The Global Monetary System Deteriorates as the Financial Crisis Moves From Greece to Spain

It was not that long ago when Greece was the main concern of global investors, but already most of us have already forgotten about that on-going saga. Now, the global financial crisis has moved from Greece to Spain, with Italy waiting to join this elite club.

Last Thursday Standard & Poor’s (S&P), credit agency lowered Spain’s long-term credit rating by two notches. S&P reduced Spain’s long-term sovereign credit rating to “BBB+” from “A.” The agency also lowered Spain’s short-term rating and assigned a negative outlook, which suggests the possibility of another downgrade in the near future. The S&P downgrade of Spain’s sovereign-debt rating, Spain’s second downgrade this year, has reignited investors’ fears about the Eurozone debt crisis.

A few days later, S&P downgraded the credit rating of 16 Spanish banks. Santander’s rating was lowered from A- to A-2 while that of its core subsidiary Banco Espanol de Credito S.A. was lowered from A+ to A-1. Rating of BBVA was lowered from A/A-1 to BBB+/A-2 with long term negative outlook. It has also been reported that the Spanish government is in talks with banks about how a privately run asset management company would manage their so-called toxic assets — defaulted mortgages and other non-performing loans stemming from the collapsed real estate sector -thus allowing banks to concentrate on providing credit to the private sector. The main banks are holding property loans that total €184bn (£150bn). But, more than 21% of the 298 billion euros of loans linked to property developers are non-performing.

On Monday, the latest GDP figures showed that the Spanish economy contracted by 0.3% quarter-on-quarter and that Spain was officially back in recession. This is Spain’s second recession in three years. The contraction follows a similar decline in the final quarter of last year. Two consecutive quarters of economic contraction constitute a technical recession.
The country joins seven other economies in the 17-member Eurozone — Belgium, Ireland, Italy, the Netherlands, Portugal, Greece and Slovenia — and three other members of the broader European Union — the U.K., Denmark and the Czech Republic — in recession.

Yet, in spite of the fact that the unemployment rate in Spain hit 24.4%, an 18-year high, and the highest in the industrialised world, and as well as having a contracting economy, a crippled banking sector, soaring bond yields, and increasing unrest in the country, Spain’s Economy Minister Luis de Guindos Spanish doesn’t see any problem.   

This is exactly how it all started with Greece. And, if you can recall, Papandreou, the then Prime Minister often told the world that Greece does not have a problem. Now in a somewhat familiar tone, Spain’s Economy Minister Luis de Guindos Spanish recently said that Spanish banks won’t need external aid, nor will Spain need a bailout from its European partners. Mr De Guindos ruled out any Greek-style debt rescue and said there are no plans for new tax increases or budget cuts this year.
He said the country had no “Plan B”, adding: “Spain is not going to ask for a rescue. No intervention will take place.
“A country needs a rescue or an intervention when its sources of financing are cut off. That is to say, what happened in Greece, Portugal and Ireland. That is absolutely not the case in Spain.”
In the first three months of 2012, Spain’s Treasury had already raised 50% of its financing needs for the year, he said, and the banks had enough liquidity to make interest payments for the next two years.
“Spain has absolutely no financing problems or urgent needs.”

Mr De Guindos said the government’s 2012 budget, with spending cuts and tax increases of €27billion, was credible and based on a realistic forecast for a 1.7% contraction of economic output for the year. The government does not plan new budget tightening measures even if confidence in Spain deteriorates further, De Guindos said: “That would be incompatible with the medium-term approach we are taking.”

Last year, Zapatero, the Prime Minister of Spain at the time often said that there was no problem with Spain’s finances. Perhaps these two men know something we don’t, but whatever way you look at the data, Spain is in trouble. Although Spain’s credit rating is still considered as investment grade, it is a mere three notches above junk status. The lower rating will impact on the nation’s borrowing costs sending rates higher as investors will likely demand higher interest rates to compensate for the greater risk implied by the downgrade.

Ultimately, the only solution will be for the central bank to fire up the printing presses again, and flood the countries with money. This of course will further debase the euro.

But, hold on a second, the Eurozone is not the only country facing challenges of this nature. Things in the US are not all that rosy either.
The latest economic data from the US was disappointing. The US economy grew at a mere 2.2% annualized rate in Q1, which was down from 3% in Q4. Initial jobless claims dropped by a mere 1000 in the week ended April 21 to 388,000. It is the third consecutive week that claims were above 380, 000.
As expected, the US Fed kept rates unchanged at 0-0.25% and did not add further monetary easing measures. Fed Chairman Ben Bernanke reiterated that the central bank is ‘prepared to do more as needed to make sure that this recovery continues and that inflation stays close to target’. He also suggested that the Fed will leave interest rates at exceptionally low levels at least until mid-2014. If economic growth remains sluggish and if the unemployment rate does not improve, the Fed may have to consider another round of quantitative easing. We will have to wait and see.
Meanwhile, things in the UK don’t look all that good either. UK GDP data showed a contraction of 0.2% quarter-on-quarter in Q1. The data indicates that the UK is now formally back in recession, the first double-dip recession in UK since 1970s. Nonetheless, Osborne pledged that he won’t ditch his austerity plan as he said that “the one thing that would make the situation even worse would be to abandon our credible plan and deliberately add more borrowing and even more debt”. It is widely believed that the BoE will pause the GBP 325 billion asset purchase program when they meet next month.
In Japan, the BoJ increased monetary easing to boost the economic recovery and inflation last week. Last week, the central bank announced that it would expand its Asset Purchase Program by 5 trillion yen to 70 trillion yen with some adjustment in the composition of the portfolio.
As these central banks pump more money into the system, they will cause successive rounds of devaluation which will lead to all sorts of imbalances, trade disruptions, huge currency volatility, and finally massive wealth destruction. The bull market in gold is therefor far from over. If the only solution to our debt problem is buying more debt, this will lead to further devaluations of these fiat currencies which will only make problems worse.
If you are already fully invested in gold, do not panic or even worry about current price levels. And, if you are not yet invested in gold, use the current lower price to accumulate physical gold bullion. In a few times, the scenario is going to be very different and those people holding gold will see their wealth appreciate substantially.
Buy the dips and hold as much gold as you can.

TECHNICAL ANALYSIS

His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. The largest gold refinery in the world use his daily and weekly commentaries on gold.

David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.
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