Tag Archive | "Mariano Rajoy"

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Spain’s Budget Preempts Bank Stress Test Results

Spain’s Prime Minister Mariano Rajoy unveiled his much anticipated 2013 budget that was quickly billed a crisis budget to lift the country from crisis.  The Euro gained some strength based on what appears to be severe budget cuts and far less severe tax increases than expected.

Spain’s 2013 budget relies heavily on an increased Value Added Tax (VAT) to increase revenues.  The budget has 43 moving parts that will make today’s distressed economy looks like a comfort zone by the end of 2013.  The 43 new reform laws will be introduced over the next six months. The budget includes mandated reforms to the labor market, public administrations, energy services and telecommunications sectors.  The most immediate question is how Spain can expect to reach a positive growth rate. This budget projects a 0.5 percent recession year.  That would be a dramatic reversal of form.

The manufacturing sector is down, housing values are down as much as 60% in some areas. There is large scale social unrest throughout the country.  There appears no hope for improvement of the 25% unemployment rate and this budget may very well expand that figure.

Under the Prime Minister’s plan, the central government will reduce spending or €13bn next year.  Spending, not including Social Security and interest payments, will be down 7.3%.  Revenues will increase 4% based on approval of a 15% increase in the country’s VAT.

Prime Minister Rajoy has come under fire from euro zone members because he has resisted applying for bailout funding.  However, in the tenuous political position the Prime Minister finds himself, the formal application may well lead to his immediate ouster.  Spain appears determined to grind out some form of recovery based on seemingly whimsical hopes of foreign investment.  Whether it is a matter of convenience or from some source of unannounced insight, Germany believes that Spain does not need assistance.

However, on Friday a report on the state of the country’s banking system will be released. Analysts project a minimum of 60 billion euros will be needed to stabilize the country’s banking and financial industry.

Two big concerns from the European Commission are how Spain will handle its pensions and what it will do about the retirement age.  Treasury minister Cristobal Montoro said pensions will increase by 1% in 2013.  He refused to answer questions as to whether the government would pay a rate of inflation on previous pension payments.  The possibility seems doubtful as it would add another six billion euros to the national debt.

The budget is based on a 0.5% recession rate for the upcoming year.  This, in itself, would be a major financial and economic turnaround.  The immediate response to the new budget was positive as the euro rebounded from two-week lows.  Any gains could well be overshadowed by tomorrow’s bank stress test results.

Expected tax increases were not included on the revenue side. This may ease some of the tension in Madrid streets but will certainly cause concern with foreign investors.

Ministry expenditures will be cut 8.9% across the board.  The budget will pressure provincial governments to increase their income according to preset limits.  This is very likely to cause a spike in unemployment during 2013.

Spain’s frustrated workforce may have expected even deeper cuts and higher taxes.  In order to qualify for bailout funding, Spain must formally apply for help.  The precursor to receipt of the money will impose the same limitations placed on Greece, Ireland and Portugal.  At this time, the euro zones fourth largest economy is trying to keep its independence and appease both frustrated euro zone neighbors and a hostile electorate.  While the Prime Minister’s budget will make progress, a lack of growth will only lead to more unemployment and more hostile protests.  Spain’s Prime Minister is in no-win situation.  Tomorrow’s bank stress test results may well be the final blow to Rajoy’s hopes for financial independence.

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For Euro The Trend is Down

Once again what was perceived to be an encouraging remedy offered by the ECB last week is muddled in political and financial theater, causing the Euro to reverse last week’s positive trend. This time Spain looks to be the culprit.  Further hindering the Euro was a release from Germany indicating that the Euro Zone’s strongest economy may be heading into recession.

The news from Spain was predictable.  But, the message from Germany may have far-reaching ramifications for the region.  September marks the fifth consecutive month that German business sentiment has trended down.  The lack of confidence in Germany increased investor concerns concerning a stalling global economy.

In Spain, Prime Minister Mariano Rajoy is holding firm that the request for bailout funding is not necessary at this time.  It is believed that the Prime Minister will eventually apply for rescue funds after a regional election to be held on October 21.  Spain’s resistance is puzzling because the country was active in pushing Ireland and Portugal to pursue a Euro Zone bailout deal.  Now, it is Ireland that is pushing Spain to apply and accept the bailout financing.

Countries like Ireland rely upon a stable euro to attract outside investment and are nervously awaiting Lisbon’s decision.  Rajoy became Prime Minister just nine months ago.  His policy is completely opposite from the posture of the previous administration. So, the message appears clear. If Rajoy applies for bailout funding, he will be voted out of office. Let’s be charitable and say that the Prime Minister is in over his head

In addition to Portugal and Ireland, France and Italy are also applying pressure to Spain to proceed immediately.  However, the Euro Zone’s paymaster, Germany, is not in any hurry to support a request from Lisbon.  France and Italy need investor confidence in the Euro zone to stabilize so as to reduce their yields on their bonds.

In Germany, 2013 is a critical election year.  Public sentiment opposes underwriting bailout funding for other Euro Zone states.  Germany’s financial leaders do not view the European Financial Stability Facility (DFSF) and the European Stability Mechanism (ESM) as a means for governments to obtain inexpensive funding for governmental operations.

For Germany and Austria, it is clear that the use of these funds is a last resort. They are determined to not make it easy for Euro zone members to access these funds until every other resource has been exhausted.  Austrian finance minister stated that position last week saying, “The goal is not to get as many countries as possible under the program, but to keep them stable enough so that they do not need a program.”

Last week, the ECB said it would buy potentially unlimited quantities of short-term bonds in secondary markets.  However for the ECB to act, nations must apply for Euro Zone bailout funds and agree to implement related fiscal and economic reforms which are monitored by an international supervisory committee.  Rajoy feels the austerity conditions accompanying bailout funding are prohibitive and contrary to any opportunity Spain would have to grow its economy.  Spain is scheduled to submit a new package of reforms at the end of this week at the same time that the prime minister submits his 2013 Budget.

Disappointing economic new-age from Germany

The lack of business confidence in Germany spread quickly across global equity and currency markets.  The immediate future does not look good for the Euro which made a pretty spectacular rally last week.

On the US equity front, the S&P 500 had climbed 6% on expectations that central banks would provide strong stimulus to assist the recovery. It appears that the ECB initiative is temporarily blocked.  Investors are also concerned about the Federal Reserve’s newest buying spree.  Many analysts thought the Fed would implement more direct investment to reduce the unemployment rate.

On Monday, the Euro hit a session low old 1.289 USB, its lowest valuation since September 13th.  Against the yen, the Euro traded at 100.54 yen, down 0.8%.  It is clear that the rally in the Euro spawned by the ECB’s new policy has already lost its momentum.

Don’t overlook Greece

Greece has made some progress in managing its debt by implementing some pretty severe austerity programs.  The question is whether the EU/IMF report on November 6 will qualify the country for the next round of bailout funding.

Greece has steadfastly insisted that they will meet the EU/IMF qualifications to entitle the country to the next round of funding.  Most analysts do not see how Greece can meet the overwhelming conditions.

Greece will not only have to trim programs, but will also have to show some growth.  There is no indication that Greece, which has been in and out of recession five times in the last seven years, can possibly generate growth.  This means that stronger austerity cuts are the only way for the country to meet its deadline terms.

So, where does that leave investors?  Investors seem to be attracted to reliable U.S. stock performers.  With U.S. bonds at historically low rates, certain US equity opportunities are in strong demand.  And, of course, if the dollar weakens, the U.S. may well increase its export trade.  Stay tuned, there’s a lot to come before the end of the week.

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Spain’s Rajoy Scores With Fiscal Conservatives

With his crushing new austerity program, Spain’s Prime Minister, Mariano Rajoy, scored big with fiscal conservatives, but taxpayer enthusiasm rated the initiative much differently. In a rare display of political honesty, a commodity lacking throughout the euro zone debt crisis, Rajoy informed Parliament that while he had run on a program of lower taxes, circumstances mandated this was not the time to cut taxes and, in fact, taxes must be raised, imposing far-reaching cuts in spending. In his new proposal, no component of the income or expense budget was spared.

The immediate reaction by labor and taxpayers was a swelling protest march that had begun 350 miles from Madrid in the mining community of Asturias.  The legions of striking miners were received with loud vocal support as they entered the capital with helmets aglow last night. The ranks were expanded as supporters and protestors outside the mining profession joined in.

One supporter, Manuel Corte, a security worker, summed up the protestor’s position, “I thought the previous cuts on medicines and pensioners and on education were the worst possible thing but now it is disaster.”  His inference was to the fact that there would be deeper cuts and higher taxes under the latest program.

Rajoy has played his cards close to the vest.  In trying to protect his campaign promises, he vehemently opposed euro zone support before finally acknowledging Spain was in  a deeper than expected banking crisis.  He was forced to apply for bailout funding to avert a run the nation’s banks.

As part of the agreement, the euro zone extended Spain an extra year, until 2014, to bring the public deficit. In negotiating the terms of the new rescue package with euro zone finance ministers, Rajoy won several important concessions.  Among the most significant are:

  • A line of credit up to 100 billion euros.
  • An agreement to give Spain an extra year, up to 2014, to bring the public deficit down to 3 percent of GDP of gross domestic product.
  • An acceptance by euro zone finance ministers to allow this year’s deficit to be 6.3 percent.

The Brussels commission did stipulate that further concessions would be extremely difficult to obtain.  Prior to Spain’s new initiatives, euro zone ministers had chastised Rajoy and Spain for falling to address the banking and national debt crisis.

Rajoy’s new budget completely revamped his previous budget, which was deemed oppressive by taxpayers but pales in comparison to the new budget. Rajoy explained to Parliament that the new austerity cuts and tax increases were necessary to slash 65 billion euros from the country’s deficit. Some of the relevant new budget items include:

  • A 3-point hike in the Value Added Tax (VAT) bringing the new rate to a whopping 21 percent.
  • New direct taxes on energy.
  • Initiatives to privatize public facilities such as airports, ports, and railways.
  • Reversal of property tax breaks implemented in December legislation.
  • Reforms to the nation’s city halls.
  • Shutdowns of public companies.
  • Reduced benefits to public servants.
  • Budget cuts for political parties.
  • Labor Union reforms.

These public policy changes were immediately met with protest as the civil service trade unions announced a schedule of strategic July work stoppages and a possible nation-wide strike in September.

Carefully drawing his words, Rajoy informed Parliament that the only alternative was a national bankruptcy.  This option would create far worse repercussions as banks would be unable to meet customer demands in an expected run.

Rajoy’s presentation to Parliament drew jeers from opposition parties and a protest outside the Parliament building. Chants of “This is not a crisis, it’s a rip-off,” filled the air.

However, a July 2nd report from Eurostat showed that in 2011, the national unemployment rate was 21.2 percent. Youthful unemployment for workers between the ages of 15 and 24 was 46.4 percent and long-term unemployment, workers unemployed for more than 12 consecutive months stood at a staggering 41.6 percent. The government’s most recent unemployment report stated the current unemployment rate, not long-term unemployment, at 24.4 percent.

One of the few campaign promises Rajoy was able to salvage was his promise that he would not change pensions. The Prime Minister said he would discuss the possibility of linking the benefit packages to life expectancy, a move supported by the EU.

For the Prime Minister, the opposition will roar across the nation. To his credit, the Prime Minister stood his ground as long as he could and then negotiated a better deal than would have been received five months ago. Fiscal conservatives and analysts welcomed a courageous national leader who stepped outside the popular neutral position held by politicians in the US , other euro zone countries and the EU nations. Politicians who push painful, deficit reduction and tax policy increases can expect a short political life. For putting sound fiscal policy ahead of his personal agenda, kudos to Prime Minister Rajoy!


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Spain Needs Bailout, India Needs Investors

Spain formally applied for bailout funding for its troubled banking sector.  The amount needed was not revealed but indications are this will be discussed and approved at Thursday’s European Union meeting.  Early Monday, Prime Minister Mariano Rajoy and Economy Minister Luis de Guindos verified the need for up to 100 billion euros to settle the country’s banks.  Rajoy announced the country would soon implement a new pro-growth strategy aimed at increasing jobs and expanding the economy.  As is apparently the custom in the region, no details were revealed. Most likely this will be another much debated topic at the Thursday meeting.

De Guindos said a letter of intent would be executed and relayed to the European Union and Euro group.  EU leader, Olli Rehn, said the deal could be completed in a few weeks. The announcements helped reduce the yield of Spanish 10-year bonds down from more than 7 percent last week to 6.5 percent on Monday.

The Spanish bond yields began to rise as results from Friday’s meeting between the region’s four biggest economies in Rome.  With Italy, France Spain joined Germany attending at the summit, German Chancellor Angela Merkel squashed any ideas of a quick fix and rejected the idea of new financial commitments.

Every week it becomes more difficult to see what Germany wants or does not want.  One week Merkel is willing to discuss pro-growth strategies only to oppose this possibility early the following week.  On Friday, Merkel told the other big four members of the euro zone that Germany wanted no part of shared liability concept that pro-growth underperforming economies sought.  Merkel also doused the idea of guaranteed deposits. The disconnect wore heavily on fatigued investors as the euro gave back 0.53 percent, settling at $1.2501.

The upcoming EU summit marks the 20th attempt by the group to create a successful, unified workout. However, Merkel’s stance that German taxpayers will pay no more will most likely doom this meeting before it begins.

India Pushes For Growth    

For much of the post-Lehman Bros. collapse era, the emerging BRIC nations were sailing smoothly.  Of late a few chinks in the armor have developed, especially in China and India.  To increase growth, India unveiled a four stage strategy to increase in-country investment and to encourage international investment in Indian companies.

The Rupee fell to a record low to $57.32 USD on Friday.  In response, India raised its level of foreign investment and relaxed restrictions on several types of investment.  The country’s new bond limit will be $20 billion, of which $5 billion can come from foreign investors. Investors appeared to be disappointed by the offering thinking that limits would be increased more.

The central bank not only relaxed the term for which foreign investors must hold government bonds but the government also opened the bond market to pension funds, other central banks, sovereign funds and insurance companies.

Of late, India’s economy has come under fire.  The rupee began to fall against the dollar mid-summer last year and is down 7 percent this year. India’s equity market shed 0.53 percent after Monday’s announcement, indicating dissatisfaction with the proposed remedy. Prior to the global recession, India was growing its economy by a stellar 10 percent per year.  After March 2012, growth was at a nine-year low of 5.3 percent.

A critical issue for India is the poor infrastructure that is now hindering growth. To grow support for infrastructure construction, India opened its doors to foreign investment in companies that were previously unavailable to outside investors. India also reduced the amount of time that foreign investors would have to hold their bonds from three years to one year.

India’s deficit is believed to be in the vicinity of $72 billion at the end of June. A year ago, the deficit was $49 billion.  India has already lost many international investors and as Fitch prepares to downgrade the country’s credit to junk status, enthusiasm is disappointingly low.

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Spain In Banking Business

On Wednesday, the euro zone put aside politics long enough to observe the plight of Spain.  In an attempt to stabilize the reeling banking sector, the government took the reins of Bankia, one of the nation’s largest banks that had recently absorbed three smaller banking entities. In announcing the takeover, Prime Minister Mariano Rajoy attempted to calm the populace declaring that the banking sector was stable and under control.

Rajoy has plenty of skeptics.  Spain’s banks have borne the brunt of the country’s financial plight. With sinking deposits and bludgeoning toxic assets, Spanish banks are holding more than $238 billion in bad loans.  Banks have resorted to renting or selling properties at historic lows to create movement in a stale market.

The euro fell to a 3.5-year low. Entering Thursday’s fray, the euro has lost ground on 8 consecutive days.  The euro rebounded lightly from the intra-day low of 1.2910USD.  Against the yen, the euro lost 8 percent, settling at 103.24 yen.

In Greece, neither pro-bailout parties nor anti-bailout factions have been able to construct a collation to rule. The bottleneck will result in another election.  Despite the tension, the European Financial Stability Fund (EFSF) agreed to advance 5.2 billion euros to the struggling nation.  4.2 billion euro will be distributed in June.  These finds will permit Greece to meet its obligations and to continue government operations.

In a recent poll, the majority of Greeks want to preserve the euro.  However, there is strong sentiment to overturn the austerity programs the region has forced upon the country.  Meanwhile, Germany is standing form that if Greece does not comply with the workout structure, there can be no more funding and the country will have to return to its national currency, the drachma.

In France, new President Francois Hollande vows to grow the economy out of recession rather than implement deep austerity cuts.  The Socialist is scheduled to meet with Germany’s Chancellor Angela Merkel on Friday for what should be an interesting initial meeting.  France has reneged on its austerity stance in favor of more government spending programs designed to stimulate employment.  During his successful campaign, Hollande insinuated that, if necessary, France would stand on its own economic feet and leave the euro zone. Such a move would signal the end of the 17-member alliance.

Hollande may find more support than he expected.  The trend in the region is to gradually implement debt reductions with a keen eye on any growth opportunities.  The continent is in a virtual stand down in terms of employment and growth.  Young workers have been especially hard hit during the downturn.  Most Euro zone nations are in prolonged recessions and have watched housing markets lose up to 70 percent of their value.

It is a rocky time on the continent.  One way or another change is coming.






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Downgraded Spain And Collateral Damage

Spain’s Prime Minister, Mariano Rajoy, has steadfastly declared that the country could handle its debt crisis. His cabinet continues to support his vision, but S&P doesn’t see it that way. After downgrading Spain’s credit rating to BBB+, S&P issued a poignant message that, “In order for Spain to restore financial confidence, the euro zone must include a greater pooling of fiscal resources and obligations, possibly direct bank support mechanisms to weaken the sovereign-bank links, and a consolidation of banking supervision or a greater harmonization of labor and wage policies.”

The other top rating agencies, Moody’s and Fitch, do not have the same opinion as S&P. The two credit rating services have stated that Spain has the “strong payment capacity.” While Spain’s rating is not considered “junk” status, it is considered risky.

The Prime Minister and his cabinet insist that they can accomplish their budget goals with austerity measures. However, Spain’s populace is resisting the austerity program. Unemployment is now at 24 percent and expected to increase. Retail sales were down in March for the 21st consecutive month. Adding to the problem, the loss of employment has caused billions of euros in lost tax revenue. With 365,000 unemployed workers in the first quarter 2012, Spain has lost more than 950 million in tax revenue.

To compensate, Spain has increased the value added tax (VAD). Spain is suffering its second recession in the past three years. With declining GDP and low levels of consumer confidence, the future looks bleak for Spain and its neighbors. Romania and Czechoslovakia are the newest center stage regional economic disaster areas.

On Thursday, Spain’s Economy Minister, Luis de Guindos, projected GDP growth of 0.02 percent in 2013 and a bold 1.4 percent in 2014. Spain has already reduced 2012 spending by 42 billion euros in 2012. Like many of the euro zone projections, it is difficult to ascertain upon what figures the Economy Monitor is basing his projections. But, Spain needs investors and the cabinet is on message as the country looks for financial support.

Another initiative implemented by Rajoy, who assumed office in December, calls for the foundation of a holding company where failing real estate loans will be centralized. This action follows consolidation of the country’s banks. The existing banks have aggressively managed their toxic assets but the country’s banks are over-burdened with debt as deposits shrink an withdrawals decrease.

S&P made it clear that austerity was not enough to stabilize Spain’s economy and the country’s banks. In a message to the entire euro zone, the credit agency echoes the call by the ECB that the region must adopt and implement uniform standards and action plans as a means to a better outcome.

Andrew Lim, an analyst with Esprito Santo in London, says that Spanish banks are holding the largest amount of toxic loans sine 1994. He suggested that a 53.8 billion euro buffer was about half the amount needed for the banks to ride through the storm ahead. Spain needs another immediate 20 billion euros to consolidate three more banks. The government is considering the issue of bonds secured by future contributions, but this seems an unlikely remedy.

While Portugal, Greece and Ireland are in line for support from the European Stability Fund (ESM), euro zone officials are not optimistic about help for Spain. Spain has not complied with the standards set by the IMF or the ECB.

The real issue here is the impact of the severe austerity cuts upon a nation’s economy. The consensus is that the penalties of austerity outweigh the advantages of some form of monetary easing.

The perfect model for this debate is Romania whose government is in the midst of a political and economic rebellion. Prime Minister Mihai Razvan Ingereanu has been in office for two months. His reign received a lack of support in a vote of confidence on Thursday.

Romania is the European Union’s second poorest nation. Ingereanu has launched a wave of austerity cuts that have the country reeling. The lack of confidence leaves President Traian Basecu with the duty of proposing a new Prime Minister. Victor Ponta is the probable replacement.

However, the IMF, which has already made two loans to Romania has stated that they will not provide further funding until the political situation is resolves and the budget cuts are enacted. This could take several months. Once again, the euro zone impacts every other market place and there is growing sentiment that would suggest this single currency is in jeopardy.



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