Spain and the EU’s ‘creditor-debtor conflict’

Posted on | april 15, 2011 | No Comments

Now that Portugal has joined Greece and Ireland in the group of EU members to undergo IMF-EU austerity measures in order to qualify for bailout money, Spain is the next target. Should Spain not take the lead to form a mini-bloc of EU debtor nations that threaten default unless their demands for substantial debt write off takes place? On the surface of the sovereign debt crisis, it appears that the creditors hold all the cards. However, this is not actually the case today any more than it was in the 1930s when a number of nations defaulted. Debtor nations acting in solidarity have enormous negotiating leverage, if they choose to exercise it and not remain divided.

A number of months ago, I wrote in this blog and in WAIS that Greece was in fact already bankrupt; that it was operating under a managed bankruptcy situation and that debt restructuring was inevitable. It seemed then that my suggestions were groundless a a couple of people who read them expressed as much to me, arguing that the strict definition of bankruptcy is stopping of payments. But what if the payments have not stopped because the new loans to service old loans are coming in to prevent the formality of bankruptcy, and in the process the middle and lower social are squeezed dry to pay for servicing such loans that only exacerbate the debt crisis?

In April 2011, the EU is waiting to see how Portugal’s bailout packaged attached to austerity measures will play out while giving Spain some time to see if it can salvage its finances, so that it does not join Greece, Ireland and Portugal seeking IMF-EU bailout. In short, Spain will require a great deal more than Ireland, Greece, and Portugal combined, and it will send shock waves to the eurozone, thus it is not in the creditors’ interest to do anything yet.

Once the field is clear on whether Spain will or will not need a bailout package, the next step if for EU to arrange debt restructuring for Greece, which means for Ireland and Portugal as well. Behind the sovereign debt crisis of Greece, Ireland, and Portugal is a new political economy paradigm that Germany and France support. This is designed to strengthen their national economies and strongest sectors. If I were a bond investor, I would want to know about the stability of bonds of the debtor EU countries, but also about the sustainability of the euro at such high levels. At the same time, I would hedge my bets depending on my sense of what would be politically acceptable and the degree to which I believed the euro’s strength is sustainable against other reserve currencies.

Granted the US is currently pursuing a liberal monetary policy in contract with the EU, but can the EU win this competitive game in which investors like currency Soros among others are talking up the EU but betting against it and hoping that Spain is the next victim to seek bailout assistance and enter into IMF-EU austerity? In the last seven months or so, a number of big international bonds and currency traders have been actively betting against Spain with credit default swaps.

This means that there is a great likelihood of a bailout – itself a political decision that rests more with Germany and France than with Spain. This is high stakes gambling, but it may have a large payoff if Germany and France decide that the northern EU countries would benefit by having Spain included in the bailout debtor group. That the EU debtor nations wait until one-minute before midnight to announce entrance into EU-IMF program is also a political decision intended not to spread panic in the markets and among the general population that knows what to expect.

Germany and France are waiting to see how the economy evolves in 2011 and how Spain’s economy performs during the year. If there is an improvement sufficient to avert resorting to IMF-EU bailout for Spain, then the sovereign debt crisis for EU is over and the euro will stabilize. However, my guess is that with rising interest rates and an expensive reserve currency and a tight monetary and fiscal policy, the EU is making it very difficult for the debtor nations to recover quickly in the next five years. Spain would be the big pay off for speculators and they will try to have a good payday. How much help will they receive from the governments of France and Germany and the European Central Bank is unknown.

What can Spain do? Play along with Germany and France and suffer the same fate as Portugal, Ireland, and Greece. Otherwise, it could form a solidarity debtor bloc within the EU. After all, there is already a creditor bloc working against debtors in any event. Creditor countries rely on debtors to purchase to purchase everything from toothpaste to submarines. The decision by creditors to squeeze every once of capital from debtors in order to strengthen their weakened private sectors is nothing new because it has taken place before and it is how the integrated global market economy operates. The issue is that EU is breaking up into blocs and the debtors may as well realize it and form their own if they wish to have any negotiating leverage on any issue. Otherwise, they may as well announce to their citizens that sovereignty for all of Europe rests with Germany and France.

AUTHOR: Jon Kofas
E-MAIL: jonkofas [at]


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