Comments on: Spain’s Valencia Struggles To Repay Debt

By: WARREN MOSLER

WARREN MOSLER — Sat, 05 May 2012 21:13:31 +0000

as if madoff could grow his way out of his ponzi scheme after being discovered

By: WARREN MOSLER

WARREN MOSLER — Sat, 05 May 2012 21:10:56 +0000

yes, for the currency issuer. for spain the right level of taxation was large deficits when it was a currency issuer

By: walter

walter — Sat, 05 May 2012 21:00:59 +0000

@Harold, 1. Yes, I know all ez member states made that move. Only Luxembourg that never had its own cb until euro entrance had always a low debt/gdp level. They have always been currency user. 2. My question refers to the desired output and employment level. I do not see how you can regulate that by govt borrowing.

By: walter

walter — Sat, 05 May 2012 19:01:09 +0000

@Harold, 1. Spain had pesetas, not reals. 2. The hierarchical move is clear. It's clear that those debt levels at euro entrance were OK for currency issuers, but not for currency users. Markets gave them the benefit of the doubt while there was growth. Growth would make debt/gdp ratio come down. However ponzi works on the way up, not on the way down. Since the crisis started markets do not see anymore how ez member states go to grow out of ponzi. And it's clear that euro leaders do not realize at all that the hard way back to 60% is by far not enough. 3. For the output and employment levels Warren refers to borrowing in the period when Spain was currency issuer. Hence my question.

By: Harold

Harold — Sat, 05 May 2012 18:37:59 +0000

@walter, Or to put it even more simply, Spain never followed MMT when it was a currency issuer. Instead, it automatically issued debt to match its deficit spending. Therefore as it increased deficit spending 'to accommodate savings desires' it issued corresponding debt.

By: Harold

Harold — Sat, 05 May 2012 16:10:42 +0000

@walter, PS @ Walter
1. All euro countries, not just Spain, did this.
2. I think I see what you specifically are getting at. MMT does teach that debt issuance by a currency issuer is a reserve drain and that spending is what accomodates savings desires. I think Warren means that increased spending to accomodate increased savings desires means higher ratios of reserves in relation to loans so more bonds must be issued to drain them.

I’ve just been fixated on the collosal stupidity of not only going onto the euro, but of starting out on the euro immediately in massive debt. That alone demonstrates the utter cluelessness of the euro designers and should be emphasized. It really is a currency that was designed for failure.

By: Harold

Harold — Sat, 05 May 2012 15:39:17 +0000

@walter,
The problem is that at the moment Spain switched to the euro, it had outstanding bonds denominated in Real. Instead of paying off the bonds and then converting to the euro, it converted the Real bonds into bonds denominated in euros. I.e. it immediately put itself into debt in a currency it didn’t issue, when there was no need to do so. It compounded the blunder of going onto the euro with another blunder.

Borrowing is ‘just’ a reserve drain if you are the issuer of the currency. If you are not, then it is debt. Spain is not the issuer of the euro, so when it borrows euros it has debt.

By: walter

walter — Sat, 05 May 2012 12:36:19 +0000

1. Note in the article : “…the regions that control over one third of spending in highly decentralized Spain”

To get things under control in Spain will be easier said than done. Many Spanish people would say there are 17 Spains, not 1. To me it looks that markets grossly underestimate the division of actual power in Spain.

2. Note also at the end of the article:
“Valencia and other regions are pushing hard to get Madrid agree to guarantee their debts, which should help lower borrowing costs”
Guarantees from national govts happen regularly now in the euro zone. Holland did it for several financials and I believe Italy too. And these guarantees are not small, but running into the tens and hundreds of billions.
I get the impression though that:
a. markets can hardly keep track of all these guarantees
b.markets overestimate such guarantees given by ez member states that are now reduced to merely currency user. (Comparable to the deposit guarantee system in the ez.)

How to look at this?
Markets will test those guarantees? or The dynamics with guarantees may work in a paradoxical way. Once you give them, they will never be needed.

How do you see this?

By: walter

walter — Sat, 05 May 2012 12:11:25 +0000

“Spain ran up its …debt as a currency issuer when ..….it was a requirement to accommodate non govt savings desires at desired levels of output and employment”

I thought desired levels of output and employment were regulated with taxes and that borrowing was just a reserve drain to maintain target interest rates.
Could you please explain?