by the PP is the most likely outcome.

PP has not been very forthcoming on the key programme proposals, therefore it is difficult to be categorical about the market implications of a change in government. But statements by party officials and by the PM candidate, Mariano Rajoy, suggest that: 1) pro-growth structural reforms will be high on the agenda, including labour market reform; 2) further restructuring of the banking sector, including increased consolidation and possibly additional recapitalisation; and 3) continuing fiscal consolidation to ensure solvency. We think the likely majority in parliament would allow the government to front-load most of these measures in the first weeks/months in government.

What would be a desirable policy outcome for the first few weeks of the new government?

In terms of structural reforms, top of the list should be further labour market reforms, including: 1) moving towards a single-contract, where firing costs increase with seniority; 2) changes to the collective wage bargaining towards firm-level wage-setting.

For banking sector restructuring, in order to address market concerns, the government would need to resolve problem loans to the construction and developers sector, which will require higher write offs and recapitalisation needs. This may entail further consolidation in the system as well as additional public funds injected in the banking system (c.EUR30-40bn).

On the fiscal front, priority should be to approve swiftly the "organic law" that details the balanced budget rule as part of the constitutional amendment approved by both socialists and conservatives in September. The new organic law would also give the central government powers to enforce "above-the-line" fiscal adjustments, ie higher taxes or lower expenditures, imposed by the central government on regions that deviate from the fiscal rule.

Yet uncertainty on the fiscal performance in 2011 is likely to remain high in the months ahead. As we have argued in several reports, the fiscal deficit target of 6% of GDP will be hard to meet. We are projecting a deficit of 6.5% with a non-negligable probability to reach 7% of GDP. The main reason for the likely fiscal slippage is the insufficient fiscal adjustment by the regional governments and that would be difficult to revert by the time the new government takes over. If the 2011 fiscal deficit is indeed closer to 7% of GDP than to 6%, markets are unlikely to react positively. Also, markets are unlikely to be receptive to the new government targeting a higher deficit path than the current plans (ie reaching a deficit of below 3% of GDP by 2013).

Would that be enough? We consider swift implementation of those policies as a necessary but possibly insufficient condition for the Spanish sovereign bond market to stabilise. Debt dynamics suggest that Spain is solvent. Even assuming average funding costs at 6.5% (currently 4%), public debt would stabilise at around 80% of GDP over the medium term. Yet, current market dynamics and the elevated and increasing spreads suggest that Spain is unlikely to stabilise on its own.

We believe also that the EFSF is not an adequate safety net to insulate Spain (and Italy) from contagion, and short-circuit "vicious circle" market dynamics that could overwhelm countries' efforts to adjust and reform. And foreign governments and the IMF could provide cash but not credit. While the EFSF and IMF can provide financial assistance in the form of credit lines, we see little practical alternative to a strengthened commitment by the ECB to act as lender of last resort. We believe that further pressure on the sovereign bond markets will require the ECB steps up unconventional policies in order to help the EFSF and IMF to stabilise stressed but solvent sovereigns like Spain. After all, the ECB's second mandate is one of financial stability, and with Spain and Italy under severe stress, financial stability is at stake.

In other words, what started off as a preview of a political event, ended as yet another direct shot at Merkel for being obstinate enough to not realize that Barclays and other banking analysts need bonuses or else. And since nobody apparently has figured out the all too obvious yet, we will repeat it: Germany is now China - the more it is pushed to do one thing, the further it will push back, as this entire detour is based on political considerations: the last thing the CDU now needs is to be seen in the eyes of its electorate as not only potentially inviting hyperinflation but also yielding to international pressure to do the only thing the broken system knows how to do: "fix" debt by issuing more debt.

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