Rabu, 11 April 2012

Spain in focus..... further taxes on the way once the inevitable failure by spain to hit the budget targets becomes clear

Slow Road to Hell: Spain Entertains VAT Hike

Of all the inept policy moves in the midst of a clear depression, hiking taxes is right at the top of the list. Yet, that is the path Spain is on, because it will not meet its budget projections.

Here is a link to an amusing "as is" Google translation of an article on El Econimista whose headline reads "The Government will raise the VAT if they fail the current fiscal".

What caught my eye was the translation of the last sentence that reads "Therefore, it is possible that eventually have to raise this popular taxbefore the deadline."

I was laughing out loud at that sentence because taxes are never popular. To be sure, I did not precisely understand the correct context of that sentence.My friend Bran who lives in Spain provides a better translation of the last sentence as follows: 

Therefore it is not ruled out that the 'populares' (a common term used to denote the PP political party) would have to raise the VAT before planned.

That certainly makes more sense. However, the rest of the translation is suspect as well.

Self-Destruction Coming Up 

Gonzalo Lira who lives in Chile, and with whom I have had (and still do) vehement disagreements regarding hyperinflation, graciously supplies the gist of the entire article in spite of those disagreements.

Lira writes ...
Hello Mish

The upshot of the piece is that if the tax amnesty doesn't work, Spain will somehow have to raise money to meet the Brussels-imposed deficit targets for 2012 and 2014.

However, the Spanish government is loathe to raise taxes, much less the VAT, because the government is aware of how counterproductive to the economy raising the VAT would be. 
Tacitly, it sounds like they're worried about a popular backlash to raising the VAT, or any other tax. Nevertheless, Brussels is pushing for tax increases.

Carlos Floriano (PP spokesman and Vice Secretary) says that anything and everything will be done to meet the 5.3% deficit target this year, and the 3% target for 2013. Nonetheless, he's reiterating that raising taxes and VAT is not on the table.

According to the Ministro de Hacienda (eq. to Treasury Secretary), if the tax amnesty and the hard-core tax collection of "impuestos IRPF" (literally "income tax on physical people"—personal income tax) are not successful, then maybe other measures will be considered, including presumably raising the VAT.

The last paragraph says that Brussels doesn't think any of this stuff will work. The very last sentence is a colloquial expression. The essential idea is that if all else fails, Brussels will push Spain to implement a hike in the VAT sooner than expected.

From the tone of the article, the eurocrats in Brussels are the "Evil Empire". Thus, the article is an attempt to make the government look good, sensible, and trying to help the Spanish working man.

Frankly, reading the tea-leaves, it's as if the government and the reporter are setting up the eurocrats as the bogey man.
Slow Road to Hell

Lira had some choice but unprintable words to say about the "wisdom" of these tax hikes. I certainly agree.

The stupidity in Brussels is staggering. The one sure-fire way to destroy Spain, right here, right now, is to hike taxes.

Spain should see the writing on the wall and default now. If Spain doesn't, it will face a slow road to hell just as happened to Greece. 



Markets took no notice of fresh austerity pledges from premier Mariano Rajoy, including new cuts worth €10bn in health and education - seen as a belated move to salvage Spain’s credibility after a spat with Brussels over fiscal slippage.
Mr Rajoy said the bond attack should dispel the illusions of those who think Spain can muddle through without serious austerity. "Markets can decide to lend or not to lend, and they can do so at a rate that is affordable or not," he said.
The country’s borrowing costs have jumped 100 basis points since February, when the European Central Bank last flooded banks with liquidity under its three-year lending scheme (LTRO). "The LTRO was supposed to be the game changer but the stimulus has worn off. It looks like it is falling apart at the seams," said the Suki Mann from Societe Generale.
A disastrous debt auction last week was taken as a sign that Spanish banks have exhausted their LTRO money and can no longer prop up the Spanish state through this back-door funding, leaving the country nakedly exposed. Other buyers are scarce after the EU imposed a 75pc haircut on investors in Greece.
Finance minister Luis de Guindos confirmed that Spain has tipped back into recession, with a 0.3pc contraction in the first quarter. He expects the economy to shrink by 1.7pc this year, though Citgroup said it could be much worse. Unemployment is already 23.6pc.
Mr de Guindos said Madrid faces a "lose-lose situation" since markets will punish excessive austerity as harshly as too little austerity. Tightening too fast risks pushing the economy into the sort of self-defeating spiral already seen in Greece, where the tax base shrivels.
Central bank governor Miguel Ángel Fernández Ordóñez denied that Spain would become the fourth EMU state to need a rescue, but warned that Spanish banks are not yet in the clear. "If the Spanish economy deteriorates more than expected, they’ll have to keep boosting capital," he said.
The Madrid bourse fell 2pc, led by banks. Short positions on Banco Santander jumped to 11.12pc of the total share base. Funds have built an extra 237m short positions in the past week alone.
Professor Jesus Fernandez-Villaverde from Pennsylvania University said the fiscal austerity imposed by the EU is deeply misguided. "Trying to cut the deficit from 8.5pc to 3pc in two years during a recession is a recipe for disaster. The Germans are crazy," he said.
He said wage cuts and internal devaluations may have restored competitiveness in the Baltic states, but it is doomed to failure in a complex country like Spain where there no national consensus on what needs to be done. "We have two trade unions in Spain that still live in the 19th century," he said.
The Rajoy government has made matters worse by cutting public investment without tackling deeper structural problems. "Markets are not stupid. They can see that he is pushing problems down the road," he said.
Critics say Mr Rajoy has created a small disaster for himself. His fight with the EU ensures that the ECB will exact a high price before stepping in to back-stop the Spanish bond markets. Investors will stay well clear of Spanish debt while this battle over moral hazard unfolds.
Prof Fernandez-Villarde said Mr Rajoy would have done better to avoid an EU fight by issuing a promise that he had no real intention of keeping - the "Italian way" - or going for broke by defying the EU altogether.
"I think he should have done what David Cameron did and told them where to go," he said.

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