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thomas davison

Spanish rescue draws closer as Cyprus buckles
Spain's ruling party has begun to crack under pressure, signalling for the first time that the country may need a European rescue to shore up its banking system.

By Ambrose Evans-Pritchard
7:39PM BST 03 Jun 2012

"A bail-out would not be the apocalypse," said Jos� Mar�a Beneyto, foreign affairs spokesman in Spain's parliament. "You have to live with it. We have got to escape this or we'll go mad worrying about bonds spreads."

Mr Benyeto accepted that it would mean cuts in salaries and pensions dictated by a Troika from the EU, the European Central Bank and the International Monetary Fund. "Portugal is living with it relatively passively, and Ireland, too," he said.

The shift came as Cyprus edged closer to a bail-out after President Demetris Christofias said his country had been engulfed by large exposure to Greece. "I don't want to absolutely exclude it," he said.

Russia has effectively shored up Cyprus over the past two years but rising defaults in Greece have proved overwhelming. The Cypriot banking system is nine times the country's GDP, with assets of �157bn (�127bn). It has been called the "Iceland" of the South.

Germany's Spiegel magazine reported that Chancellor Angela Merkel is actively pushing Spain into the arms of the EU bail-out machinery, concluding that Madrid cannot hope to tap the open market for the estimated �50bn to �90bn needed to recapitalise banks.

Spanish officials denied the claim but Mr Benyeto's comments have caused deep confusion. He contradicted a speech on Saturday by premier Mariano Rajoy, who vowed once again that Spain would recover under its "own strength".

Mr Rajoy demanded intervention by the ECB to cap bond yields and warned the EU authorities that they too had to deliver on their side of the bargain as his country swallows austerity.

"One must insure that the euro continues to be the currency of our countries. If it is urgent to solve Spain's situation, it is equally urgent to solve the problems of the whole eurozone. Spain is one factor among many others in this situation. It is not the only one, and it is not the worst," he said, calling for an EU "fiscal authority" and use of the European Stability Mechanism (ESM) to recapitalise banks.

Top EU officials are drafting a "master plan" for a Brussels summit this month but it will focus on the future shape of the EU in 10 years' time. The drafters are powerless in the face of the immediate crisis. Berlin has a de facto veto on all key decisions.

The ECB has so far sat on the sidelines as spreads on 10-year Spanish bonds reached a record 496 basis points over Bunds. The ECB is wary of moral hazard but critics say it is a dangerous game for bureacrats to force democracies to their knees by switching intervention on and off. In this case it is spreading contagion to Italy and risks igniting a tinderbox.

Ms Merkel is herself under massive pressure from Europe's Latin bloc and world leaders. Leaks of a teleconference call on Wednesday reveal that France's Fran�ois Hollande, Italy's Mario Monti and US president Barack Obama launched a three-pronged attack, pressing Ms Merkel to drop Germany's veto on the use of EU rescue funds for banks.

The trio repeated their demands three times with mounting tension. Each time she answered no, first in English, and then in German for precision, according to details obtained by Italy's La Repubblica.

"Germany does not want the fund to spend billions in exchange for collateral from ruined banks. I don't see why we should end up holding bits of bankrupt lenders," she reportedly told them.

All three warned that if Spain is forced to request a sovereign rescue � as Germany demands � it will be deemed insolvent by markets. The EMU crisis will become much more dangerous.

Critics doubt whether a surgical bail-out of �50bn to �90bn is possible. Alberto Gallo from RBS said Spain will need �370bn to �450bn to tide it through to 2014, pushing its debt to 110pc of GDP.

A key reason is the cancerous precedent of the Greek haircut deal, in which private investors were left with all the losses. Once the ESM starts lending to Spain, others creditors are instantly pushed down the ladder or "subordinated".

Losses will be larger if Spain ultimately needs to restructure. Stuart Thomson from Ignis Asset Management says this may well happen. He predicts haircuts of up to 50pc for Spanish bondholders.

Any rescue must be huge enough to fund Spain's total debt needs for the foreseeable future. Theoretically, the EU bail-out machinery has deep pockets. Whether it can actually raise such sums from global investors � and cope with contagion to Italy at the same time � is untested.

Gary Jenkins from Swordfish said half-measures are no longer enough. "We may be approaching the endgame where either the eurozone or the ECB takes action to stem the bleeding or the whole thing collapses," he said.

Meanwhile, a Greek exit from the eurozone will be on the agenda if Athens fails to impose austerity measures required in its EU-IMF bailout deal, French Finance Minister Pierre Moscovici has said.

"The question would be raised without a doubt.... if the Greeks themselves do not respect their commitments," Mr Moscovici said on French television, adding that he hoped Greece would remain in the eurozone.

It's precisely that governments have driven through vast swathes of unaffordable policies as well as the setting up of state structures without the means to set them up, why Europe in general is in debt. In simple terms, a second layer of government such as the European Union cannot be afforded and nor should the people be expected to pay for this money spending machine without consultation.

It is both morally wrong and economically unsound to pay for massive government on debts which can only be met by taxes and which can only rise if it become bigger.

The EU cannot get funding for its budgets, its salaries, its policies, its pensions, expenses, its buildings and the aid it gives to others, except by way of taxation from its citizens.

Citizens are taxed more so they spend less, it is as simple as that.

On top of that, we have our own governments engaged in these spending tranches as well as government workers salaries, pensions, state structures we don't need, as well an unaffordable levels of legal spending and compensations from the state which again adds to the burden of tax and results in more debt we cannot afford which effects our financial sustainability.

In order to have economic growth we must have governments that do not see their job as 'spending our money', but instead they must see their job as making the people prosper and creating an environment which promotes full employment. This gives confidence and promotes wealth to the people and not to corporations or to government employees and elected officials under the illusion that they are politicians who represent the people.

Nothing will change until we change the politicians and get out of the EU, the human rights laws and start trading with our old partners again, end this farce now before we have no money left.