Spain - Everything Suddenly Stops

[Master Shake]

Economic data releases from Spain have one thing in common lately: they are all 'worse than expected'. Even data that were in fact expected to be atrocious surprise by being more atrocious than previously imagined. The latest example is the reported decline in retail sales of 9.8% year-on-year, a new record. In fact, this was the 'seasonally adjusted' decline. In real terms, retail sales plummeted by 11.3% year-on-year. This follows on the heels of a 3.8% (s.a.), resp. 4% (real) decline last month, which was already quite bad, but not really alarming just yet.

A friend remarked to us that when looking over Spain's economic data releases during April and May, one had the impression that everything had 'suddenly stopped'. This was buttressed by a table depicting said releases:

http://www.financialsense.com/contri...suddenly-stops

[globaleconomicollaps]

Re: Spain - Everything Suddenly Stops

http://www.itulip.com/forums/showthr...Suddenly-Stops

[Thailandnotes]

Re: Spain - Everything Suddenly Stops

Uh-oh, it’s on npr

http://www.npr.org/2012/05/31/154074...-tipping-point

Spain looks headed for a bailout, says Gonzales, a 27-year-old geologist who works for free because he can't find a job. He just withdrew his meager savings from Bankia, the failing lender that Spain is struggling to rescue.

"I have a box of coffee with my money in it in my home," he says. "I think it's better."

Germany doesn't want its contributions to the European rescue fund to disappear into Spanish banks that have had their share of mismanagement and scandal. This week, it came out that the parent company of Bankia has promised one of its executives a pension totaling $17.5 million — while taxpayers bail out his bank.

[globaleconomicollaps]

Re: Spain - Everything Suddenly Stops

Uh-oh, it’s on npr

http://www.npr.org/2012/05/31/154074...-tipping-point

Spain looks headed for a bailout, says Gonzales, a 27-year-old geologist who works for free because he can't find a job. He just withdrew his meager savings from Bankia, the failing lender that Spain is struggling to rescue.

"I have a box of coffee with my money in it in my home," he says. "I think it's better."

Germany doesn't want its contributions to the European rescue fund to disappear into Spanish banks that have had their share of mismanagement and scandal. This week, it came out that the parent company of Bankia has promised one of its executives a pension totaling $17.5 million — while taxpayers bail out his bank.

I'm thinking of taking all my money out of the bank and putting it into used coffee cans. I think there will be a huge market.

[thriftyandboringinohio]

Re: Spain - Everything Suddenly Stops

I haven't planned to be a distributor, trafficker, or dealer of federal reserve notes, but we have a stash for our personal use in any emergency.

You could be right if the ATMs and credit card readers go off line for a couple weeks.

In our ZIRP world, a coffee can pays the same as a CD.

[jiimbergin]

Re: Spain - Everything Suddenly Stops

I haven't planned to be a distributor, trafficker, or dealer of federal reserve notes, but we have a stash for our personal use in any emergency.

You could be right if the ATMs and credit card readers go off line for a couple weeks.

In our ZIRP world, a coffee can pays the same as a CD.

so do we

[wayiwalk]

Re: Spain - Everything Suddenly Stops

Same here. Except mine is stored in an antique toy truck.

[don]

Re: Spain - Everything Suddenly Stops

Target Two and the run to safety . . .

By FLOYD NORRIS

There is an unfortunate logic to bank runs. The rational thing for any depositor to do is to join in the run if there is even the smallest possibility that the bank really is in danger of failing. If you pull your money out and the bank survives, the costs of your mistake are tiny compared to the costs if the bank fails with your money in it.

Right now in Europe, there are trots — think of them as slow-speed runs — not on individual banks but on national banking systems. Depositors are pulling money out of banks in countries that may or may not be solid, and putting the money into German banks.

That move sets in motion a daisy chain of loans that leaves Germany’s central bank, the Bundesbank, financing the system.
An interesting question is whether the rate of withdrawals is accelerating.

We don’t know. These are numbers that come out with long and variable delays of weeks to months.

Certainly the numbers were large before worries about Spanish banks intensified in May.

It is conceivable that the trot could speed up even more before the Greeks get around to their next election, two weeks from Sunday.

Before considering whether the numbers are scary — and there is a sharp debate on that among economists — consider how the daisy chain works. An Italian withdraws 1,000 euros from his local bank and deposits them in a German bank. A lot of other Italians — and Irish and Greeks and Spaniards and Portuguese — do the same. Of course, those local banks still have the same loans outstanding.

If enough deposits leave, the banks may have to borrow from their own central banks, such as the Bank of Italy.

If other Italian banks do not have excess reserves — and in this situation they will not — the Bank of Italy then borrows from the European Central Bank. And where does the European Central Bank get the money? As it happens, the German banks now have more deposits than they need, and they deposit money with the Bundesbank. The Bundesbank lends the money to the European Central Bank.

Those loans between central banks are called Target 2 flows, a term that comes from the name of a payment system. When things were running smoothly, no one paid much attention to them. Now many worry about them.

All told, it appears that close to a trillion euros in Target 2 loans were owed to the European Central Bank by central banks of countries with leaky banking systems at the end of April. I say appears because two debtor central banks — those of France and Austria — have yet to report April numbers. A year ago, the figure was under 500 billion euros.

The largest lender to the European Central Bank under the program — 644 billion euros at last count — is the Bundesbank. But the national banks of Luxembourg, Finland and the Netherlands are also substantial creditors.

Broadly speaking, those are the countries that have prospered as others lost competitiveness. If the euro zone is to survive, they are also the ones most likely to have to finance a solution. Let us pause for a second and ask what the advantages and disadvantages are for those who move their deposits. They will get no interest from a German bank, but they got none from their local banks. They will give up having a convenient local branch. They have no currency risk, since their deposits are still in euros and they can write euro checks to pay their bills.

But what will happen if the euro blows up? Talk of that has intensified in recent weeks, as it became clear that the German diet of constant austerity was not attractive to voters in other countries. If the euro zone did blow up, or shrink, would depositors in Spain see their euro deposits converted to pesetas at some unknown exchange rate?

If you think the answer to that question may be yes, what do you have to lose by moving your money? That is the logic of a bank run.

Legally, no country can leave the euro zone. The euro was supposed to be the Roach Motel of currencies: once a country checked in, it could never check out. But now it is hard to see how some countries’ economies can ever become competitive if they cannot devalue their currencies, and voters are growing restless.

There is no way to know how messy a euro breakup would be. If euro deposits convert to the national currencies of the countries where the banks are located, it seems likely that the German mark will appreciate against the peseta or lira or drachma or whatever.

If all goes well, and the euro survives, a Spanish depositor can always move his deposit back to his home country later.

Late last year, when worries about Italy and Spain grew, forcing them to pay relatively high interest rates to borrow, the European Central Bank came up with what was called LTRO, for Longer-Term Refinancing Operation. That allowed European banks to borrow very cheaply for three-year terms. They could then buy national government bonds and pocket the profits. Rates on Italian and Spanish notes — particularly the two-year maturity — quickly fell.

The tactic was properly seen as buying time, allowing the governments to finance themselves at reasonable cost while they worked out strategies to deal with the crisis. But no real solutions have emerged since. Rates on Spanish and Italian two-year bonds are rising, although they remain below last year’s highs.

But even when national borrowing rates were falling early this year, the amounts of bank deposits that were slipping away from peripheral countries continued to grow, as was shown by the Target 2 balances.

Those balances are not disclosed by the European Central Bank. National central banks do make disclosures, but in varying formats and with differing frequencies and delays. The Institute of Empirical Economic Research at the University of Osnabrück in Germany compiles the numbers on a Web site. Some economists are waiting nervously to see if the numbers spiraled upward in May.

Theoretically, if a central bank ever did default on a loan from the European Central Bank, the loss would be shared proportionally by all the members of the euro zone. But if that did happen, some of those members would be in no shape to share. Odds are that Germany would end up with the bulk of the losses.

Would that matter? A newly independent Bundesbank could of course print money, which leads some economists to say there would be no real loss at all, even though the amount the Bundesbank is owed by the European Central Bank amounts to about a quarter of the country’s gross domestic product. But the Bundesbank’s hatred of printing money is legendary.

More likely, there could come a level of Target 2 obligations that causes Germany to call a halt to the game. It could do that by withdrawing from the euro. Or it could accept the logic that the euro — perhaps after Greece departed — needs common deposit insurance for all banks, perhaps with common bank supervision, as the European Central Bank president, Mario Draghi, called for on Thursday. That could help end the bank runs, but Europe would still be left with the fundamental question of how some of the countries can become competitive again.

Floyd Norris comments on finance and the economy at nytimes.com/economix.