IMF to Save Italy, Spain from Default?

An International Monetary Fund spokesperson denied reports that had surfaced in Italian news media on Monday of an international rescue mission preparing to aid Italy with up to €600 billion.

Contact between IMF officials and Rome had reportedly intensified nevertheless as Northern European countries, including Germany, are opposed to enabling the European Central Bank to purchase Italian sovereign debt indefinitely.

The central bankers in Frankfurt have spent several tens of billions buying peripheral bonds since this late this summer but are worried that if they continue their effort for much longer, it will discourage the governments involved from enacting the necessary economic reforms.

Despite the controversial central bank intervention, Italy’s borrowing costs have risen to rates that are deemed unsustainable in the long term.

Spain, Europe’s fourth largest economy, is similarly struggling to finance its deficit spending. It may be offered access to IMF credit to prevent its predicament from worsening.

Both countries have seen political upheaval in recent weeks with Italy’s Silvio Berlusconi forced to resign as prime minister to make way for a caretaker government and the opposition conservatives winning the parliamentary elections in Spain. Mariano Rajoy is expected to replace the socialist José Luis Zapatero as prime minister in December and announce additional austerity measures to shore up the nation’s finances.

In Italy, Mario Monti is set to unveil his economic reform agenda next month as well which could include an accelerated increase in the pension age, a rise in sales taxes and a revamped housing tax.

IMF inspectors will monitor Italy’s fiscal consolidation. Its €1.8 trillion economy is too big to bail out for other European countries, even if the €440 billion European Financial Stability Facility is expanded.

Heavily indebted euro nations and the European Commission advocate an activist role for the central bank and the issuance of eurobonds respectively which would effectively make Germany and its austerity allies the paymasters of the currency union.

The Dutch finance minister, who was in Berlin on Friday to consult with his Finnish and German counterparts, rejected both proposals. “There is a lot of pressure about eurobonds or European Central Bank financing, and we said ‘no’, we have something else, and that is an increased role for the IMF.”

Spain’s Conservatives Claim Historic Election Win

Spain’s conservatives rolled to victory on Sunday in a parliamentary election that ousted one of the few remaining socialist governments in Europe. Mariano Rajoy’s People’s Party secured a majority in the Congress of Deputies, its largest ever.

With nearly all of the votes counted, the People’s Party was set to win 186 out of 350 seats in the lower chamber of parliament.

With one out of five workers unemployed and Madrid’s fiscal projections closely watched by international bond markets as Europe’s sovereign debt crisis unfolds, the opposition conservatives were expected to win but not by a landslide.

Incumbent prime minister José Luis Zapatero had to implement unpopular austerity measures when Spain seemed on the brink of being drawn into the continent’s spiraling debt crisis this summer. He froze public pensions, cut government salaries, raised the retirement age and trimmed union bargaining rights to the dismay of traditional left-wing constituencies.

In May, the socialists were crushed at regional polls when they won less than 28 percent of the vote nationwide. That election followed a downgrade of Spain’s credit rating. Interest rates on Spanish bonds currently hover around 7 percent, a rate deemed unsustainable in the long term.

The People’s Party returns to government after almost eight years of socialist rule but Rajoy, expected to become prime minister in December, hasn’t detailed where he will find further spending reductions. He does champion business tax cuts to stir economic growth. Recent projections have Spain’s economy expanding by a mere 0.2 percent this year.

“I’m prepared to do what Spaniards want,” Rajoy said after he voted in Madrid on Sunday. He urged voters not to expected “miracles” later that day but promised not to cut pensions.

Other conservatives have been more adamant. “The measures will be tough and we will have trouble with a lot of people,” predicted one party leader in August, “but people will have to understand that we lived beyond our means. Spaniards will understand.”

After joining the European Union in 1986 and the euro in 1999, Spain enjoyed years of prosperity but part of its newfound wealth was driven by a boom in real estate and cheap credit. When the property market crashed in 2007, many Spaniards found themselves over their heads in debt.

Household borrowing nearly tripled between 1996 and 2005 from €200 to €595 billion which, at the time, equaled almost 75 percent of the nation’s gross domestic product. It doubled between 2002 and 2009 from accounting for roughly 45 percent of disposable income to more than 90 percent. In Germany, by contrast, debt to disposable income ratios actually decreased during the same period from 66 to 57 percent.

On social policy, the Spanish conservatives aren’t considered likely to roll back liberal reforms enacted during Zapatero’s administration, including the legalization of gay marriage.

European Central Bank to the Rescue

Once more unto the breach, Trichet! While central bankers from the north of Europe, including Germany, were reportedly against the ECB propping up Italy and Spain with a massive bond purchase operation, the Frenchmen acted to stem Europe’s unfolding debt crisis this weekend and prevent the contagion that nearly bankrupted Greece, Ireland and Portugal from bringing down the third- and fourth largest economies of the eurozone.

The European Central Bank announced late Sunday that it would “actively implement” its bond purchase program which had been put on hold before officials resumed purchasing Irish and Portuguese debt last week. These countries received billions in bailout funds from the European Union and the International Monetary Fund when they were no longer able to borrow against an affordable rate on the market. Read more “European Central Bank to the Rescue”

Spanish Conservatives Prepare for Government

Spain’s unpopular prime minister called early parliamentary elections last week in the wake of the release of dismal new unemployment figures. José Luis Rodríguez Zapatero won’t stand for reelection and it seems highly unlikely that his socialist party could maintain its present majority. What the opposition conservatives would do to alleviate Spain’s economic crisis remains ambiguous however.

The number of Spanish unemployed fell only slightly last quarter to 21 percent — the worst joblessness rate in the European Union. It may get worse still toward the end of the year when seasonal jobs disappear.

Meanwhile, the specter of Spain’s demise continues to worry Europe. Its creditworthiness was downgraded earlier this year as the government struggles to mend its deficit. Zapatero’s cabinet designed a budget last year that would cut the deficit in half, down to 6 percent of GDP this year. Austerity measures include a 7.7 percent reduction in government spending, a 5 percent pay cut to public-sector salaries and an increase in personal income taxes for those earning more than €120,000 euros a year.

The socialist government also promised labor law and pension reforms to boost Spain’s competitiveness but with trade unions marching against austerity and Zapatero’s approval rating down to 25 percent, the left appears to have lost the credibility necessary to enact them.

Former interior minister Alfredo Pérez Rubalcaba will lead the socialists into November’s election. Although his party was crushed at regional polls last May, Rubalcaba has begun to eat into the opposition conservatives’ lead. If elections were held today, People’s Party leader Mariano Rajoy would find himself at the helm of a minority government.

Rajoy has announced an economic “shock plan” if elected, anticipating protests and strikes during his first year in office but enough to derail a reform agenda. “The measures will be tough and we will have trouble with a lot of people, but people will have to understand that we lived beyond our means. Spaniards will understand,” said one party leader.

The conservatives could find support from nationalists parties from Basque country and Catalonia for pro-business policies but major welfare reforms might not be enacted. “I do not intend to make social cuts,” Rajoy said this weekend. He promised tax and spending cuts but details on fiscal policy have so far not been forthcoming from the man who is widely expected to be Spain’s next prime minister.

Is Austerity Failing?

In his latest New York Times column, economist Paul Krugman criticizes the “pain caucus” in Europe, notably the European Central Bank (ECB), for insisting that sound money and balanced budgets will somehow fix all of the continent’s fiscal woes. Austerity, he argues, is failing and American policymakers would be ill advised to repeat it in their own country.

Krugman’s column is unfortunately so filled with mischaracterizations and outright blunders that it is difficult to purely dissect his Keynesian alternative. In fact, he doesn’t offer much of an alternative to austerity at all except to suggest “debt reduction,” which means restructuring. He has traditionally championed stimulus though and blamed the “arrogance” of Europe’s policy elite for “pushing” the continent into adopting a single currency well before it was supposedly “ready for such an experiment.” Krugman then is no fan of the euro and hasn’t ever had much respect for Europe.

The ECB, writes Krugman this week, claims “that raising interest rates and slashing government spending in the face of mass unemployment will somehow make things better instead of worse” but only half of that statement is perfectly true. Frankfurt has been urging budget cuts but kept interest rates low at the same time not to make matters worse in the highly indebted eurozone countries of the south. Austerity, moreover, is not supposed to get people back to work directly. The point is to avert sovereign bankruptcy as would have happened in Greece and possibly Ireland without European support by restoring confidence on bond markets.

Krugman characterizes this as “belief in the confidence fairy — that is, belief that slashing spending will actually create jobs, because fiscal austerity will improve private-sector confidence.” That’s more accurate although budget cuts in themselves won’t create jobs. The private sector will if it has confidence in future growth.

But, “the confidence fairy hasn’t shown up,” writes Krugman. Case in point? Greece, Portugal and Spain where unemployment remains high. He is right but also disingenuous in pretending that those countries have fully implemented austerity measures yet — while not considering the nations that have. Read more “Is Austerity Failing?”

Spanish Socialists Crushed at Regional Polls

Spain’s socialists suffered their worst performance in regional elections this weekend since democracy was restored to the country in the early 1980s. Prime Minister José Luis Zapatero’s ruling party is blamed for Spain’s lackluster economic recovery and high unemployment rate, the worst in Europe.

Thousands of city councils and thirteen out of the country’s seventeen regional legislatures were up for grabs on Sunday. The socialists lost control of their former municipal strongholds of Barcelona and Seville as well as the Castilla-La Mancha region where they had governed for 28 years. Just in three regions were the socialists still in the lead. Nationally, the opposition People’s Party enjoyed a ten point lead.

Conservatives claimed control of Spain’s richest and most populous state in December of last year and have been on the rise nationwide for close to two years. Zapatero’s government is regarded as incompetent by many on the right and increasingly under fire from its own union backbone. In the face of mounting budget deficits, the socialists have been forced to heavily slash public spending, much to the dismay of their electorate.

When Zapatero came to power in 2004, while the country was riding a real estate boom, the prime minister expanded Spain’s welfare state with higher minimum wages and improved health insurance coverage. He made scholarships available to all youngsters, introduced rent subsidies, free child care and made health care for seniors more affordable.

In an attempt to diversify Spain’s economy, the socialists invested in renewable energies, bioengineering and infrastructure but in the process, probably destroyed more jobs in traditional industries than they created.

Seven years later, confronted with a 10 percent budget shortfall, the government froze pensions, increased the retirement age, trimmed union bargaining rights and cut public-sector salaries. The alternative, Zapatero argued, was bankruptcy, but his supporters see no improvements in their daily lives. One out of five workers is still without a job while the unemployment rate among the young is even more dramatic. A government hiring freeze and the collapse of the housing market are mostly to blame.

Increasingly unpopular, Zapatero announced last month that he will not seek a third term as prime minister in next year’s general election, hoping that his party can find a viable candidate to reinvigorate the left.

Spanish Debt Rating Downgraded

Spain’s debt was downgraded a notch by Moody’s Investors Service on Thursday, triggering sharp declines for the euro and European bond prices on the market.

Moody’s raised concerns over the Spanish government’s ability to improve its finances in the face of disappointing growth rates and public anger at spending cuts. The ratings warned that further downgrades were possible as the costs of bank restructuring could “considerably exceed” current projections.

Spain, which has the highest rate of unemployment in the eurozone at about 20 percent, is under pressure from investors and fellow European Union member states to reduce its budget deficit which is also among the highest in the region.

The Spanish economy expanded by .2 percent in the fourth quarter of last year but contracted mildly over the whole of 2010. Read more “Spanish Debt Rating Downgraded”

Conservatives Win in Spain’s Richest State

Spain’s Socialist prime minister, José Luis Zapatero, is increasingly embattled. Without a majority in parliament, his government has had to rely on the support of minor regional factions. But a recent victory for conservatives in the country’s richest province casts further doubt on the socialists’ ability to garner support for their policies.

Regional elections in Catalonia, both the most prosperous and most populous of Spanish regions, saw gains for the pro-business and nationalist Convergence and Union as well as the local affiliate of the People’s Party, Spain’s right-wing opposition.

The Socialists were decimated in what may well have been a forecast for more regional elections next year, if not the general election of 2012. Read more “Conservatives Win in Spain’s Richest State”

Specter of Spain’s Demise Worries Europe

After bailing out Greece and Ireland and undertaking an unprecedented rescue effort to save the single currency this spring, European leaders now fret over the fate of Spain which, as the bloc’s fourth largest economy, imperils the future of the eurozone as such.

The bailing out of Ireland with €85 billion in loan guarantees from the International Monetary Fund and its fellow European member states has temporarily laid to rest fears that its collapse could trigger debt crises throughout Southern Europe. But Portugal and Spain remained mired in recession and are unlikely to be able to restore balance to their budgets any time soon. Read more “Specter of Spain’s Demise Worries Europe”

Ireland Renews Fears of European Debt Crisis

Pressure is mounting on Ireland to accept a European bailout in order to restore confidence with investors in the solvency of other eurozone members deep in red ink. With its budget deficit expected to reach 30 percent this year, fear of a meltdown similar to Greece’s this spring is mounting.

When Greece was faced with bankruptcy last April, European leaders agreed to an unprecedented rescue effort to save not only Greece from sovereign default but safeguard the future of the euro itself. With a €750 billion stabilization package, the European Commission, individual member states as well as the International Monetary Fund sought to restore confidence in the common currency. Read more “Ireland Renews Fears of European Debt Crisis”