Edmund Burke, a British statesman and philosopher who lived from 1729-1797, once described Spain as “a whale stranded upon the coast of Europe”. That quote seems apt on the morning that desperately poor Spanish unemployment figures have been published.
Spain already has the highest unemployment level in the EU, where youth unemployment is close to 50%. The number of people out of work has finally risen above 5 million, but Spain hasn’t sneaked over the wire, or reached this psychological number in a ‘photo finish’ it’s smashed through it. An extra 400,000 have found themselves unemployed since the third quarter of 2011. The National Statistics Institute said 5.3 million people, or 22.8% adults, were out of work at the end of December, up from 4.9 million in the third quarter. the fact that 50% of young Spanish adults are unemployed is an incredibly disappointing figure that should generate far more discussion in the wider media.
Spain’s adherence to its imposed (and partly self imposed) austerity measures may be a canary in the mine for technocrats and decision makers, the belief that slashing costs and imposing austerity measures works is deeply flawed. Whilst it may potentially ring fence the asset wealth of an elite few the human misery it inflicts, on those whose only individual collective ‘sin’ was to take on board a slight increase of debt, is not a price worth paying. The Spanish are suffering and some ‘big questions’ need asking with regards to the wisdom of the imposition of austerity measures as a one dimensional supposed ‘solution’.
Austerity kills potential growth, not only due to the cuts, but the psychological blow delivered towards the masses confidence causes an unforeseen consequence. For example, retail, on which Europe is as reliant as the USA (70% of the economy is consumerism driven) is hit hard due to the austerity measures. The economy of the austerity state inevitably enters into a downward spiral. Whilst not uncontrollable this pattern can have severe repercussions on the potential for any economic recovery.
Portugal
The concerns over Portugal’s financial health were re-visited this week as Portugal’s bond yields rose steadily, to all-time recent highs, despite the issuance of 2.5 billion euros of short-term treasury bills last week at slightly lower yields. The country’s 10-year yields have risen to circa 15 percent. Five-year credit default swap prices implied the market was pricing in a 66.8 percent chance of a Portuguese default.
The main issue for Portugal, the third euro zone country to seek a bailout after Greece and Ireland, is does it have enough time to restructure its economy as it enacts harsh austerity and faces the worst recession in decades. Any hope of growth under such austerity terms are surely tenuous.
2012 will be the toughest of the three-year bailout for Portugal as the deep spending cuts, including the elimination at a stroke of two months of pay for civil servants and across-the-board tax hikes, could cause a 3 percent economic contraction after a 1.6 percent slump in 2011. The Portuguese government pledged to cut the budget deficit to meet the goals set by the bailout, it only met the goals in 2011 due to a much criticised and one-off transfer of the banks’ pension funds to the state.
Under the terms of the austere bailout, Portugal also had to agree to introducing sweeping reforms, including that of the highly rigid labor market, agreement was reached on this last week with unions.
Greece
The highly respected European Union Economic and Monetary Affairs Commissioner Olli Rehn has this morning stated that the authorities are “very close” to reaching an agreement on a private-sector involvement in Greece this month.
Rehn said in a press conference at the World Economic Forum in Davos, Switzerland, today;
[quote]The next three days will be very crucial for the future in three years. In other words, We’re just about to close a deal on private sector involvement between the Greek government and the private-sector community. Preferably still in January rather than February. We need to have a sustainable solution for Greece. PSI won’t be applied to any other country of the euro zone. An agreement may come if not today, then over the weekend.[/quote]
Market Overview
Ten year U.S. Treasury note yields climbed three basis points, Standard & Poor’s 500 Index futures has risen circa 0.2 percent. The Stoxx 600 Index added 0.1 percent after falling 0.5 percent. The Markit iTraxx SovX Western Europe Index of credit-default swaps linked to 15 governments climbed 7.5 basis points to 330 basis points. Oil gained 0.7 percent to $100.37 a barrel.
The yen rose against all 16 most-traded peers, appreciating 0.6 percent against the euro. The euro was little changed at $1.3097, on course for a second weekly gain. The yen has strengthened the most in a month versus the dollar whilst the cost of insuring government debt has risen as bondholders resumed talks with Greece. The yen has appreciated by as much as 0.7 percent versus the dollar before trading 0.6 percent higher at 10:15 a.m. in London.
Market snapshot at 10:40 am GMT (UK time)
In the overnight/early morning Asia/Pacific session the Nikkei index closed down 0.09%, the Hang Seng closed up 0.31% whilst the ASX 200 closed up 0.4%. European bourse indices have enjoyed mixed fortunes in the morning session, the STOXX 50 is flat the FTSE is down marginally by 0.13%, the CAC down 0.03%, the DAX is up 0.32%. The SPX equity index future is currently down 0.58%, Brent crude is up $0.55 a barrel whilst Comex gold is down $2.8 per ounce.
The euro strengthened versus the dollar as borrowing costs fell at a sale of Italian bills. The 17-nation currency has appreciated 0.2 percent to $1.3140 at 10:15 a.m. London time. Italy auctioned 182-day bills at a yield of 1.969 percent, down from 3.251 percent at a sale of similar maturity securities on Dec. 28.
The Dollar Index, which tracks the U.S. currency against those of six trading partners, declined 0.3 percent, falling for the third straight day.
