By Don Quijones, Spain & Mexico, editor at WOLF STREET.
After game-changing municipal and regional elections in Spain, panic and fear are beginning to take root in the hallowed halls of government power and corporate HQs. The governing People’s Party (PP) won more votes than any other. However, it also lost majority control of virtually all of the country’s key municipalities and electoral regions.
As I have been warning for months, the Rajoy era of maleficient strong-arm governance seems set to give way to a new era of political instability. According to some commentators, Spain may even become ungovernable after this autumn’s general elections. If the new political reality at the local and municipal level is anything to go by, they may be right: in nine out of ten major municipalities the local government will be run (or otherwise) by loose coalitions of disparate political parties.
They include Spain’s two biggest cities: Madrid, for decades the Popular Party’s impenetrable seat of power, and Barcelona. Both cities now seem destined to be led by strongly leftist (or as some are calling them, “anti-system”) mayors, Ada Colau in Barcelona and Manuela Carmena in Madrid. Among the policies they espouse are an immediate halt to foreclosures (bitterly opposed by the Spanish banking lobby), an audit of the public debt, a complete revision of municipal contracts, increased taxes for big businesses, job-creation programs, and a halt to the privatization and outsourcing of public services.
Predictably, the prospect of increased political instability and deep radicalization of local and city politics has set off alarm bells, both at home and abroad. According to Bank of America-Merrill Lunch, the biggest fear is that it will be almost impossible for Madrid to form a strong government capable of carrying out the necessary fiscal adjustments and structural reforms after the general elections.
As El Confidencial reports, international investors have already taken the foot off the pedal out of concern for what the future in Spain may hold. “What is important are the questions of policy continuity and predictability,” says Moody’s vice president, Sarah Carlson. “If we have reasons to doubt that, it will be important.”
It’s Not Just the Economy, Stupid!
As for Rajoy’s government, it seems powerless to stop the winds of change. So far it has run an election campaign based on two simple strategies: first, to sow fear about the threat posed by radical alternatives (i.e. Podemos); and second, to talk up the government’s economic achievements, most of which are owed to Mario Draghi’s unprecedented loosening of the European Central Bank’s strings and few of whose benefits are actually being felt by the majority of the Spanish public.
The government was convinced that voters would care little about its stinking morass of corruption, lies and malgovernance. It was wrong. And now its culture of hubris and impunity is fast giving way to one of fear and desperation. One can picture the thousands of unseated municipal and regional party members across the country frantically trying to destroy the paper and digital trails left behind by decades’ worth of corruption. Podemos has already warned its ranks of new councilors to keep a close eye out for data destruction.
As for Rajoy, his sights are now firmly set on the next elections. Just 48 hours after the municipal elections, he resorted to the ultimate last resort of a desperate political leader: the promise of across the board tax cuts. If his government is reelected and tax revenues keep rising, he told a skeptical Congress, his government would reduce “fiscal pressures” in all areas of central government. It is his last bullet but alas a blank.
Rumors of a New Bailout
As Rajoy well knows, Spain is in no fiscal position to offer across-the-board tax cuts, especially with the IMF breathing heavily down its neck. The Fund has already warned that Spain will have very little fiscal room to maneuver after the general elections, in particular with the country’s debt forecast to continue its parabolic rise past the official point of no return (100% of GDP). Extra-officially speaking, Spain surpassed that point long ago.
With the country’s banking sector still teetering on the precipice of financial collapse, albeit quietly, Spain’s next government is almost certain to come under renewed Troika pressure not just to continue applying the austerity screw but to tighten it further.
Indeed, as Rajoy tries to bribe his way into power with promises of tax cuts, the IMF is quietly preparing the groundwork for a new bank bailout – not just in Spain, but also in Italy. According to El Confidencial, José Viñals, the Fund’s hyper-connected financial councilor and director of monetary and capital market department, is talking behind the scenes about the huge risks posed by the rising tide of non-performing loans (NPLs) in Italy and Spain.
A new clean-up is needed that will allow banks to “unload” debts that are more than 90 days overdue, said Viñals. In Italy NPLs represent a mind-blowing 17% of total credit, with a total value of over €300 billion – almost a quarter of Italy’s GDP. In Spain the financial sector has already undergone an adjustment program worth €250 billion, including a €41-billion Troika bailout and €61 billion in government assistance. It clearly wasn’t enough.
Recent estimates have put NPLs in Spain at around 9% to 10% of total bank credit – the equivalent, according to analysis by the Wall Street Journal, of around €120 billion – almost all of it held by Spain’s six biggest banks, Santander, BBVA, Caixa Bank, Bankia, Sabadell, and Banco Popular. As I warned just over a month ago, the Spanish bad bank’s rug is no longer big enough to cover all the junk festering on the bank’s balance sheets.
For now, the Fund is playing it cool, even letting Rajoy try to lure gullible voters with impossible promises of across-the-board tax cuts. However, once the elections are over, the fun and games will truly begin, as pressure is once again applied to ensure that the governments in Spain and Italy pledge fresh (or future) taxpayer funds to save the banks. The problem for the Fund is that by then Spain may not even have a functioning government to boss around. By Don Quijones, Raging Bull-Shit.
This comes at the worst possible time for Spain’s regime. Read… Downturn in South America Mauls Spanish Companies, Threatens Spain’s “Recovery”
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