Tag Archives: Spain

John Rubino: How Stupid Do You Have To Be To Let This Happen?

By John Rubino, Mar 27, 2016

How Stupid Do You Have To Be To Let This Happen?

Europe is the birthplace of Western civilization and the source of most of the trends and bodies of knowledge that define modernity. The average European speaks several languages versus sometimes less than one for Americans. They are, in short, a well-schooled people with vast accumulated wisdom.

So how do we explain this: After World War II most European countries set up generous entitlement systems including government pensions designed to offer dignified retirements to citizens who had worked hard and paid taxes and obeyed the rules for a lifetime. BUT they didn’t bother putting anything aside for the inevitable — and mathematically predictable — retirement of the immense baby boomer generation. Here’s an excerpt from a recent Wall Street Journal article outlining the problem:

Europe Faces Pension Predicament

State-funded pensions are at the heart of Europe’s social-welfare model, insulating people from extreme poverty in old age. Most European countries have set aside almost nothing to pay these benefits, simply funding them each year out of tax revenue. Now, European countries face a demographic tsunami, in the form of a growing mismatch between low birthrates and high longevity, for which few are prepared.Europe’s population of pensioners, already the largest in the world, continues to grow. Looking at Europeans 65 or older who aren’t working, there are 42 for every 100 workers, and this will rise to 65 per 100 by 2060, the European Union’s data agency says. By comparison, the U.S. has 24 nonworking people 65 or over per 100 workers.

“Western European governments are close to bankruptcy because of the pension time bomb,” said Roy Stockell, head of asset management at Ernst & Young. “We have so many baby boomers moving into retirement [with] the expectation that the government will provide.”

The demographic squeeze could be eased by the influx of more than a million migrants in the past year. If many of them eventually join the working population, the result could be increased tax revenue to keep the pension model afloat. Before migrants are even given the right to work, however, they require housing, food, education and medical treatment. Their arrival will have effects on public finances that officials have only started to assess.

A Growing Mismatch
The pension squeeze doesn’t follow the familiar battle lines of the eurozone crisis, which pits Europe’s more prosperous north against a higher-spending, deeply indebted south. Some of the governments facing the toughest demographic challenges, such as Austria and Slovenia, have been among those most critical of Greece.

Germans, meanwhile, “are promoting fiscal rules in Spain and other countries, but we are softening the pension rules” at home, said Christoph Müller, a German academic who advises the EU on pension statistics. He pointed to a recent change allowing some workers to collect benefits two years early, at 63. A German labor ministry spokesman called that “a very limited measure.”

Europe’s state pension plans are rife with special provisions. In Germany, employees of the government make no pension contributions. In the U.K., pensioners get an extra winter payment for heating. In France, manual laborers or those who work night shifts, such as bakers, can start their benefits early without penalty.

Across Europe, the birthrate has fallen 40% since the 1960s to around 1.5 children per woman, according to the United Nations. In that time, life expectancies have risen to roughly 80 from 69.

In 2012, the Polish government launched a series of changes in its main national pension plan to make it more affordable. One was a gradual rise in the age to receive benefits. It will reach 67 by 2040, marking an increase of 12 years for women and seven for men. The changes mean the main pension plan now is financially sustainable, said Jacek Rostowski, a former finance minister and architect of the overhaul.

The party that enacted the changes lost an election in October, however, and a central promise of the winning party is to undo them. Recently, Poland’s president introduced a bill to reverse some of the measures. “You have to take care of people, of their dignity, not finances,” said Krzysztof Jurgiel, agriculture minister in the current Law & Justice Party government.

The implication is that Germany, Italy, Spain, France et al are functionally bankrupt, apparently (amazingly) by choice. They saw the avalanche coming decades ago and instead of getting out of the way or reinforcing their chalets, simply sat there watching the snow roll down the mountain. It will be arriving shortly, and they’re still debating what — if anything — to do about it.

In fact the only thing that can be reasonably described as preparation is the decision to ramp up immigration. This might have worked if Europe had chosen more compatible immigrants, but that’s a subject for a different column. For now let’s focus on insanely stupid choice number one, which is to offer entitlements with no funding mechanism other than future tax revenue. If an insurance company or corporate pension plan did something like that its executives would be led away in handcuffs — rightfully so, since the essence of such deferred-payout entities is an account that starts small and grows to sufficient size as its beneficiaries begin to need it.

So what the Europeans have aren’t actually pensions, but a form of election fraud designed to give an entire generation of politicians the ability to offer free money to voters without consequence.

Soon, a whole continent will be left with no choice but to devalue its currency to hide the magnitude of its mismanagement. The math will work like this: devalue the euro by 50% while raising pension payouts by 20%, thus cutting the real burden significantly — while taking credit for the nominal benefit increase at election time. It might work, based on the level of voter credulity displayed so far.

Now here’s where it gets really interesting. The US “trust funds” that have been created to guarantee Social Security and Medicare are full of Treasury bonds, the interest on which is paid from — you guessed it — taxes levied each year on US citizens. So the only real difference between the European pay-as-you-go and US trust fund models is that the former is more honest.

This is why gold bugs and other sound money people are so certain that precious metals will soon be a lot more valuable. The pension numbers are catastrophic everywhere and the reckoning that was once merely inevitable is now imminent. Europe is a little further along demographically and so might have to devalue its currency first, but $80 trillion in unfunded Medicare liabilities can’t be denied. We’ll be following along shortly.

This article is written by John Rubino of Dollarcollapse.com and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Dollarcollapse.com, please visit:


How Much Austerity Has Europe Actually Endured?

Bloomberg, Jul 9, 2015

Pensioners queue to enter a National Bank of Greece branch to collect their pensions in Thessaloniki on Thursday, July 9.

Quantifying the economic pain among bickering neighbors in the euro zone

As euro zone leaders wait for details on Greece’s last-chance proposal for a new bailout deal, several have taken a hard line toward Syriza’s claim that austerity measures, as they stand, are unacceptable to the Greek people. Those feelings have been simmering for months. After all, people in Ireland, Portugal, Spain, and Italy have all dealt with harsh austerity measures implemented following debt crises. If these countries had to swallow the bitter pill of austerity, the argument goes, so should Greece.

But are the situations comparable? How much austerity have these countries endured, exactly? Budgetary austerity is roughly defined as any combination of spending cuts and tax increases, usually during an economic downturn. The broadest way to quantify such policies is to look at the change over time in a country’s structural deficit. While a government’s total deficit is simply the difference between its revenue and expenditures, it can change over time because of cyclical factors beyond its control. Imagine a country with a balanced budget that suddenly suffers an economic downturn due to some outside shock. Incomes will fall, which will depress the amount of taxes the government collects. This pushes the balanced budget into deficit, since the government is still spending as much as before. But the structural deficit is still zero, since the government hasn’t made any fundamental changes to its tax-and-spend policies.

Measuring the change in a country’s structural balance shows how committed that country is to balancing its books. So do the other peripheral euro zone nations have a case when they say Greece should endure the same austerity they did? As the chart below shows, Greece has undergone austerity far beyond what its counterparts have. In 2009, Greece’s structural deficit was 18 percent of gross domestic product. Spending cuts and tax hikes have resulted in a 2 percent-of-GDP surplus, a 20 percentage-point swing. Ireland has dealt with just a 9-point increase over the same period, with Spain and Portugal each enduring 7-point swings. (The U.K. and the U.S. have dealt with 6- and 4-point swings, respectively.)

To be fair, Greece’s structural deficit was the biggest to begin with. Its tax-and-spend policies were the least sustainable, so would naturally require the biggest adjustment. But when other countries claim they’ve had to endure austerity like Greece, it isn’t quite true.

That’s not to say life has been easy in the rest of the euro zone these past few years. A quick look at GDP shows that Spain, Portugal, and Italy remain poorer than they were in 2008. Still, Greece’s economy has shrunk by a staggering 23.6 percent. (The U.S. lost 30 percent from peak to trough during the Great Depression.)

But if the peripheral euro zone’s pain isn’t quite as severe as Greece’s, it’s understandable why it might feel that way. Unemployment in most countries peaked at more than double pre-austerity levels. Spain’s jobless rate even exceeded Greece’s until 2013 and has nearly matched it since then:

If a quarter of your population is still searching for work after austerity implementation, it’s easy to see how solidarity for Greek debt forgiveness might be a difficult sell.


John Rubino: What If You Had An Italian Bank Account? Or A Portuguese Bond?

By John Rubino, Jul 2, 2015

Though it might yet drag on for weeks, months or even years, Greece’s drama can end in one of only two ways: Continued austerity which consigns its most vulnerable 50% to an endless “capital D” Depression, or some form of temporary dictatorship complete with capital controls and wealth confiscation — and a then “capital D” Depression. Either way, some of today’s Greek kids might grow up without ever holding a job in a legitimate business. For more details, see Greece’s hideous choice: More austerity or collapse.

But Greece was never the main story. At best (worst?) it’s an illustration writ small of what’s really coming, as the eurozone’s bigger weak economies travel the same road. Italy, Spain, and Portugal will soon need (more accurately demand) a Greek-style bailout, though with a twist: There isn’t enough money available anywhere to bail out economies of that size sufficiently to allow them to remain in the common currency union NOR to manage the debt writedowns that would instantly hit the major European banks if those countries withdraw from the euro. So whatever Greece does, the real crisis is on its way. Here’s a good Zero Hedge analysis of what comes next.

To understand this convergence of inevitable and imminent, put yourself in the shoes of an Italian with a local bank account. You’re seeing the footage of Greeks queuing up around the block only to be greeted with “No Money” signs when they finally reach the ATM. And you’re drawing the right conclusion: Get your money out of the local bank and under your mattress, into a tin can buried in the back yard, or into a Swiss franc account even at the cost of a negative interest rate. Later, when Italy has left the eurozone and returned to a much-devalued lira, those euros/francs will be worth twice as much as they are today.

Or buy gold just in case Italy gets bailed out with a trillion newly-created euros, causing that currency’s value to plunge. Just don’t leave it in the local bank to be confiscated by the government.

All it will take is a few tens of thousands of like-minded Italians, Spaniards and Portuguese to crash their local banking systems. But why would it be only that many? Why would anyone with money in those banks, even if they’re far more optimistic than our hypothetical Italian, not empty their accounts just to avoid the turmoil caused by the pessimists?

And why would anyone lend money to those countries for five or ten years, which is what you do when you buy one of their bonds? That banks, governments and hedge funds around the world have gorged on eurozone debt while writing hundreds of trillions of dollars of derivative “insurance” on them is something historians will be scratching their heads over for decades.

This article is written by John Rubino of Dollarcollapse.com and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Dollarcollapse.com, please visit:


ECB Billions Can’t Save Euro-Area Bonds From Worst Quarter Ever

Bloomberg, June 30, 2015

The European Central Bank’s first full quarter of quantitative easing hasn’t stopped the region’s government bonds from heading for their worst performance on record.

The rout started in April after the ECB’s purchases helped send yields on more than $2 trillion of euro-area sovereign debt below zero, sparking an investor backlash against such meager returns given the region’s improving economic outlook. ECB President Mario Draghi added fuel to that fire this month when he said markets must get used to periods of higher volatility. The latest turmoil in Greece further undermined bonds from Europe’s periphery, even as it revived some demand for the relative safety of German debt.

Euro-area sovereign securities handed investors a 5.7 percent loss this quarter through June 29, according to Bank of America Merrill Lynch’s Euro Government Index, which tracks data back to the end of 1985. That was led by a 16 percent decline in Greek securities, with German bonds dropping 4.7 percent and Spain’s 6.4 percent.

“German 10-year bund yields went down to five basis points in April at the same time the ECB was throwing 60 billion euros a month at the market,” said Mark Holman, chief executive officer at TwentyFour Asset Management in London, which oversees about $8 billion. “We’ve seen better growth prospects, better economic numbers. Is that consistent with five basis point yields? Absolutely not.”

The ECB settled about 194 billion euros of public bond purchases between the program’s start on March 9 and June 26, it said on Monday.


Credit Risk Gauges in Europe Rise by Most Since Lehman on Greece

Bloomberg, June 29, 2015

Measures of risk in Europe’s credit markets surged after Greek debt talks broke down, rising the most since Lehman Brothers Holdings Inc. failed in 2008.

A benchmark of credit-default swaps rose by as much as 20 percent to the highest in more than a year, according to data compiled by Bloomberg. Greek bank bonds dropped to their lowest levels on record and contracts insuring the Mediterranean nation’s sovereign debt indicated a 91 percent probability of default.

Source: Bloomberg

Greece sent shock waves through credit markets after the government shut its banksand imposed capital controls in an overnight announcement aimed to prevent the collapse of its financial system. Prime Minister Alexis Tsipras’s decision to call a July 5 referendum on austerity measures demanded by the country’s creditors derailed months of negotiations.

“No one really knows what the consequences of a Greek exit would be,” said Gary Jenkins, chief credit strategist at LNG Capital. “Then again no one really knows what the consequences of a Greek default would be either. Or the longer term consequences of a deal which includes debt forgiveness. We are all just guessing.”

The Markit iTraxx Europe index of credit-default swaps on 125 investment-grade companies rose to as high as 80 basis points, and was at 74 basis points 1:29 p.m in London, Bloomberg data show. The index was the most-traded credit-default swap measure globally, with a gross $196 billion changing hands in the week through June 19, the most recent data published by the Depository Trust & Clearing Corp.

Bank Bonds

The Markit iTraxx Europe Senior Financial Index of credit-default swaps on 30 European banks and insurers climbed by as much as 21 basis points to 98 basis points. The increase is the biggest in percentage terms since Sept. 15, 2008, Bloomberg data show.

Credit risk is still lower than during the debt crises of 2008 and 2011. The investment-grade index reached a peak of 217 basis points in December 2008 and rose 25 basis points to 128 basis points on the day Lehman collapsed on Sept. 15, 2008.

Alpha Bank’s 400 million euros of 3.375 percent notes due June 2017 dropped 28 cents on the euro to 40 cents, while Piraeus Bank’s 500 million euros of 5 percent notes maturing in March 2017 dropped 23 cents to 41.5 cents.

Greek Exit

Strategists are reassessing the likelihood of Greece leaving the group of 19 nations that use the single currency. The probability of a Greek exit increased to about 60 percent from 40 percent, according to Hans Redeker, Morgan Stanley’s global head of currency strategy. The risk increased to 40 percent from 20 percent, Royal Bank of Scotland Group Plc strategists including Michael Michaelides wrote in a note to clients.

“If you were to put a gun to my head and say: Give me a probability right now that Greece is in the euro zone in the next few weeks, I would tell you it’s about 15 percent — there’s an 85 percent probability that Greece will be forced to leave the euro zone,” Mohamed El-Erian, chief economic adviser at Allianz SE, said in a Bloomberg TV interview.

While markets have essentially stopped trading Greek default insurance, sovereign debt risk signaled by the contracts surged. Credit-default swap prices implied a 91 percent probability of default within five years, up from 71 percent on Friday, according to data compiled by CMA.

The upfront cost of insuring $10 million of Greek debt for five years rose by $1.3 million to be quoted at $5.1 million. That’s in addition to $100,000 annually and assumes investors would recover 35 percent of face value should the government default.

Sovereign Debt

The yield on Greek 10-year securities jumped the most on record, up 389 basis points to 14.74 percent, the highest since December 2012. While yields on Spain’s bonds also rose, the increases were only the steepest since last month.

“The market is waiting to see how bad contagion is from Greece,” said Geraud Charpin, a London-based money manager at BlueBay Asset Management, which oversees more than $65.8 billion. “We’ve yet to see how much a Greek exit would hurt Europe. Who knows what will happen when we open Pandora’s box.