Category Archives: Sin categoría

Massive Subsidies Endanger Spanish Energy Reform

Global Economy, On the cover, Sin categoría, Spain,
This article was published in El Confidencial on August 27th 2012 

“If technologies have economic merit, no subsidy is necessary. If they don’t, no subsidy will provide it”. Jerry Taylor.
“Governmental subsidy systems promote inefficiency in production and efficiency in coercion”. M. Rothbard

This week the press has highlighted the discrepancies between two of Spain’s top ministers regarding the much delayed electricity sector reform. The shares of many of the companies involved have moved between +7% and -6% depending on the words of one minister or another.
Let me begin by saying that I do not find anything wrong when a company hires a consultant to defend its interests and that, when they do, they do it with the best. And I believe this controversy creates a great opportunity for the government to demonstrate that their decisions are not influenced by one lobby or another, but focused on the only thing that matters: that Spain cannot continue destroying its competitiveness with a massively subsidized and inefficient energy sector, where the electricity bill has soared by 40% while demand fell and where excessive renewable subsidies count for 39% of the costs (excluding energy component) of the system.
renewables II
To eliminate the tariff deficit accumulated until 2012; electricity bills will have to go up by an estimated 35%.
The Spanish tariff deficit is the difference between the real system costs and those recognized in the tariff, where the result is an IOU from the government that is financed in the balance sheet of the companies until it is settled. This tariff deficit is part of the infamous “Spanish private debt,” which is in no small part made of outstanding commitments from the government and funded by the balance sheet of private companies. It is also the consequence of a highly optimistic central planning of the system that incentivised overcapacity and massive new build that has made companies more indebted, with or without acquisitions, and less and less profitable.
renewables I
The tariff deficit myths are:
– “Companies make billions out of it” We must differentiate between accounted and real profits. We sometimes forget that companies account for the tariff deficit as a “receivable” so their profit and loss is not made of real cash. As such they generate no free cash flow and borrow more and more. Investments in Spain, from generation to distribution, generate less than 7% return on capital employed. However, companies are told by governments to undertake massive investments, but without legal certainty or acceptable returns. And there is always someone willing to build more for less.
–  “It is a temporary problem that goes away with the latest measures.” The latest government measures to reduce the costs of the system seem to look to collect from the efficient and cash generating businesses to cover inefficiency errors, but these measures do not solve a problem of subsidies and overcapacity, as they have been mainly applied on one-off costs, with a maximum impact of 2 billion euros, yet they do not take into account that in 2013 renewables subsidies will rise by another 2 billion to almost 9 billion a year in 2014 due to the plants that are coming on stream, bringing the tariff deficit up again.
–  “Renewables are unfairly demonized.” This is true, in part. The tariff deficit is not an issue created by renewable energy, but by the excessive cost of certain subsidies-particularly solar photovoltaic- where massive premiums were given to build 400 megawatts, ending with 3000 megawatts built – the consequences of an extremely generous aid system and a poorly controlled approval system, where all regional governments gave permits to plants regardless of the 400MW limit. But who pays that “tiny” 5 billion per annum mistake?. No one has anything against renewable energy. I love to read that Spain will build nearly 600 megawatts in solar PV without subsidies. The problem in Spain is the accumulated upfront cost of those subsidies, the fact that the excess cost is not paid but deferred in the tariff, and the claim from some operators to continue with the same scheme of subsidies and installations when all 2020 targets have been fully met. Many renewable companies in Spain have followed a model of builder-developer entering a country, and maximizing capacity to move on and grow in others. But there is no eternal growth in each market.
– “Coal generates no deficit because it is a social cost.” Other subsidies maintain inefficient capacity alive, like coal, which gets 600 million a year. If the rationale to keep coal is “social” it should not accumulate costs to the power bill, but be paid by the regional governments like healthcare or social services. The problem is the habit of subsidizing outdated technologies while building up the deficit that is generated by other new technologies.
–   “The renewable subsidies are offset by the fall in wholesale prices.” The cumulative net reduction in wholesale power prices between 2005 and 2011 was less than 9.2 billion euros, according APPA- while accumulated subsidies to renewable energies shot to 25 billion in the same period. In any case, talking about the benefits of renewable energy on price is almost comical when the power tariff to consumers has risen almost 40% in four years.
–   “The tariff deficit is created by the manipulation of wholesale price by large utilities”. It would be the most disastrous manipulation ever, when wholesale prices have remained exactly in line with the energy mix, below Italy’s, France’s and Britain’s, and in line with Germany.
renewables III
–  “Nuclear and hydro should pay the deficit.” They do, but it makes no sense to use cheap sources of energy to subsidize more expensive ones. And let’s not forget the string of regional and national taxes that traditional utilities suffer.
–   “If nuclear capacity is shut down, there would be no overcapacity.” Sure, and if EDF and France dismantle their 58 nuclear reactors, there would not be any overcapacity there either. And if Saudi Arabia closes Ghwar and Khursaniyah there is no oversupply of oil. We have to take advantage of technologies that are cheap while they work, and work well, because we need cheap, non-interruptible power. We forget that solar and wind are interruptible and cannot be installed exponentially because the land occupied by megawatt is finite. And the cost of adding a network connection is not properly taken into account.
renewables IV
What has led to this problem? 
An optimistic central planning based on demand expectations -2% pa growth- which were completely unjustified, an increase of generation capacity and infrastructure -25 000 megawatts of additional capacity in gas and 35,000 megawatts of renewable- and the joy of subsidies to every technology without control –renewables, coal subsidies, capacity payments, island grants…
As subsidies mounted over each other, capacity rose and demand collapsed, we find a power system in which the annual costs -guaranteed by the state- exceed revenues by c4 billion euros … and regulation has always been modified to tax the efficient to subsidize not only “nascent” technologies, but also “dying” ones.
The solution
The solution to this issue will have to be a compromise between the industry, the entire sector-traditional and renewable-, the State and the consumer, and cancel future subsidies in all technologies. From the existing deficit, part will have to be absorbed by the energy sector, the state-responsible for the optimistic planning- and consumers, who wildly applauded the green economy and coal-mining subsidies without knowing its costs.
The German model is simple: subsidies are paid 100% by retail consumers, so people know the true costs of green energy – and 70% strongly agree- while industries, many highly energy intensive as BASF or BMW, do not pay the cost of those subsidies. Therefore, competitiveness does not sink and the country doesn’t suffer from industries closing down due to excessive power costs. Additionally, unnecessary capacity is removed, while inefficient companies go bankrupt, as they should.
The American model is interesting. Investors are given tax incentives, not direct subsidies, for renewable projects. Thus, if there is no investor interest or projects are not economically viable, the system will be reducing unnecessary capacity by the law of supply and demand and, of course, if a company has to file for bankruptcy, it does.
Spain needs to be absolutely clear in its power sector regulation, guarantee legal certainty and avoid changing rules retroactively to solve past mistakes. But the consumer cannot support all costs if everything is subsidized and if there are no market mechanisms that enable cheaper and more efficient technologies to displace the expensive inefficient ones. Our excellent renewable companies are competing exceptionally well in the previously mentioned international models. So let’s not ask at home what we don’t need abroad.
Seizing revenues from the efficient to give it to the inefficient does not help. More importantly, a couple of years later the need for revenues will make the inefficient of today suffer as well.
I commented a few months ago in my article “the problem of fixing the price of power in government offices and not in markets” that Governments and some companies do not like to liberalize. They live very well asking and giving favours while the bill is either not paid or sent to the consumer. Amazingly, while governments see power costs soar, they are surprised to see that the country’s industries close down and that demand falls.
Mistakes in planning –always from excess, of course- have led to a power sector overcapacity that has many similarities to the housing bubble. The generation fleet overcapacity in Spain is enough to cover demand for years. Let us use this opportunity to end the current tariff deficit through market mechanisms.

The Impossible “Soft” Rescue Plan for Spain

Global Economy, On the cover, Sin categoría

(This article was published in El Confidencial on August 11th 2012)

‘I never understood why it is considered selfish to keep the money you’ve earned, but it is not considered selfish to take other people’s money. “- Thomas Sowell

“Our debt is what it is” – Jose Antonio Griñan (President of the Andalucía Region)

I have read during these two weeks many comments criticizing Rajoy for not making a formal request of a rescue package. I will not be one who criticizes that decision. Because those who demand an EU rescue mistakenly expect donations, and those don’t exist. And because the placebo effect of kicking the can forward for a few months just multiplies the negative impact later.

The new term spread all over the press is “soft bailout”. Ludicrous. There is no such thing.

I said it yesterday. You wanted ECB? You got ECB. “Draghi demands lower wages, cuts in social benefits and lower corporate margins” in Spain, a country where wages have only come down in real terms where 23 of the 35 largest companies generate returns below their cost of capital.

Congratulations! We have achieved it. That is the implication of a rescue plan. Cuts everywhere except where needed. Look at the list of recommendations from the ECB to Spain. It is not mentioned even once to cut the monstrous political spending. And this is very important to understand. Neither the IMF nor the ECB nor the Troika will dismantle a hypertrophied state unless it is decided by the democratically elected government, which has been given an absolute majority to make the tough decisions and comply with what they stood for. Budget control.

Bond yields can rise further with or without the ECB

If Spain does not tackle the real problems –excessive spending- we are heading straight towards default, with the resulting consequences of further tightening our access to funding, after sinking our creditworthiness by ourselves.

I commented almost two years ago that there would be a day when Spain would be celebrating bond yields at 6.5% and the spread to the Bund “eased” to 500 points. Sad. And a round of massive purchases of bonds by the ECB is useless without cutting the waste political spending and subsidies, without attracting capital, without curtailing cronyism and duplicated administrations, because Spain will generate less real wealth, less economic activity and therefore lower tax revenues, running the risk of seeing bond yields rising further and spreads to the Bund at 700 bps in 2013, if the differential between income and expenditure exceeds 120 billion.

However, commentators continue to ask the ECB to intervene to save us, when we explained a few weeks ago in my article “Markets expect a full Spanish bailout ” that it does not work with the examples seen in the past. But above all it is worth repeating:

– Purchases of bonds from the EFSF or ECB will not lower spreads to normal creditworthy levels (50 points), so asking favours to artificially lower bond yields “a little” is useless and will not attract needed private capital. Spreads will not reach anywhere near 50 bps while Spain is constantly breaking the principle of credit responsibility and rescues saving banks and regions which rebel against the state, after receiving the money -of course-.

– Artificial purchases of bonds discourage real final demand (secondary market), and the cost of debt will increase after the short term placebo effect, if the system remains with a structural deficit. The ECB, which is already heavily indebted- or the ESM-EFSF –debt with more debt- cannot buy all the outstanding debt of Spain, and anyway it would not matter because we would still continue the reckless spending and sinking our creditworthiness. These measures temporarily lower bond yields artificially, but the yields rocket again afterwards, as we have seen many times, as if you threw a stone to the water.

– These measures don’t “buy time”. They “borrow” even more and create perverse incentives- to keep unproductive spending. But more than anything, these measures do not generate confidence, rather the opposite. All European bailouts have ended up in junk bond. In fact, the bailouts so far generated no new demand for bonds, or improvement in credit for the real economy.

– There are no “soft” bailouts, they are a hoax. Given the avalanche of comments from the press that will be talking about a national success because Spain received a “soft” bailout, the reality is that there is no money to rescue Spain and conditionality clauses will be very aggressive. The so-called “soft” bailout would actually be a series of small “lifelines” in a Greek way, to see “how it is going” … accompanied by constant “demands” on the economy, especially taxes, depressing GDP. Look at each and every single bailout since 1978 and its impact.

– Artificially reducing bond yields does not solve our problem of competitiveness, or the monstrous primary deficit and the problem of subsidies and political spending. In fact, high bond yields have been critical to prevent the government from dusting off the cronyism check book, and go back to subsidize civil works, unions, parties, new useless trains, solar farms and ghost airports. As I told a friend, “every time I see spreads tightening I imagine a government official signing a check.”

– Spain is not Greece, it is several Greeces. As Antonio España said in El Confidencial. If we surrender to a rescue we will go down the same road, but with the huge problem that no EU money or the ECB can extinguish this fire. We are not as important to be too big to fail, but we are too large to be rescued.

And just in case we wanted ECB, here’s some more. Moreover, inflation increases if the ECB carried out the monetization of the debt. Because “printing” increases the cost of raw materials and food, see the case of the U.S. or the UK. And the U.S. “exports” inflation. The EU imports it.

It seems incredible that we continue to demand to do the same as the US-stalled despite the monstrous spending and the push of the oil and technology industry- or the UK-in a recession despite massive stimulus-, when such stimuli did not generate any benefit to the real economy. Six trillion dollars spent globally in “stimulus” to generate a real GDP growth of… 0% (source Boenning & Scattergood) and a decline in lending to the real economy.

In fact, it is proven that increased public spending and borrowing does not generate a multiplier effect and that it cannibalizes the private sector. According to IMF figures, in the U.S., an increase of 7.3% of public spending between 2007 and 2009 to generate an 8% drop in real GDP (not nominal), in the UK an increase of 6.9% over the same period to generate a fall in real GDP of 11%, and all this debt by devaluing the currency impoverishing savers. Of the 34 OECD countries, those that stimulated the economy the most were the ones that generated a slower growth of real GDP.

All this shot of adrenaline to “reduce” bond yields for a few months, last time it lasted less than three months, only to continue spending so that the Spanish regions can all have a debt of 16% and to try to force a stock market rise before the string of capital increases. Pretend and extend.

… And then nothing will be done and commentators will say again that “we need time.”

Of course, there are positive recommendations from the ECB such as open competition reduce bureaucracy and invest in R&D, but those are all long-term policies that will not be likely to take place when there are seventeen governments fighting over the cake of crony-ism.

The recommendations of the ECB, or the IMF, are recommendations of a lender. And as we mentioned in this column over and over again, the ECB does not donate. And as a lender, it demands.

The solution was, and is, the private sector. Show that we are a good investment

There is nothing more entertaining than a manipulated market. And in one we are. But while we pat ourselves on the back for the temporary placebo effect, we are throwing away investment capital, which is what we need. More than 163 billion euros have left Spain in the first five months (source BoS).

– Lower taxes now, curtail the ridiculous bureaucracy and attract capital to create businesses, generate jobs and tax revenues, not to consume them as the public sector does. In Spain, a country with interesting assets and modern cities, we could get billions of investment from financial and venture capital funds if all efforts were not focused on limiting foreign investments.

– Demonstrate that investment in government debt is attractive. How? Exceeding –not meeting- our objectives. Cutting off useless political spending as the majority of voters have asked, reducing the primary deficit. Do not ever fall back into the temptation of “meeting targets hiding and not paying bills”.

– Absolute conditionality. No bailout of savings banks and regional communities. And if they happen, they must meet the same rigorous conditions that the ECB or any lender demands. Now. Not in 2015.

– Stop moaning of revenue assumptions that may have been, fictitious and invented figures of tax fraud, and excuses of “we expected” and “we could have”. Focus on what the government controls: spending. Revenues will come, as always, when the economy grows.

I read an article this week accusing Bill Gross of PIMCO and other large investors to be the evil hand not wanting to invest in Spain, when the problem is that we have made Spain uninvestable to many funds through the habit of manipulating and pretending. If there is a bad policy it is to insult those that can fund us, and to think that without private capital, asking for impossible bailouts, we will get out of this, when the state, our banks and our businesses have to refinance, increase capital, and make divestitures of hundreds of billions in the next three years.

Markets expect a full Spanish bailout

Global Economy, On the cover, Sin categoría, Spain

(This article was published in El Confidencial on July 23rd 2012)”Defeat? I do not know the word”. Margaret Thatcher.Here come the shorts. It was obvious. Everyone prepared for a dose of QE from the Fed and the ECB, and when it didn’t happen, on Friday 75% of orders were better to sell.

Spain moves closer to a full bailout. Congratulations, we did it. Years of nonsense saying “we don’t have a problem of public debt” and “we have less debt to GDP than Japan” while our ability to repay was destroyed with wasted money on phantom airports, irrelevant statues, and high-speed trains with no passengers. The Ibex 35 plummets; no one invests in our bonds and the spread to the Bund rockets to 610 basis points. But do not think everything is discounted and that a bailout will be positive.

“There is no money”

The Spanish government in 2011 had fiscal revenues of 377 billion euro, about 7 billion more than in 2009. That means that in the middle of the crisis, with tens of thousands of businesses closing and unemployment rampant, revenues not only remained at a monstrous 37% of GDP, but increased. I estimate revenue of 385 billion in 2012. In other words, there is plenty of money. And there is liquidity, with hundreds of billions provided by the ECB. The only thing where there is no more money for is the public spending bubble, which has soared to 470 billion.

The recent demonstrations, which are perfectly legitimate, must take into account this problem. Today’s cuts come from past excesses.

It is amazing to see that citizens throughout the entire EU seem to presume “good intentions” to those rulers that bankrupted countries through reckless spending, but accuse of “bad faith” to those that deal with paying the bills and cleaning the accounts. The widespread perception that money is free, that spending is good and saving is bad.

Slash political spending now
Maybe it’s a matter of perspective. Arthur Laffer said that he would reduce the deficit in one hour. I am more conservative. Give me the Spanish budget and a red pencil, and I will reduce the deficit to zero within a week. I accept getting paid in government bonds.
What terrifies me is that everyone in Spain seems to have given up and just looks for excuses. It is irresponsible to dismiss as alarmists those who alert of the gravity of our problems. In fact, those who continue to say that “we are on track”, “we need more time” and thinking that this crisis is temporary are doing a huge disservice to the country. The VAT and tax increases will not be “absorbed by companies without affecting consumption” because corporate margins are at bear minimums, and we saw that consumption does fall as in 2010 with the previous VAT increases.

Has Spain given up?
The market does not “put pressure on Spain.” Investors do not buy because the risk of default is too high. Just look at the number of contracts traded on Spanish debt. Less than 40% compared to historical levels.

From a market perspective, there are three issues that concern me tremendously, issues that differentiate us from Italy, and unfortunately place us in the same risk as Greece or Portugal, but with a much larger corporate debt:

-Spanish governments always focus their economic measures on revenues (taxes). 61% of the measures adopted so far are expected increases in fiscal revenues.

–The cuts are not real cuts, but slowdown of the increase in spending. I read that the changes in the implementation of the Dependency Law “will allow a slowdown in cost increases estimated at about 3 billion euro”. I repeat, “a slowdown in expenditure growth”. Not cuts.

-Even with the new measures deficit is set to be around 6.5% in 2012, and the government continues to listen to advisers who say that everything will improve next year, as exports will help the economy and they need time to carry out reforms. It’s not true. The economy will not improve in 2013, nor will Spain export enough to cover the structural primary deficit- a key difference with Italy. And no, we have no time.

The perception that this is a temporary issue that can be sorted out increasing revenues is a huge mistake similar to that made by those who said in 2009 that “the worst of the crisis is over.”

¿Full bailout? No thanks. The example of Greece, Portugal and Ireland
We have seen this week a disastrous debt auction which, at the close of this article, has put the 10-year bond touching 7.2% and the spread to the Bund at 610 basis points. And I hear voices crying out for a full bailout and the ECB buying bonds as a great idea.

However, a full bailout does not involve anything positive. Do not expect an intervention to dismantle the bloated regional governments or to encroach on political spending. Moody’s had doubts on Thursday that Spain has any real chance of taking harsh measures on the regions. In fact, the Budgetary Stability Law itself establishes “hard” corrective measures that involve publishing a report and s written warning to the President of the region. Hardly agressive.

Intervention? Once the 10-year bond is up to 7% …
Unfortunately, the bailout process – including the “placebo” effect of useless massive purchases of bonds by the ECB- neither solves the crisis, nor calms markets, nor lowers bond yields unless the economy returns to competitiveness and political spending is slashed. Interestingly, political spending was not touched at all either in Portugal or Greece.

Greece and Ireland acted immediately and asked for a bail-out. Portugal took over five months to officially request one. In all three cases, the ten-year bond soared to 8 to 8.5% when the bailout was requested.

2012072194grafico1But once the bailout was in place, ten-year bonds just kept rising and the rating agencies downgraded the three countries to junk status. None of the countri


The few debt issues in Portugal and Greece were meagre 3-6 month paper, and Ireland was only able to return to the market almost two years after the bailout also with short-term paper, and that was after cleaning aggressively its banking system. The Portuguese 10-year bond is today at 10%, and the Irish is still at 6.3%.es had access to the credit market.

The time from applying for pre-bailout to downgrade to junk bond lasted between four and ten months for the three countries mentioned. Today, none of the bailed-out countries has seen a recovery of credit to the real economy.

Stocks are not discounting a bail-out
There are no “defensive” stocks with “exposure to emerging markets” and “low PE” when a country is bailed-out. Stock markets in Portugal and Greece fell by 44% and 65% respectively, a collapse almost as large as the pre-bailout fall. And we must bear in mind that, despite the poor performance of its stock market year-to-date, Spanish companies are still highly leveraged, a 200% of GDP in private debt, which comes in many cases from IOUs of the state for unpaid invoices.

The effect of a bailout for Spanish companies could be much higher than in Portugal or Ireland because of the huge refinancing needs in 2014, accounting for almost 35% of all corporate bond issues in Europe in said year. Without access to credit markets, companies would be forced to do more asset sales, dividend cuts and dismissals.

And watch out for the “positive example of Ireland.” The Irish Stock Exchange is the only one that has “recovered” because its index is mostly comprised of net exporters with low debt, no utilities and hardly any listed bank (less than 3% of the index), ie almost no companies subject to the intervention of the State. And despite this, the index collapsed.

Bail-out means massive cuts
Do we want the ECB to buy Spanish debt? More “pretend and extend”. Pack and disguise. We did not learn from the past and the subprime crisis.

2012072178grafico2What has been the benefit so far of the massive purchases of Portuguese, Spanish, Italian and Greek bonds than loading the ECB with losses of 56 billion?, Nothing else but making the ECB the most indebted central bank … and no positive effect either on bond yields or the economy of the countries. “Watering the wine” to make it appear that there is more quantity in the barrel.

Want a full bailout? Not if we look at the example of our comparable countries. If you think that what we have now in Spain is “austerity”, when there is at best a modest adjustment, a full-scale rescue implies all social costs are axed. Severe cuts in pensions and the number of civil servants, raising the retirement age, much higher tax hikes and a collapse in GDP of between 3% and 3.5%. Do not forget that Ireland, the “good example”, suffered a fall in GDP of 7% in a year.

Internal bailout
What Spain needs is an internal bailout. If the government is right and there is “no money” and there is a national emergency then they have to be consistent and cancel the aid to banks, imposing debt to equity swaps to its debtors, cancel all subsidies and grants provided by the government (close to 14 billion a year), close all duplicative councils and pay politicians 50% of their salary in government bonds. Curtail spending now. Immediately.

I do not want a bailout because we do not need it if we cut spending. I do not want the ECB infected with Spanish bonds in exchange for giving away sovereignty because we can show that investing in Spanish debt is a good idea if we adapt expenses to income and stop calling for default and “odious debt”.

Spain can solve its problem, which was and is excessive spending. And then we will see the huge positive qualities of the Spanish economy, with excellent companies that can continue to export and can create jobs if we lower taxes and attract capital, not if we throw investments away.

We must not surrender Spain to the lenders. The ECB and the troika do not rescue, they do not support, and they do not donate. They lend in exchange for much larger cuts. And it doesn’t work, it only impoverishes. It has been proven by previous bailouts and all interventions of the IMF since 1978.

The red pencil to slash unnecessary spending is needed now. I provide the pencil if needed.

Blaming the ECB. Better to sink the fleet than to repair the boat

Global Economy, On the cover, Sin categoría,
(This article was published in El Confidencial on July 8th)
 
‘Everything is subject to conditionality. There is nothing without conditionality. Conditionality is what gives credibility to these measures’, Mario Draghi, president of the European Central Bank.
 
The new mantra in Spanish media is that the European Central Bank is attacking us. Before, it was the Anglo-Saxon press, then the markets, then,Germany… Now, according to some commentators, it is unquestionably Mario Draghi, president of the ECB, who is to blame for Spain’s misfortunes.
Draghi, obviously, is to blame for the reckless spending, for doubling the national debt, for the most convoluted regulation of the Organisation for Economic Co-operation and Development (OECD), the ghost airports and the phantom cities. Evil.
We have spent a week hearing: “Draghi will connect the printing machine,” and it seemed everyone was shocked when it didn’t happen. The debt threshold is at its limit even at the ECB. Quoting the famous South Park…”Aaaand it’s gone.”
Debt is a drug. And like drug addicts in the infamous crack supermarkets of Harlem, we were looking forward to the ECB to saving us from our debt problem with more debt in order to keep spending. And like drug addicts, even if the ECB lowers rates to indecently low levels, the effects last less and less.
We blame the ECB, which after lending €288bn to Spanish banks and lowering interest rates to 0.75 percent does not “do more.” What more do we want it to do? A donation. Ah, no, my friends, there are no donations.
The ECB does not help. It lends. The ECB doesn’t rescue. It lends. The ECB does not donate. It lends.
When people hear that the ECB should buy Spanish debt they should also know that it’s not a favour, and that there are strict conditions attached to the agreement. But more importantly, people should know by now that the ECB buying bonds does not solve anything, as evidenced by previous purchases, which have not lowered bond yields for more than a very short period of time. 
 
These bond purchases of the past have done nothing but infect the ECB’s balance sheet the same way as the sub-prime debt packages of 2007, without attacking the underlying problem, which is excessive spending.
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The ECB balance sheet has ballooned to 30 percent of gross domestic product of the Eurozone. The Federal Reserve‘s and the Bank of England’s balance sheet is 20 percent of the GDP of their countries. The Fed and BoE loans are paid back. In Europe, however, no one pays back these loans.
What is a little more debt between rich friends?
The ECB, which has nearly 40 percent of its assets in toxic bank debt, and has lowered interest rates again, has to do “more”. But who contributes to the ECB when all others ask for help? No wonder that Finlandand the Netherlands say: “Me? No, my friends.”
Spain demands “more” from the ECB even when Spain has received the equivalent of two Marshall Plans in aid since 2009. After two injections of liquidity (LTROs) that have crippled the ECB to €3bn of debt, we demand “more”. Expand the balance sheet, they say, which is nothing else than packaging and hiding debt. We demand donations. Well, no.
We live in a manipulated market and the more it is manipulated, the less the placebo effects last, because the real problems are not solved. A manipulated market to benefit the states. Financial repression.
It is curious to hear more and more people demanding financial repression, because that is what they ask for when citizens demand more inflation and mutualisation of debt. And it’s funny because media and citizens demand these measures as if everything was not going to be paid by the taxpayer in the end.
 
Financial repression
 
We claim our undeniable right to be robbed of our savings by lowering interest rates and to sink our financial capacity through inflation.
Commentators tell us insistently that there is no inflation threat. We hear over and over that this is a deflationary spiral, and meanwhile American economist Paul Krugman tells us that “a little bit of financial repression is not that bad.” However, inflation is there and it is a tax, an unfair and accumulated tax created to pay the excessive government debt.
However, the media repeats that there is no risk of inflation. Of course, anyone who pays for groceries, gas, utilities and bills sees prices going up every year while their net income after taxes plummets. Inflation according to “official figures” is 2 percent, yet the real increase in the cost of living is 5 percent per year. I recommend you read this report on the actual inflation in the United States compared to the official.
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Every day, I read more suggestions from politicians, economists and other commentators calling for an “audit” of public debts and to consider “illegal” those debts incurred by a state and regional governments that have been democratically elected and supported by the majority.

When one reads “audit,” “revise debts,” or “lenders must bear some of the cost,” one needs to be aware of what it means. It means default. Because then none of us can complain that bond yields are too high. If we call for a restructuring, then bond yields are actually very low, as leaders are telling the market that here is a very high risk that one of them is elected and then defaults.
The consequences of a default are devastating:
 
. The country loses international support. The cost of the remaining debt after default would soar, as has happened in Greece and other similar countries.
. It does not reduce the need to make huge cuts. Spain has a primary deficit of almost 7 percent. Cuts would be even more severe after default, given that the funding of the structural primary deficit would be prohibitive.
. The credit crunch would be enormous. Forget lending to the real economy. The crunch would destroy growth and employment, but as the government would continue spending beyond its means, the crowding-out effect of the state would increase.
. Private companies would suffer immensely. Refinancing needs of non-financial Spanish firms are concentrated in 2014, and many would find it impossible to get financing on the market, which would lead them to cost-cutting and massive restructurings.
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One of the most important sentences Draghi said on Thursday was: “What if all countries need help?” The ECB cannot bail out the big Eurozone countries. With what funds? We are talking of infecting the ECB’s balance sheet at €500bn annually if it needs to help Spain, Italy and those who have sought bailouts, when the latest could be Slovenia.

The ECB cannot buy debt without first seeing that countries have carried out drastic reforms that will prevent this debt crisis from happening again in 2014, because Europe faces €800bn of sovereign debt maturities every year over the next three years.

Spain has to solve its structural problems of competitiveness and high spending. To do that there is plenty of support and funding, but there are no donations or quick exits to a structural problem. 
Converting the ECB into the cockroach motel, where what comes in doesn’t come out, would cost much more to all – businesses, citizens and states – instead of doing what should have been done years ago. Align expenses to revenues. What everyone is doing except the state.

Watch the documentary Fraud, Why The Big Recession here:

http://www.youtube.com/watch?v=PTpKGiVwKHY&feature=youtube_gdata_player

Further reading:

http://online.wsj.com/article/SB10001424052702304782404577488283442408896.html