The Spanish Prime Minister's Job Is Not An Easy One

 |  Includes: EWP, FXE, UDN, UUP
by: Ralph Shell

For Spanish Prime Minister Mariano Rajoy, the job is not an easy one. Every where he turns, there seems to be nothing but more trouble. When elected by a landslide back in November 2011, Rajoy cautioned there would be a long battle back, but the battle back may be even tougher than anticipated.

The balloting was barely complete when it was discovered that Spain, unlike Greece who relied on Goldman, was quite capable of cooking the books on their own. Consequently the Spanish debt to GDP ratio was much higher than originally forecast.

Reports continue on a fairly regular basis about monetary irregularities, and missing money. Today the Mayor of Estepona reported €100,000 is missing. It seems there might be a need to find some unemployed accountants and put them to work.

The Spanish troubles continue. Unemployment is now over 23%, the highest in Europe, and over 50% for those under 25 looking for a job. Under the austerity solution proposed by the Germans, the economy is contracting further, and more cuts are demanded as a consequence of the shrinking government revenues. Yesterday, for example, it was announced there would be a 20% cut in education expenses. Today those who take prescription drugs under the socialized prescription scheme were told their copay would increase.

The Spanish government is also trying to clamp down on tax fraud, and slow the rapid flight of money from Spain. As we have noted there has been an increasingly large movement of funds from Spain to other countries. Effective immediately, all cash transactions of over €2500 will need be reported to the Spanish tax ministry.

Since there has been a money flight from Spain for the past several months, the hasty change in the reporting of cash transactions may have resulted in people scrambling to retrieve cash. Perhaps they have had to buy back some euros.

For the PM, the turmoil continues. This week, Christina de Kirchner, declared she is an elected head of state and not a hoodlum, but acting like a hoodlum, announced she was nationalizing the assets of the Spanish Oil Company, Repsol, and their Argentinian subsidiary YPF. There has been rumors the Chinese were interested in paying $15B for the assets, but ownership of hydrocarbon reserves are now in the Argentine "public interest," according to de Kirchner.

Currently PM Rajoy is attending the World Economic Forum in Mexico. Rajoy reminded the attendees that the recent rapid growth in Latin America was in part the result of foreign capital in flows, and Argentina's actions would hurt their growth. It is interesting to note that the "European Commission has reminded Spain that the protection of investments outside the EU is the 'exclusive' responsibility of the EU, although any possible options are yet to be revealed."

We wonder if the Spanish are going to like being a ward of Brussels and Frankfurt.

Finally, the Spanish King Don Juan Carlos had to cut his elephant shoot in Botswana short and return to Spain for hospital treatment. With belt tightening austerity sweeping over Southern Europe, it seems appropriate. The king, ironically is the holder of a honorary position in the World Wildlife Fund, cut his safari short.

For months the epicenter of the European sovereign debt problem was Greece. Now it is Spain. The catalyst for the recent panic attach has been the interest rate climbing back to over 6% for a ten year bond. They do claim the Spanish auction this week was a success but 12 month bills yielding 2.623%, and 18 month bills at 3.11% hardly sounds like a bargain.

Austerity as practiced by Spain may make the Germans happy, but the economy in Spain is slipping back into another recession. Granted the ECB has been lending an increased amount to Spain but the need for funds seems to be endless.

The regional banks hold bad real estate loans. Today it was reported that non-performing loans were 8.1% of the total outstanding, the highest since 1994. It should be no surprise that the IBEX35 Index is down over 3% today, lead by bank stocks.

The German ZEW Economic Sentiment may be soaring but this is of little help to Spain. There, they need liquidity, a version of Quantitative Easing, and some stimulants to subsidize some new business. They also need lower real estate prices so the current inventory glut can be worked off, and to facilitate increased real estate activity, they need a cheaper currency. As long as the money keeps flowing from Frankfurt, the ladder will not happen, unless the impaired economies in Southern Europe pulls the euro lower.

Again this week the EURUSD traded below 1.30, but briefly. We continue to think the pair is going to retreat under the 1.30 handle but support shows when we get close, so patience is required.

The Spanish Prime Minister
(Click to enlarge)

The Spanish Prime Minister
(Click to enlarge)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.