Monday, May 31, 2010

Bank of Spain - Reduce Leverage

From the Spanish publication ABC.ES. This is translated into English from Spanish so wording may look funny.

The Bank of Spain considers that non-financial companies should take steps to reduce its debt, since debt levels are higher than those of European companies, and stresses that efforts should be greater in the housing sector, which reached reach a size "excessive" during the expansionary phase of the economy, reports Ep.


The watchdog's report recalled that the average 5% reduction in the salaries of public employees, the suspension of pension increases in 2011, the disappearance of the birth or adoption assistance and reduction of public investment will lead to state spending cut 5,000 million in 2010 to 10,000 millions in 2011.

This is what needs to happen worldwide BUT I think it is to late. Definitely could have been done during the recession in 2001. Possibly could have been done in 2008 letting the government balance sheet control the collapse rather than preventing the collapse but now the government is planning on cutting spending, the government is planning on reducing deficits and overall leverage, asking the private sector to cut deficits hence cutting spending, and asking the private sector to reduce leverage. Spain and the world is in a death trap. Governments have very little flexibility in padding the deleverging because they used all their ammunition a couple of years ago trying to prevent what needed to occur. It is a death trap.

From a markets perspective the question is whether Spain is where Greece was in February of this year and the markets can ignore it or is Spain where Greece was a month ago about to cause another major leg down in worldwide equity markets.

Spain has sovereign debt problems like Greece but not nearly as bad. The problem is Spain has huge private debt issues. The private sector is very overleveraged just like the United States was in 2007 into 2008 (and still so). In 2008 the U.S. government had room on its balance sheet to keep the private sector afloat. Spain doesn't have that room because they already have sovereign debt issues.

Spain is a major domino in the process of falling. Within months if not weeks.

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