Thursday, August 16, 2018

Thoughts from Galicia, Spain: 16.8.18

Spanish life is not always likeable but it is compellingly loveable. 
- Christopher Howse: A Pilgrim in Spain. 

If you've arrived here because of an interest in Galicia or Pontevedra, see my web page here. Garish but informative.

As usual on a Thursday morning, I'm indebted to Lenox Napier of the comprehensive Business over Tapas for some of the following items.

My apologies for not posting the cited article until later in the day yesterday. Undue haste.

  • News of a development in the Franco era stolen baby saga.
Life in Spain
  • I recently mentioned the string-holding manteros in Madrid. The Guardian reported on them on Tuesday, headlining that: Street vendors in major Spanish cities have found themselves at the centre of an immigration row, as rightwing political parties try to reverse their poll slump. The Popular party and the Citizens party – flailing since Pedro Sánchez’s socialist party came to power in June – have followed their attacks on migrant ships by targeting street vendors, the majority of whom are undocumented immigrants from west Africa. The Guardian says there might be more than 500 manteros in Madrid. Nearly all of them on Gran Vía, I suspect. More on this here. One nice comment: The irony is that, while Spaniards are rightly proud of their humanity in opening their ports to refugees, under the current immigration law most of the new arrivals will not be allowed to work legally and many will end up as 'manteros'. IGIMSTS.
  • Mr Trump's problems seem to be increasing by the hour. Couldn't be happening to a nicer guy. Are his days really numbered now? Especially as his lawyers seem to be singularly incompetent.
  • Meanwhile 1: Mr Trump justifies his revocation of the security clearance of the former CIA director John Brennan on the grounds that he's shown “questionable objectivity and credibility” and “erratic conduct and behavior,”. You have to laugh at this pot-kettle saga. Does Trump have any self-awareness at all? No need to answer that.
  • Meanwhile 2: A nice cartoon . . .

The EU
  • See the Ambrose Evans Pritchard article below on Italian developments and their implications. The fate of the eurozone, he says, now depends on a trial of strength between the Brussels-Frankfurt-Berlin axis and a ferociously-defiant Matteo Salvini. And: The eurozone has just two or three months to figure out how to handle the most dangerous revolt since the launch of monetary union, and what to do before the ECB stops buying Italian bonds. This has the makings of very hot autumn. Interesting times.
The EU and Brexit
  • Perfidious Brits?: The EU fears that they are being bugged by the British secret service after the UK obtained sensitive documents “within hours” of them being presented to a meeting of EU officials last month. Let's hope so . . . But: UK officials dismiss the European bugging concerns as “too imaginative”, arguing that there are plenty of sources of good information in the leaky Brussels bureaucracy. They would say that, wouldn't they?
The UK and Brexit
  • Says an optimist in today's Times who describes himself as 'a moderate Brexiteer who wants, or wanted, a sensible deal between Britain and the EU': Although the autumn talks are likely to end in deadlock there are encouraging signs a pragmatic solution can be found. This would be the no-deal deal in October. The starting point would be to agree a transition period, so that from March 2019 regulation can essentially stay the same for a limited period, giving business and security services on both sides certainty and time to prepare for no deal, or a free trade arrangement and security partnership in 2020. You then, from December to March, work quickly through each area: aviation, finance, pharma, security, with an emphasis on problem solving. And, I guess, with looming disaster concentrating minds on both sides of the divide. Well, since no one knows what's going to happen, I suppose anything is possible. And it might not be fatuous to hope/believe that common sense breaks out. I wonder how Dr North will react to it. By coincidence, he refers to the 'no deal deal' today as follows, in a post in which he dismisses out-of-hand another commentator's rose-tinted view of the current situation: Inexorably, we are headed for a "no deal" scenario, not as the result of any conscious policy decision, but simply because the UK government has run out of ideas, and doesn't know what to do next – "Death by default", so to speak. 
Galicia and Pontevedra
  • Some nice, if rugged, beaches in Galicia and neighbouring northern regions.
  • I thought I was having 'one of those shopping days' yesterday. All 4 places I went to to either buy a stamp or deposit some trousers for repairs were closed. As was the Post Office. Then it dawned on me that it was one of Spain's dozens of feast days. Dredging my ex-Catholic brain, I decided it was Assumption of the Virgin Mary into heaven. Any excuse for a holiday.
  • Talking of holy folk . . . An American actor I've never heard of said this in an interview: My wife and I have plans to walk the Camino Santiago. It’s a path between Spain and Portugal that people say Jesus walked way back when. Someone needs to set him straight on a number of things. It's St James who's supposed by the credulous to have walked on Spanish, but never Portuguese, soil. And then to have returned, as a corpse, in an un-crewed, stone boat to our coast. Suggesting Jesus came here and walked through Pontevedra would surely stretch credulity beyond breaking point. Surely no one would believe that . . .
  • And turning to unholy folk . . . These 3 books, in the window of a shop opposite my regular bar, all relate to our vast drug-trafficking industry.  . . .

The one on the left is entitled Now it's my turn, and is penned by one of the more infamous clan heads. Who on earth would want to give this shit more money?

Finally . . .
  • Here's an an interesting suggestion . . . I think part of a best friend’s job should be to immediately clear your computer history if you die.
© [David] Colin Davies, Pontevedra: 16.8.18


Italy's bubbling bond woes are a bigger global threat than Turkey

The EU is courting fate if it pushes Rome too far
The chairman of Italy’s budget committee is frighteningly blunt. The country's bond market will spin out control as soon as the European Central Bank stops buying its sovereign debt. “The bond spreads will widen dramatically. The whole situation is unsustainable without an ECB guarantee, and the eurozone will collapse,” said Claudio Borghi.

This is a greater threat to European banks and global finance than the current opera buffa in Turkey. It is drawing closer. The ECB has pre-announced that it will halve purchases of eurozone bonds to €15bn (£13bn) a month in October, and will stop altogether at the end of the year. There will no longer be a lender-of-last resort behind eurozone states on January 1 2019. Any rescue will require the backing of the EU bail-out fund (ESM), under draconian terms, subject to a vote in the Bundestag.

There is no chance that the insurgent Lega-Five Star coalition in Rome would accept any such programme dictated by the German finance ministry. The eurosceptic alliance would activate its "minbot" parallel currency and subvert monetary union from within. “The minibot is part of our official programme. We have it if needed,” he told me this morning.

Any move by the ECB to extend bond purchases into next year would cause a political firestorm in Germany. It would be seen as a concession to a rebel politicians who have openly threatened to tear up the EU Stability Pact and Fiscal Compact. The ECB could perhaps get away with extending its long-term (TLTRO) funding for eurozone banks.

“It is not only Italy that will be in trouble. Who is going to buy a 10-year Portuguese bond with a lower yield than a US Treasury, when there is nothing standing behind Portugal?” said Mr Borghi, a Tuscan MP and budget chief in the lower house of parliament. “We’re back where we were when the crisis began in 2011. Instead of fixing the structural flaws in the eurozone system, they used the bond spreads as a weapon of mass financial destruction to topple governments and put their friends in power,” he said. “There are only two golden keys to get out of this slaughterhouse: either the ECB agrees to hold the risk spread at 150 points; or we take back our own currency and restore national independence,” he said. The spread ended today at 290.

Mr Borghi has long been the eurosceptic firebrand of the nationalist Lega. An ex-Deutsche Bank trader, he proposes the restoration of the Medici Florin as the new patriotic coin of Italy.

What is striking is that the Lega’s elder statesman – and de facto co-premier as minister of government – has issued equally stark warnings over the last two weeks. “I expect an attack; financial markets are populated by hungry speculative funds that pick their prey and pounce,” said Giancarlo Giorgetti. “We saw  what happened in August 1992 (ERM crisis), and seven years ago with Berlusconi. In the summer, there is thin trading in financial markets, and it lends itself to assaults on countries. Look at Turkey,” he told Il Libero. “The old establishment in Italy and Europe wants to overthrow this government to avoid a precedent. Populist governments are not tolerated. The EU is afraid that if Italy succeeds, other countries might copy us,” he said. Sound familiar?

Mr Giorgetti is alluding to the "coup d’etat" of late 2011 when the ECB withheld purchases of Italian bonds to enforce austerity policies on Silvio Berlusconi, and ultimately to drive him out of office when he began to flirt with the lira. That this was a political execution is more or less confirmed in Morire di Austerita, a kiss-and-tell memoire by an ECB board member. It is also confirmed by Athanasios Orphanides, then an ECB governor. “They cut off refinancing and threaten to kill the banking system. They create a roll-over crisis in the bond market. This what happened to Italy in 2011,” he said earlier this year.

A former EU commissioner was installed as prime minister of Italy, Mario Monti. He is a high-minded gentleman but that is not the point. The defenestration was done with a nod and wink from the Italian president of the day, a Stalinist who later converted to EU ideology with the same fanaticism. This preserved the constitutional formalities. Much the same happened in Greece to premier George Papandreou.

The Italian and Greek episodes show how the EU apparatus works through powerful elites in each member state to enforce its will when resisted, and how it uses fear. Economic coercion is an instrument for regime change. In the case of Brexit it is now being used for the reverse purpose, to prop up the compliant – almost capitulard – regime of Theresa May.

Lorenzo Codogno from LC Macro Advisors said Lega rhetoric has become alarming. He had a ring-side seat in the 2011 drama as chief economist at the Italian treasury, and saw how quickly the debt markets can turn against you.

The risk spread on Italian 10-year bonds has risen almost 50 basis points over the last four trading sessions, whether caused by fears over Unicredit’s exposure to Turkey or – more importantly – fears over the looming budget clash between the Lega-Grillini and Brussels this autumn.

Mr Codogno said the the Lega’s usually cautious Mr Giorgetti almost seemed to be opening the door to "Italexit". “Italians may get distracted at the beach, but financial markets will notice. Italy is very vulnerable right now if there is any slowdown in the global economy. If the government pushes the budget deficit above 3% of GDP there will be a crisis immediately,” he said.

Italy is not a basket case. It still has the EU’s second biggest manufacturing industry and a current account surplus of 2.8% of GDP. It is a net contributor to Brussels. Italians have greater private wealth than the Germans. Aggregate debt as a share of GDP is at low end of the G7. That is why the EU is courting fate if it pushes Rome too far.

The country faces insolvency risk only because the deformed EMU structure has no lender-of-last-resort and creates a deflationary trap for states that entered monetary union with high public debt. EMU has entrenched a vicious circle of low investment and dismal productivity.

We forget now that Italy used to have a trade surplus with Germany. Until the mid-Nineties, its growth tracked German levels, helped by benign devaluations from time to time. Italy’s two lost decades began when the currencies were fixed. Germany slowly locked in competitive advantage through the Hartz IV wage squeeze and through falling unit labour costs, until the mercantilist trap closed.

The consequence is that Italy’s debt dynamics are acutely sensitive to slight changes in nominal GDP growth. The obvious risk is that the trajectory will turn fatal in the next global downturn.

Public debt has only just stabilised at 132% of GDP a full decade into this ageing cycle. One more shock will push it through 140% in short order. The compound arithmetic will do the rest.

Foreign hedge funds already have their fingers on the trigger, watching for the first clues on the budget. Brussels wants further fiscal austerity of 1% of GDP over the next year. The Lega-Grillini promised voters fiscal expansion of 6% of GDP, if you add up the flat tax, universal basic income, reversal of pension reforms, and the cancellation of planned VAT rises.

Finance minister Giovanni Tria sounds conciliatory. The next budget will be “compatible” with EU rules. But he is an orphan figure foisted upon the coalition after the country’s president vetoed a eurosceptic. Electoral power lies with Davide Casaleggio, the cyber Godfather of the Five Star movement.

Above all, power lies with Matteo Salvini, the Lega strongman, becoming stronger by the day and leading the polls at 32%. He has seized on the Genoa bridge disaster to denounce austerity and EU budget limits. It is the tragic excuse he needs to defy the Stability Pact and to outflank the pro-EU poteri forti in Italy. “There can be no trade-off between fiscal rules and the safety of Italians,” he said.

The fate of the eurozone now depends on a trial of strength between the Brussels-Frankfurt-Berlin axis and a ferociously-defiant Matteo Salvini.

There is no use threatening to eject the country from monetary union, a la Grecque. That would precipitate a chain-reaction of sovereign and corporate defaults, and bring down the European banking system. Germany could expect to lose €2 trillion.

Besides, it is what Mr Salvini wants. He concluded long ago that national self-government is impossible as long as Italy remains in the ECB cage. Or as he once told me, “the euro is a crime against humanity”.

The eurozone has just two or three months to figure out how to handle the most dangerous revolt since the launch of monetary union, and what to do before the ECB stops buying Italian bonds. This has the makings of very hot autumn.


Sierra said...

"....Suggesting Jesus came here and walked through Pontevedra...."

Await press release from local tourists' office

Colin Davies said...

Nice one,

Alfred B. Mittington said...

And what often unappreciated friend pointed out to you that you had forgotten to post the promised article, part tell??

What IS wrong with honour where it is due...?


Colin Davies said...