I been covering the European crisis for over two years and throughout my commentary I have been very clear that I consider the policy responses to the crisis to be misguided, delusional and dangerous. One of my major concerns has been that the implementation of what I see as a deluded ideology would eventually lead to a breakdown of cvil society in periphery nations that are being forced to endure these failings. As I stated previously:
One of my greatest concerns is that there are now literally millions of bored, unemployed and socially disenfranchised youths across southern Europe. These numbers will continue to grow as the mix of government austerity and deflating private sector economics pushes down periphery GDP.
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Obviously this is an economic disaster and I have been at the front of the queue screaming about misguided economic ideologies in Europe that have led, and continue to lead, to this situation. However, it doesn’t take much of an imagination to realise that this has the potential to become something much more sinister than just ugly looking charts and that is my real concern.
“My biggest fear is of a social explosion,” said a senior adviser to the country’s likely next prime minister, New Democracy leader Antonis Samaras.
“If there is no change in the policy mix, we’re going to have a social explosion even if you bring Jesus Christ to govern this country.”
Obviously there has been a demographic split in the voting, with the youth supporting Syriza and the older generation moving toward New Democracy, but this is only the start of it. If you need proof of the social strain in Greece I don’t think you need to go much further than the rise of Golden Dawn. In a country where 10% of the population was wiped out by Nazis in World War II, and even though a member of the party blew up on national television attacking two women and a number of crew members, they managed to hold 7% of the vote and again gain 18 seats in parliament.
Moving onto the economics.
I stated yesterday that there really wasn’t much too get excited about past the short term from the Greek election because of the likely fallout:
The centre of the crisis has now moved west of Greece and a New Democracy win may in fact be further bad news for the other weaker economies because it takes some pressure off Europe to provide a more immediate resolution to Spain.
Unfortunately that appears to have been the case:
… any hopes that the Greek election result might ease the strain on vulnerable Spanish and Italian debt were dashed.
The cost of borrowing rose for both Spain and Italy, the two big euro zone economies under fire for poor finances, widening the gap between what they have to pay and what Germany pays.
The yield on Spain’s 10-year bond went above the 7 percent widely viewed as unsustainable. Italy’s was just above 6 percent.
“The financial markets … aren’t relaxing their pressure on Spain. Doubts continue regarding the construction of Europe, about the present and the future of the euro,” Treasury Minister Cristobal Montoro told the Spanish Senate during a budget hearing.
As I mentioned last week the fallout from the Spanish property bubble continues to worsen with falls from peak on the Tinsa housing index now over 30% and accelerating downwards. This is obviously putting ever-more pressure on the already struggling banking system and we continue to see bad and doubtful debts rise. As of April there were €152.74 billion worth of loans more than three months overdue which is up another 0.4% from March:
No surprise then to hear Spanish authorities again demanding that the ECB restart the SMP in order to support Spanish yields:
Spanish Budget Minister Cristobal Montoro called on the European Central Bank to prop up the nation’s bond market as yields surged beyond the 7 percent level that prompted bailouts in other euro nations.
“The ECB should respond with all firmness,” Montoro told lawmakers in the Senate in Madrid today, echoing a call made by other members of the government. Doubts that remain about the currency region that need to be eliminated, he said.
Spain’s 10-year bond yield rose to a euro-era record of 7.15 percent today as the positive impact of the Greek election result faded after about an hour of trading. Spain agreed to a 100 billion-euro ($126 billion) bailout for its banks on June 9, and its borrowing costs have continued to rise amid speculation the government will have to come back for a full rescue.
Montoro said Spain backs more fiscal and political union in the 17-nation euro area as well as a so-called banking union. The government has chosen the “path of responsibility” and will meet its budget-deficit targets, he said.
So, unfortunately, I was correct. Good news yesterday, same news today.
Spain plans to sell €5 billion worth of 12 and 18 month treasury bills tonight and €3 billion of bonds on Thursday. Obviously the expectation is for higher yields.