Forget Greece’s drama. Spain & Italy the real show.

Another odd 24 hours in Europe, especially from the Greek camp, but the real story, as always, is in Spain and Italy.

First to Greece though, former prime minister George Papandreou gave an interview to the BBC trying to explain how disastrous he thought a Euro exit would be for the country and how what Greece really needed to “stop the uncertainty”. Just after that interview the other former Prime minister, Lucas Papademos, talked to the Wall street journal and dropped the comments:

“Although such a scenario is unlikely to materialize and it is not desirable either for Greece or for other countries, it cannot be excluded that preparations are being made to contain the potential consequences of a Greek euro exit.

I share the view that if Greece defaults and exits the euro, the consequences for the euro zone—its financial system and real economy—will be profound and the associated cost will be significant and far-reaching. It will also affect the economies of other countries outside the euro zone.”

So much for stopping the uncertainty. Mr Papademos later talked to CNBC to clarify his comments stating that he wasn’t aware of any preparations being underway for a possible exit from the euro, which makes you wonder why he bothered to mention it.

The damage was done, however, with the markets taking yet another hit on the comments and not bouncing back on the retraction. The Greece stock market is now down 58% for the year, which sounds terrible until you realise the Cypriot index has managed 80%.

I’ve stated previously that there really isn’t much point trying to predict what will happen before the June election, it could be that New Democracy and PASOK come back with even more strength and continue to implement the Troika program. However, even if that doesn’t occur, I am still doubtful that Greece will be going anywhere because in the game of chicken they hold many of the cards. A Greek exit would obviously be a huge upfront hit to the rest of Europe, but it also opens the door of uncertainty that Greece is just the beginning of the exits. Such an exit would come at an economic cost, but more significantly a massive political one, and given the fact that most Greeks want to stay in the Euro, even if they don’t fully comprehend what that means, I struggle to see the majority of Europe accepting this outcome.

On the other hand, the Germans and the Austrians, amongst others, are reportedly unmoved at this point which means we continue to see the world’s economic media reporting that the European banks are unprepared for what’s coming even though comments from the Bundesbank suggest they think otherwise. We’ve also heard rumours of national contingency plans , and even articles running through scenarios of what the exit would mean, some down to the point of working out exactly how much time the Greeks would have to execute such a plan. 46 hours apparently.

So it is possible that I am wrong and we could be heading for a Lehman-like event but what we have seen in Europe over the last few weeks is the growth of far more conciliatory tone than we have seen in a very long time, led in most part by the French.

French Prime Minister Jean-Marc Ayrault Wednesday said a Greek exit from the euro would be a “catastrophe” and Europe must do more to foster growth to emerge from its debt crisis, rather than simply focusing on austerity.

Mr. Ayrault said the meeting between French President Francois Hollande and German Chancellor Angela Merkel in Berlin last week considered the possibility of extra investment to help the Greek economy.

“The majority of Greek people want to remain in the euro so we have to help them,” Mr. Ayrault said on French radio station RTL.

That tone, however, must be tempered with a reminder that France’s political landscape is itself still in a state of flux with June also a key month for that country.

The new French president, François Hollande, is already making headlines with his calls for measures to promote growth. But he won’t have any real power unless the Socialists win the parliamentary election in June. If they don’t, the result will be political deadlock — a development that France and Europe can barely afford.

The Greek situation is an important one, but realistically it isn’t Europe’s major medium term issue in my opinion, that is most definitely Spain. As I mentioned previously the country’s problems grow daily led by the continuing fall out from their housing market collapse as you can see from the most recent bad loan rate.

The Spanish authorities have just announced they will be injecting at least another €9 billion into the Bankia group, but this is doubtfully the last of it as Spanish banks hold €656 billion of mortgage debt on top of their exposure to developers and other commercial institutions. The trouble is that even though the Spanish government is attempting to implement new policy to stimulate the market it is no way enough to offset the mix of private sector’s continuing deleveraging mixed with attempted government austerity.

The future for developers, companies that invest in and finance construction, looks equally dark, according to many experts, who are skeptical to a new government reform, announced about a week ago, in an attempt to stimulate the housing market.

The new measures, for instance, aim at making it easier to rent out apartments by allowing for shorter cancelation periods for rental contracts, by only two months. It also reduces taxes on house purchases by up to 50 percent. Moreover, it will require banks to keep provisions of up to 30 percent of the value of their ‘clean’ housing assets, as compared to 7 percent before.

The reform was received with much skepticism among both developers and tenants.

“Many developers, both major and small ones, will go bankrupt in the next months, and banks will be left with their assets,” said José Parra, head of Grupo Main, a bank asset manager, regarding to the new law.

If the banks’ property assets do increase considerably, as he predicts, the next coming months are likely to be marked by sharp declines in housing prices. “The banks will try to sell big amounts of property assets to international investment funds,” Parra said.

and if Spain is worrying enough then there is always Italy, the real eurozone end-game, and the slow-but-sure creep of contagion.

Those charts are the thing Europe should really be worried about, not the side show that is Greece.

It’s another Euro flash PMI night tonight with German, French and eurozone data out. After the woeful April data hopefully we’ll see some improvement, but I’m obviously not too optimistic.

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  1. I like Spain, but there;’s no way I’d buy a property there today in Euros, when it might be whatever% less in Pesetas next year. Then, I’d be off like a shot…and this links into the BabyBoomer retiring and selling their houses story. Australian retirees will go where their money buys the best lifestyle, and if that happens to be Vietnam, or Spain or wherever and not Queensland, that’s where their cashed-in property wealth will take them. Reverse economic migration to come to Australia.

    • Dunno, Janet,

      I’ve seen a lot of retired boomers sell up in Qld over the past few years for the sole reason that Grandma is tired of being so far away from the kids and grandkids back in (fill in city of origin).

      Hell of a long way to go visit the family back in Oz from Spain or Vietnam. Particularly if you don’t have enough spare cash for the plane flight.

      The other counterfactor is social inclusion – in most cases these boomers have spent all their life in Australia and, probably in most instances, lived in the one city or regional area. They are members of bowling clubs, golf clubs, and have all of their friends and family within reach – an important factor as they age and may become more dependent.

      Moving overseas and cutting all existing lifelong family and social ties, learning a new culture, political and social environment, and possibly even a new language, is not really something to which people in the later stage of their life aspire.

      • Quite possibly, J. My father ( and us!) migrated to Melb in ’65, and when he retired, he went back to the UK, for the reasons you mention – it’s basically where he came from and felt it was home (he’s still there, and will stay so). But here’s the thing, he took what he’d made in Oz with him. The $12k house in St. Albans that turned into a $1.5m house in Hampton, went with him. So all the property ‘wealth’ he’d accumulated..left with him. What he left behind was probably the debt that someone else’s is now servicing to live in Hampton. ( Oh, and because he was on a final salary pension, that still gets paid here, then it goes to him as well!)

        • I think same way with you especially for migrants from NZ and Asian countries which are relatively closed to Australia (not long flight like Europe / US).

          I also have a thought that when I retired and the Australian government cannot afford to pay decent pension and I don’t have enough retirement savings, I will go to regional towns, NZ or some Asian cities to ensure my savings last more in my retirement. Cost of livings is just too expensive in SYD for regular retirees.

        • Some may do this but I dont think this would happen on mass. The majority of the population are creatures of habit and Im not convinced they would adjust to a lifestyle change of that magnitude.
          Your fathers situation is very diferent as he was heading back to a culture he was very comfortable with. Im happy for him that circumstances allowed him to return having made some very good money but the reversal could easily happen if the dollar drops and housing tanks in oz.

      • Brissy for now

        I agree with you Julius. I just finished a 3 week visit to Spain and lots of boarded up, half finished housing developments are everywhere. Spain is lovely to visit but I met ex pat Brits of 10 years who still had problems with languages( there are 3 Spanish dialects)and general day to day stuff. Moving there for cheap housing would be a giant risk. The problems are repeated in other countries I visited but without the petty crime I personally witnessed in Spain. On a side note, while value lunching in Trafalgar Sq yesterday, The suits at the next table were overheard mentioning things like ” when the market picks up”,” a hundred million”, “risk on,risk off” in generally wishful outlook tone. I thought to myself, I bet you guys don’t read Macrobusiness and it shows. The press here is very confused between austerity and growth and so are many of the regular people I meet. Some have been able to shift cash out of local banks in fear already. Also have met 2 international finance young ‘uns who can’t get work. The entrenched vested interests are still talking it up but reality is something can’t or wont deal with.The massive debt/bankruptancy situation is going hit even harder very soon IMHO. No one will be immune as we so interconnected nowadays.

        • Rabbits stunned by headlights!

          Helps if you read Steve Keen’s papers and follow what Neil Wilson blogs:

          Neil has better handle on the accounting principles and possibly financial products than Steve.

  2. Wait for ECB QE, LTRO, or USD swaps and it will all be fine for a while longer. It’s got to get to crisis levels before they can agree on any action it seems. But, I am convinced we’ll see a big co-ordinated action soon, otherwise there will be a slip into the quicksand.

    • +1

      Though, just in case, I’ll keep my Super stays in cash for now.

      As MP said on tuesday:
      “One of our dealers likened it to playing roulette, where we’ve had a whole run of reds, and now we must be due a few blacks – but we’ve all failed to realise we’re actually sitting on the titanic whilst we’re playing.

      You really need balls, not brains, because there’s really no depth or great reason other than mean reversion to the rally; sort of soft optimism that we’d suddenly be buying everything now. If you look at the stocks that have gone up, they’re all the stocks that went down hardest.

      Some of the midcap resources companies – and I don’t think the big money, which is institutional money or the investors’ money stuck in term deposits is going to be tempted out just because we’ve gone up for two days. So, looking for more substance; too many issues in the future Europe, China, to sort out, to really get going.”

  3. And the media word of the month is: ‘uncertainty’. As if that is the problem in Europe. And ‘certainty’ is going to fix things. I now replace this word with ‘insolvency’ and all starts to make sense. I think the real question is who absorbs the cost of insolvency of these countries as austerity measures obviously not going to work.

    • For GFC#1 the magic word was “confidence” which was better said as “lost capital”.

  4. “I am still doubtful that Greece will be going anywhere because in the game of chicken they hold many of the cards”.

    But there’s more than one game of chicken going on here. The German electorate are going to crucify any politician who hands over their pensions to bail out gold-plated Greek pensioners in Eurobonds or whatever vehicle.

    The Spanish banks have been zombies since the moment the country realised that no-one was ever going to live in the thousands of apartments in the desert. We know how that ends; hello Ireland.

    My view is that, in a triple irony, the EU was set up with the grand notion of peace and democracy but then resulted in more risks to peace and less democracy and its downfall will be due to some basic democractic processes.

    As Mish suggests, it only takes one candidate to be elected on a “No; those debts aren’t getting paid” platform and it’s all over. Who know’s, he/she might even be German.

  5. There was an article yesterday quoting Angela Merkel as being more open to the idea of eurobills while opposing eurobonds. She is not alone in resisting eurobonds at this point of time.

    The difference and moral hazard of eurobonds written up here

    Moral hazard and the problem of insolvency pondered here too

    DE, if you believe in eurobonds, what are your thoughts on the effect of eurobonds on the debt/GDP ratios and credit ratings of the current triple A countries?
    End game in the case of a continued recession despite eurobonds?

    The size and composition of Gov debt in the euro area