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Tuesday, 10 April 2012

Spain and Italy and the sovereign debt crisis: a sad fairytale.

It was just like a fairytale at the end of last year.

few years ago, Hänsel and Gretel (Spain and Italy) had fallen into the hands of the wicked credit witch (the financial markets), the one that already had eaten Nikos alive (Greece).

Hänsel and Gretel had stopped at her house about ten years ago after losing the right path in Eurostan. This house existed of credit candy (loans for mortgages, investments and imports of North-West European products) and started eating of it, like there was no tomorrow. After five years they had eaten so much of this credit candy, that they didn’t notice that the credit witch tried to catch them, until it was too late.

Now they were the prisoners of the credit witch and she locked them up and fed them with more credit candy, only to slaughter them in a few years.

The friends of Hänsel and Gretel (Germany and France) knew that they were kept by the credit witch, but only wanted to free them if they lost all the weight that they gained while eating from the credit candy house. This almost starved Hänsel and Gretel to death, but their friends persisted in their treatment, feeding them only the smallest portions of credit food to survive.

The situation for Hänsel and Gretel became more and more dire… until at the end of last year the good fairy (ECB) came to the rescue. ‘Listen, Hänsel and Gretel. I throw credit candy at the wicked credit witch and then you run for your life’. ‘But where can we go to?’, Hänsel and Gretel replied. ‘We don’t know what we should do, as we don’t know the right path to prosperity in Eurostan?!’ ‘Don’t bother’, the fairy replied, ‘I’ll throw the candy and you two just run’.

Hänsel and Gretel ran and ran, after the fairy threw the credit candy at the credit witch and lived long and happily ever after. Right? Wrong!

Unfortunately, the situation of Italy and Spain is not a fairytale. Both countries yet didn’t find the right path to prosperity in ‘Eurostan’ and are still in the hands of the wicked credit witch aka the financial markets. Their European friends keep on wanting them to lose their overweight first, without helping them by showing them the right path to sustainable prosperity.

Their option is still binary: starving to death before they are rescued by their European friends, or being eaten alive by the financial markets. And no-one bothers to show them the right path, by giving them a third option (i.e. a kind of Marshall plan to help rebuilding the economy of both countries).

The interest rates for Spain and Italy that had lowered at the beginning of this year, are almost back at their old level, before the ECB came to the rescue. Billions of Euro’s are wasted on buying time, without delivering a true rescue plan for both countries (and of course for Greece, Portugal and Ireland too).

Today the Financial Times ( wrote a story on the returning problems for Spain. Here are the pertinent snips:

Market turbulence returned to the eurozone on Tuesday as Spanish and Italian bonds and equities fell sharply on renewed concerns about the health of the European economy and investor fears that Spain could become the fourth member country to need emergency rescue loans.

Spanish 10-year bond yields, which have an inverse relationship with prices, jumped above 6% for the first time since the European Central Bank began flooding the region’s banks with €1tr in cheap loans in December. Spanish stocks dropped 3% to the lowest levels since March 2009.

Italian equities dropped 5% and the country’s 10-year bond yields rose about a quarter of a percentage point to 5.68%, a similar jump to Spanish bonds. Shares of Italy’s two biggest banks UniCredit and Intesa Sanpaolo fell 8%.

Alan Wilde, head of fixed income and currency at Barings, said: “There is a lot of nervousness over Spain and Italy and whether these countries can hit fiscal targets and turn round their stagnating economies. Spain may eventually need EU help to tackle its structural problems.”

Spanish officials have insisted they will not seek EU aid to help struggling banks, and a senior EU official involved in Spanish talks said there were “no plans” to use the eurozone’s €500bn rescue system, insisting Madrid has been “very determined both on fiscal and structural reforms”.

But markets remain far from convinced that Spain can avoid joining Greece, Ireland and Portugal in needing rescue loans.

Investors fear that tough new austerity and economic reform programmes in Spain and Italy could hold back growth, undermining the ability of these countries to reduce debt levels.

The difference between the Hänsel in my little fairytale and Spain is, that Spain itself is too pigheaded to see that it is not going to find the right path towards sustainable economic prosperity. Unfortunately the European Union is not going to help Spain and Italy either by showing them options to reach this path and take them by the hand.

Therefore this sad fairytale is going to end in one of the binary outcomes, if nothing changes: the country will starve to economic death, or it will be eaten alive by the financial markets. And the EU and the ECB? They will wonder what went wrong!

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