Global Economic News

Spanish Debt Crisis Has Now Erupted

May 28 (EIRNS)—The financial and economic situation in Spain can implode at any moment. The Bank of Spain has issued new rules to banks where they have to set aside reserves of up to 30% on property holdings, according to City of London mouthpiece Ambrose Evans-Pritchard. Writing today in the Daily Telegraph, Evans-Pritchard said the new rules hit particularly the cajas, Spain's savings banks, which hold much of the EU445 billion of property debt. This follows the failure of Cajas Sur which forced the government to take it over last week.

There are already 926,000 unsold houses, a figure that could well increase to 1.6 million, once the banks start unloading these properties, Evan-Pritchard writes, adding that it represents "a gamble, risking a house price crash." But it is not just the cajas; both the Inter Alpha Group's Banco Santander and BBVA, Spain's largest and second-largest banks respectively, are being force to borrow on the interbank market at a stiff premium. BBVA reportedly was unable to rollover EU1 billion in commercial paper. Spanish lenders have to raise EU125 billion by late 2011.

Meanwhile, the Spanish Parliament passed the government's austerity package by only one vote. The measures call for a 5% wage cut for public sector workers and a three-year wage freeze, cuts in various benefits, and raising the retirement age.

An IMF delegation was in Spain this week, and issued a dire assessment of the Spanish situation: "The challenges are severe: a dysfunctional labor market, the deflating property bubble, a large fiscal deficit, heavy private sector and external indebtedness, anemic productivity growth, weak competitiveness, and a banking sector with pockets of weakness."

While the Spanish debt is only 55% of the country's gross domestic product, at least 55% of the debt is held by foreign creditors, who could very easily pull out their funds. On May 28, Fitch Rating downgraded Spain's sovereign debt.

German Short-selling Ban Gets Support

May 29 (EIRNS)—Support for Germany's unilateral ban on short selling is growing, and the only thing preventing its adoption is the self-imposed "consensus" to do it on a "European" level.

On the European level, the Financial Times has an article entitled, "Europe dithers over adopting Germany's short selling ban." While reporting that France and Great Britain were critical of the proposal, the article says others were supportive but mentions only Belgium. It quotes Eddy Wymeersch, chairman of European Securities Regulators, as having said the move was "not off the cards, but not on the cards either. There is not a unanimous view to follow the German approach."

Prime Minister of Belgium Yves Leterme is quoting as having said that a ban "is an interesting idea, which may have merit. For us the key thing is to act together [in Europe]. If it came up in discussion at that level, we might support it. We are studying the dossier."

In Germany, the opposition Social Democratic Party gave its full support to the government decision to act unilaterally, with the vice chairman of the SPD faction, Joachim Poss, saying that such a measure was long overdue.

The German Industry and Trade Chamber Association (DIHT) announced support for limited prohibition of these sales, but demands that it be done European wide, if not internationally.

And, the Austrian government joined the German move against "naked" short sales, by expanding a decree that already had been in place against certain categories of such sales, to a number of leading banks and insurance companies, including a ban on CDS related to state bonds of Eurozone member countries. The Austrian measures will be in effect until November.

U.K.'s Spending Cut 'Shock Wave' Just the Beginning

May 24 (EIRNS)—Chancellor of the Exchequer George Osborne and his deputy David Laws, Chief of the Treasury, announced the first round of budget cuts this year (£6.2 billion), and said they expect to announce deeper cuts later in the year as government departments report in, as Britain adopts an austerity policy to reduce the £156 billion government deficit. "This is only the first step on what will be a long road to restoring good management of our public finances," said Law, adding, "Even tougher decisions undoubtedly await us."

The only areas exempt from cuts this go-round are: spending on defense; foreign aid; the National Health Service (NHS); and schools, with the exception of food aid and administrative overhead. Both the Conservatives and Liberal Democrats in Parliament agreed to the £6.2 billion start-up figure. Labour will oppose cuts in the first year, arguing that the "recovery" has not yet gelled.