Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22
How to Profit from 2022’s Biggest Trend Reversal - 11th Jan 22
Stock Market Sentiment Speaks: Are We Ready To Drop To 4400SPX? - 11th Jan 22
What's the Role of an Affiliate Marketer? - 11th Jan 22
Essential Things To Know Before You Set Up A Limited Liability Company - 11th Jan 22
NVIDIA THE KING OF THE METAVERSE! - 10th Jan 22
Fiscal and Monetary Cliffs Have Arrived - 10th Jan 22
The Meteoric Rise of Investing in Trading Cards - 10th Jan 22
IBM The REAL Quantum Metaverse STOCK! - 9th Jan 22
WARNING Failing NVME2 M2 SSD Drives Can Prevent Systems From Booting - Corsair MP600 - 9th Jan 22
The Fed’s inflated cake and a ‘quant’ of history - 9th Jan 22
NVME M2 SSD FAILURE WARNING Signs - Corsair MP600 1tb Drive - 9th Jan 22
Meadowhall Sheffield Christmas Lights 2021 Shopping - Before the Switch on - 9th Jan 22
How Does Insurance Work In Europe? Find Out Here - 9th Jan 22
MATTERPORT (MTTR) - DIGITIZING THE REAL WORLD - METAVERSE INVESTING 2022 - 7th Jan 22
Effect of Deflation On The Gold Price - 7th Jan 22
Stock Market 2022 Requires Different Strategies For Traders/Investors - 7th Jan 22
Old Man Winter Will Stimulate Natural Gas and Heating Oil Demand - 7th Jan 22
Is The Lazy Stock Market Bull Strategy Worth Considering? - 7th Jan 22
METAVERSE - NEW LIFE FOR SONY AGEING GAMING GIANT? - 6th Jan 2022
What Elliott Waves Show for Asia Pacific Stock and Financial Markets 2022 - 6th Jan 2022
Why You Should Register Your Company - 6th Jan 2022
4 Ways to Invest in Silver for 2022 - 6th Jan 2022
UNITY (U) - Metaverse Stock Analysis Investing for 2022 and Beyond - 5th Jan 2022
Stock Market Staving Off Risk-Off - 5th Jan 2022
Gold and Silver Still Hungover After New Year’s Eve - 5th Jan 2022
S&P 500 In an Uncharted Territory, But Is Sky the Limit? - 5th Jan 2022

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Spain's Molasses Jeopardizing Eurozone?

Politics / Eurozone Debt Crisis Jul 24, 2012 - 07:56 AM GMT

By: Axel_Merk

Politics

Best Financial Markets Analysis ArticleSpain's regional government debt is in focus again. Spanish 10-year government bond yields are trading near 7.5% as Spain's central government is expected to bail out its regions - and in return may ask for a bailout itself. Guarantees don't make a system safer, quite the opposite: everything is safe until the guarantor itself is deemed unsafe. While the failure of any one business of regional government is a tragedy, providing a guarantee puts the system as a whole at risk.


Spain consists of 17 autonomous regions, whose total debt almost doubled in the past three years. Technically, Spanish law forbids the central government from rescuing regional government (in much the same way that the Maastricht Treaty prohibits bailouts of EU countries). The debate on whether the central government should take more control over regional budgets and provide guarantees/bailouts has intensified since January, when the central government implicitly helped Valencia, one of the most indebted regions, with a €123 million loan repayment to Deutsche Bank:

  • Though the central government is prohibited from rescuing regional governments and it denied it has done so, El Pais (Spain's highest-circulation daily newspaper) reported earlier this year that the Spanish Treasury provided implicit guarantee and help to Valencia in repaying the loan to Deutsche Bank. The central government advanced its regular transfers to Valencia by about 10 days to January 3rd. On the next day, Jan. 4th, Valencia was reported to have repaid the loan. It can be viewed as the first implicit bailout from the central government in Spain.

In an effort to impose more control over the spending of regional governments, the Spanish Council of Ministers approved a draft of a Stability and Sustainability Law in late January; one provision is that the central government could oversee the budgets of the 17 autonomous regions and establish penalties for those who do not meet the balanced budget targets (all regions missed the deficit-to-GDP target of 1.5% last year). Not surprisingly, the provision created strong controversy. Socialist-led regions (i.e. Catalonia) criticized the provision harshly, while some conservative-ruled regions (i.e. Valencia) backed the plan. The criticism didn t stop Catalonia to ask for delays in handing tax payments to the central government.

In May, in a clear sign that troubles for the regions were escalating, Valencia, one of the most troubled regions, was forced to pay what was considered a punitive 6.8% yield to roll over €500 million for six months, more than six times the Spanish Treasury had to pay on the comparable-maturity at the time. By now, the yields have further risen to around 20%.

A highly decentralized budget system

  • Spain is divided into 17 autonomous regions due to historical reasons and cultural differences.

  • Regional governments have historically been granted significant control over spending. They take charge of education, health and social services, which account for 50% of total government expenditures.

  • Regions also have the power to authorize or veto the issuance of public debt.

  • The central government has little ability to interfere regional government spending, but is prohibited by Spanish law to bailout regional governments.

Mismatch in regional fiscal autonomy

  • While regions enjoy high autonomy on spending, the central government retains effective control over regional government revenue.

  • For 15 out of the 17 regions, the central government retains all powers over the collection and regulation of important taxes (i.e. corporate income tax, import duties, payroll taxes). Regional government revenues mainly come from the central government's conditional grants and ceded taxes (set at central level, but collected at regional level). Central grants vary from year to year; they are designed to address regional imbalances. And for some of the ceded taxes, these regions only retain a small share (i.e. 35% for VAT and 50% for personal income tax) after collection.

  • Only two regions are close to the maximum fiscal autonomy. They have full powers over a number of major taxes and retain 100% of ceded taxes.

Regional debt accumulation

  • As a result of the economic recession and housing market collapse, all 17 regions experienced a significant rise in debt. By 2011, the total debt of 17 regional governments rose to 140 billion, accounting for 13.1% of Spain's GDP. This number is up from 6.7% by 2008.

  • 10 out of 17 regions' debt-to-regional-GDP ratio exceeded 10% (versus 2 out 17 by 2008). All regions missed the deficit-to-GDP target of 1.5% last year.

  • The most indebted region, Catalonia, recorded a 20.7% debt-to-regional-GDP ratio and 3.6% deficit-to-GDP ratio in 2011. Catalonia s 10-year bond yield exceeded 14% at its peak in June.

  • The 2nd indebted region, Valencia, delayed repayment of a 123 million loan to Deutsche Bank in January. Subsequently, the region's credit rating was downgraded by Moody's to junk and it failed to raise 1.8 billion in a bond auction in March. Valencia is a Mediterranean region with many beach-front properties; its economy collapsed after the housing bubble bust.

Last Friday, Valencia was the first region to say it would into a new Spanish government fund to meet its debt-refinancing obligations, as well as to pay suppliers. With that, the Spanish government is now clearly on the hook for the regions' debt. Not surprisingly, the market is pricing in that reality. Trouble is that Spain's central government does not have the credibility that it has sufficient influence to turn the regions' finances around. Unless the Spanish government can assure the markets that it can deliver sustainable budgets - for itself and now the regions as well - it will simply go deeper into the molasses and risks taking the Eurozone with it. And while Spain certainly tries to advance its structural reform, the headlines coming out from the region suggest Spain might be more interested in the European Central Bank (ECB) intervening to help out Spain's cost of borrowing. As long as debt is merely shuffled around, the Eurozone crisis won't be solved. And as long as ever more guarantees are provided - from regional to national governments, from supranational issuers such as the European Stability Mechanism (ESM) to the International Monetary Fund, the more the global financial system as a whole may be at risk.

Please sign up to our newsletter to be informed as we discuss global dynamics and their impact on currencies. Please also register for our upcoming Webinar on July 19, 2012. Please also follow me on Twitter to receive real-time updates on the economy, currencies, and global dynamics.

By Axel Merk

Manager of the Merk Hard, Asian and Absolute Return Currency Funds, www.merkfunds.com

Axel Merk, President & CIO of Merk Investments, LLC, is an expert on hard money, macro trends and international investing. He is considered an authority on currencies. Axel Merk wrote the book on Sustainable Wealth; order your copy today.

The Merk Absolute Return Currency Fund seeks to generate positive absolute returns by investing in currencies. The Fund is a pure-play on currencies, aiming to profit regardless of the direction of the U.S. dollar or traditional asset classes.

The Merk Asian Currency Fund seeks to profit from a rise in Asian currencies versus the U.S. dollar. The Fund typically invests in a basket of Asian currencies that may include, but are not limited to, the currencies of China, Hong Kong, Japan, India, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand.

The Merk Hard Currency Fund seeks to profit from a rise in hard currencies versus the U.S. dollar. Hard currencies are currencies backed by sound monetary policy; sound monetary policy focuses on price stability.

The Funds may be appropriate for you if you are pursuing a long-term goal with a currency component to your portfolio; are willing to tolerate the risks associated with investments in foreign currencies; or are looking for a way to potentially mitigate downside risk in or profit from a secular bear market. For more information on the Funds and to download a prospectus, please visit www.merkfunds.com.

Investors should consider the investment objectives, risks and charges and expenses of the Merk Funds carefully before investing. This and other information is in the prospectus, a copy of which may be obtained by visiting the Funds' website at www.merkfunds.com or calling 866-MERK FUND. Please read the prospectus carefully before you invest.

The Funds primarily invest in foreign currencies and as such, changes in currency exchange rates will affect the value of what the Funds own and the price of the Funds' shares. Investing in foreign instruments bears a greater risk than investing in domestic instruments for reasons such as volatility of currency exchange rates and, in some cases, limited geographic focus, political and economic instability, and relatively illiquid markets. The Funds are subject to interest rate risk which is the risk that debt securities in the Funds' portfolio will decline in value because of increases in market interest rates. The Funds may also invest in derivative securities which can be volatile and involve various types and degrees of risk. As a non-diversified fund, the Merk Hard Currency Fund will be subject to more investment risk and potential for volatility than a diversified fund because its portfolio may, at times, focus on a limited number of issuers. For a more complete discussion of these and other Fund risks please refer to the Funds' prospectuses.

This report was prepared by Merk Investments LLC, and reflects the current opinion of the authors. It is based upon sources and data believed to be accurate and reliable. Opinions and forward-looking statements expressed are subject to change without notice. This information does not constitute investment advice. Foreside Fund Services, LLC, distributor.

Axel Merk Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in