80% of Catalonians Say YES to Independence!

Last night I wrote (bold mine) 

Unlike the failed Scottish vote for independence where Scotland has mostly been a tax consumption economy, so in the fear of the loss of the welfare privileges, the elderly stampeded to cast a NO vote to independence, Catalonia has been the main contributor to the Spanish economy with nearly 19% of Spain’s GDP where her GDP per capita is higher than the European Union average (EU-27) according to the OECD.

In short, Catalonians may be fighting to keep their share of production rather than satisfy Madrid’s political interests by redistributing the former’s resources to the latter’s welfare dependent supporters.

Thus should Catalonia’s independence become a reality, this will likely signify a big setback to the already struggling Spanish political economy.

I am not aware of the political agenda of the leaders of Catalonia, whether they will elect to join the EU and adapt the euro or join the EU and decide to have their own currency or operate independently from the EU.

Moreover an independence victory by Catalonia can set in motion or inspire a string of existing and active secession movements around Europe to ask for political recognition. Should this happen this would serve as the death knell for the centralization plans for the Brussels based bureaucracy.

So should the independence vote prevail, there will likely be huge political uncertainties that will dangle over the political economic domain of EU and of Mr. Draghi’s ECB.

Well, Spain’s PM Rajoy, the EU and the ECB's troubles have come to fore as Catalonians has voted overwhelmingly for independence!

From the BBC.com

An informal vote on independence for Catalonia has shown more than 80% in favour, officials say.

The provisional results followed a day of voting across the autonomous region in north-eastern Spain.

The non-binding vote went ahead after Spain's constitutional court ruled out a formal referendum.

Earlier, Catalan leader Artur Mas hailed the non-binding poll "a great success" that should pave the way for a formal referendum…

The 80% Yes…

Voters were asked two questions - whether they wanted Catalonia to be a state and whether they wanted that state to be independent.

Vice President Joana Ortega said that more than two million people had taken part in the "consultation of citizens" and that with almost all votes counted, 80.72% had answered yes to both questions.

Just over 10% voted yes for the first question and no for the second, he said, and about 4.5% voted no to both questions.

Spain’s Mainstream Resists…

The ballot was held in the face of fierce opposition from the Spanish government.

Speaking beforehand, Spanish Justice Minister Rafael Catala dismissed the exercise as "fruitless and useless".

Opinion polls suggest that as many as 80% of Catalans want an official referendum on the issue of Catalonia's status, with about 50% in favour of full independence.

Spanish unionist parties argue that because the ballot was organised by grassroots pro-independence groups it cannot legitimately reflect the wishes of the region.

More than 40,000 volunteers helped to set up and run the informal exercise.

It is obvious that beneficiaries of Spain's welfare state will refuse to have an independent Catalonia, that’s because these groups get their welfare finances from them! The political parasites would essentially lose their financial and economic hosts!

But if the Spanish authorities will defy the wishes of Catalonians, don’t expect a peaceful transition. At worst, the outcome could be a civil war.

Catalonian experience as I noted above will fire up a string of existing and active secession movements around Europe to likewise ask for political recognition. The wave of decentralization has snowballed. 

The existence of the EU, ECB and the euro are now in jeopardy

More Parallel Universes: Spain’s Bond Markets and EU Macro

Europe has been a showcase for the falsification of what seems as conventional relationships between financial markets and fundamentals or what I call as "parallel universes".

For instance, in Spain instead of the bond markets reflecting on credit quality, where soaring non-performing ‘bad’ loans should have prompted a bond selloff (higher yields), we get to see the opposite, rallying bonds (falling 10 year yields)…

From the Zero Hedge… (bold-italics original)

Despite the onslaught of confidence-inspiring flim-flam from leadership in Europe and a Spanish Prime Minister (and finance minister) desperate to distract with "soft" survey based data, the hard numbers keep coming in and keep getting worse and worse. The latest, seemingly confirming the IMF's fearsome forecast that European banks face massive loan losses in the coming years, is Spain's loan delinquency rate. Bad loans across Spanish banks amounted to $247 billion in August - a new record-breaking 12.12% of all loans outstanding (now 30% higher than any previous crisis in the history of Spain). Credit creation continues to implode with a 12.3% plunge in total loans outstanding but of course, none of that matters (for now), as Spanish bond spreads (and yields) press back towards pre-crisis lows...

This has been a product of entwined manifold political factors.

One, ECB’s Mario Draghi’s “do whatever it takes to save the euro” via a bond buying guarantee program [the unused Outright Monetary Transactions (OMT)] as well as the previous or OMT’s predecessor Long Term Refinancing Operations (LTRO). The LTRO has also functioned as credit subsidies to the banking system. The LTRO, the ECB learned lately, has entrenched the dependence of the banking industry, where the latter can hardly wean away from the LTRO without disorderly adjustments.

Also the Spanish government via Social Security Funds and other public pensions, as well as, the banking (€225bn in March) and financial sectors have been made to support sovereign bond prices. The banks likewise use these bonds as collateral to draw loans on the ECB. By keeping rates low, banks and the Spanish government benefits from these political subsidies financed by the economy.

International politics have also been a factor. For instance, Abenomics has spurred Japanese buyers to buy international bonds, including Europe, where Spain's bonds could have been a part of. 

Zero bound rates has also spurred a yield chasing dynamic for private sector funds.

As one will note politicization of markets results to a vast distortion of relationships between market prices and the orthodox view of fundamentals. 

Yet the mainstream who largely frames the above as 'recovery' either has blinded by such developments or deliberately twist or spin them to justify their actions

Such parallel universe applies to Europe's stock markets relative to ‘fundamentals’, which I have repeatedly been pointing out such as here and here

Again from another Zero Hedge article: (bold and italics original)

Goldman has, in the past, indicated how little forecasting power the soft survey data has in Europe and yet still, day after day we are treated to the herd of mainstream media types proclaiming that Europe is recovering and that their fundamentals have turned a corner. The problem with that "story" is that is that is a lie. In fact, European macro data has been sliding since the start of September and has plunged recently to 3 month lows. Of course, the reality is that a record high for European stocks is all that matters to the fast-money charging momo players and betting against divergences from fundamentals is for dummies...

Are these divergences 'This time is different'?

Social Security Funds as Government Milking Cow: Spain Edition

I previously pointed out what seems as Ponzi financing scheme where the Spanish government has raided its pension reserve fund in order to boost Spanish bonds or to lower bonds yields, by buying up to government debt up to 97% share of its assets.

For the cash strapped Spanish government, this hasn’t been enough, as they squeeze money from the social security fund to finance state pension.

According to a report from Reuters: 

Spain tapped its social security reserve fund for the second time in a month on Monday, the Labour Ministry said, to help with extra summer pension payments as unemployment and retirement costs deplete government funds.

The government turned to the fund for 3.5 billion euros ($4.6 billion) on July 1 then for a further 1 billion euros on Monday. Spanish pensioners receive two cheques in summer and two over the Christmas holidays.

Spain was forced to tap the reserve for the first time last year to help pay pension costs, using some 7 billion euros.

Record high unemployment, which hit over 27 percent in the first quarter, and a growing number of retirees on a state pensions have put an unprecedented strain on Spanish social security funds.

Social security or pension funds have become a favorite tap for governments, especially for the cash strapped variety. These funds are not only subject to to government’s predation, they can also be used as instruments to effect political agenda. For instance, in the Philippines, government retirement fund the GSIS has been used as a tool to promote the popularity of the incumbent government via stock market purchases. Not only does the GSIS intervene directly via actual purchases, they also provide signaling mechanism to the marketplace by pledging to buy stocks at certain levels.

And like the Detroit saga, if the Spanish government defaults on their debt, pension fund beneficiaries will get cleaned out.

It’s sad to know how government tapping of or dabbling with people’s savings would eventually lead to hardships.

Spanish Government’s Ponzi Financing Scheme

More signs why the European debt crisis is far from being over.

Spain’s pension fund has been loaded with debt from the Spanish government

From Bloomberg: (bold mine)

Spain’s pension reserve-fund ramped up its holdings of domestic debt last year, profiting from a rally across southern Europe and making it easier for Prime Minister Mariano Rajoy to raid the fund to finance his budget.

The so-called Fondo de Reserva de la Seguridad Social in 2012 increased its domestic sovereign debt holdings to 97 percent of its assets from 90 percent at the end of 2011, according to its annual report due to be presented to lawmakers today at 12:30 p.m. in Madrid and obtained by Bloomberg News.

The fund purchased about 20 billion euros ($26 billion) of Spanish debt last year, while it sold 4.6 billion euros of French, Dutch and German bonds. More than 70 percent of the purchases took place in the second half of the year, after European Central Bank President Mario Draghi pledged to do “whatever it takes” to defend the euro, boosting Spanish bonds.

Two insights from the above.

One, pension funds are subject to government’s predation, thus can’t be relied on.

Two, if the Spanish government defaults on their debt, pension fund beneficiaries will get cleaned out.

Yet more signs of increasing vulnerability of Spain’s welfare state. More from the same article: (bold mine)

Spain’s state-run social security system, also in charge of unemployment benefits, stopped registering surpluses in 2011. Its deficit was 1 percent of GDP last year, contributing to the nation’s total budget gap of 10.2 percent of GDP.

A recession is crimping contributions paid by workers and their employers. At the same time spending has increased due to a record jobless rate of 26 percent and a pensions’ bill, which has risen to 9 billion euros a month from 8 billion euros in 2004.

While the fund stopped receiving government contributions in 2010, its managers changed rules on July 17 to profit from returns from Spanish securities, according to the document.

The maximum amount that can be invested in a given security was increased to 35 percent of the total portfolio from 16 percent. At the same time, the fund raised to 12 percent from 11 percent its maximum share in the Treasury’s total outstanding debt. The Treasury’s debt stock was 634 billion euros in February, according to data on its website.

See why governments have used central bank inflationism to boost asset prices? Gains from asset arbitrages have been used to cover funding shortfalls!

This reminds me of Hyman Minsky’s Ponzi finance from his Financial Instability Hypothesis

Mr. Minsky defines Ponzi finance as (bold mine)

cash flows from operations are not sufficient to fulfill either the repayment of principle or the interest due on outstanding debts by their cash flows from operations. Such units can sell assets or borrow. Borrowing to pay interest or selling assets to pay interest (and even dividends) on common stock lowers the equity of a unit, even as it increases liabilities and the prior commitment of future incomes. A unit that Ponzi finances lowers the margin of safety that it offers the holders of its debts.

In short, Ponzi finance depends on asset values from which is used either as collateral for borrowing or for funding purposes through asset sales.

 

How Ponzi schemes implode, again from Mr Minsky

In particular, over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is large weight to units engaged in speculative and Ponzi finance.

Furthermore, if an economy with a sizeable body of speculative financial units is in an inflationary state, and the authorities attempt to exorcise inflation by monetary constraint, then speculative units will become Ponzi units and the net worth of previously Ponzi units will quickly evaporate. Consequently, units with cash flow shortfalls will be forced to try to make position by selling out position. This is likely to lead to a collapse of asset values.

The difference here is that Mr. Minsky refers to capitalist economies or private finance units as practitioners of Ponzi financing, whereas today it has been governments that rely on Ponzi finance via asset bubbles to sustain their welfare states.

And Spain’s Ponzi finance scheme shows why debt laden governments will unlikely resort to the “exorcise inflation by monetary constraint”, since this will “lead to a collapse of asset values”, thus extrapolates to the collapse of Spain's welfare state.

At the end of the day, what is unsustainable will simply not last, like all ponzi finance schemes, they will fail.

Third Wave Politics: Secessionist Parties in Spain Gains Political Footing

In the information age, forces of decentralization will function as the key agents of social change.

In the realm of politics, such evolutionary transition will likely be channeled through secessionist movements.

In Spain, the secessionist parties of Catalonia may have just gotten the momentum that could trigger a potential chain of events.

From Bloomberg,

Pro-independence parties in Catalonia won a regional vote, strengthening a drive for a referendum on secession in defiance of Spanish Prime Minister Mariano Rajoy.

Catalan President Artur Mas, who called early elections to force the debate on independence, won 50 of the 135 seats in the regional assembly for his Convergencia i Unio party, down from 62, with 99 percent of the vote counted. The separatist Catalan Republican Left, known as the ERC, more than doubled its seats to 21 from 10. Two smaller parties that also back a plebiscite secured 16 seats.

Rajoy, weakened by recession and speculation that Spain needs a European bailout, says a referendum on secession is unconstitutional. Mas’s losses showed his bid for a mandate backfired, leaving him dependent on anti-austerity separatists to govern Spain’s largest regional economy.

“With a majority, Mas could have negotiated for all kinds of goodies to postpone the referendum but clearly that’s not an option anymore,” Ken Dubin, a political scientist at Carlos III University and IE business school in Madrid. “He was hoping he’d have a stronger hand to negotiate some intermediate status, but his bluff has been called.”

Rajoy’s People’s Party won 19 seats, a gain of one. The Socialists took 20 seats, down from 28.

Mas has pledged a referendum within four years. In contrast, the ERC would be willing to declare independence unilaterally in 2014.

The above developments reminds me of, and appear as gradual confirmation of the predictions of futurist Alvin Toffler as elucidated in his highly prescient 1980 book, The Third Wave (p.317)

National governments, by contrast, find it difficult to customize their policies. Locked into Second Wave political and bureaucratic structures, they find it impossible to treat each region or city, each contending racial, religious, social, sexual or ethnic group differently, let alone treat each citizen as an individual. As conditions diversify, national decision-making remains ignorant of the fast-changing local requirements. If they try to identify these highly localized or specialized needs, they wind up deluged with overdetailed, indigestible data…

In consequence, national governments in Washington, London, Paris or Moscow continue, by and large, to impose uniform, standardized policies designed for a mass society on increasingly divergent and segment publics. Local and individual needs are forgotten or ignored causing the flames of resentment to reach white heat. As de-massification progresses, we can expect separatist or centrifugal forces to intensify dramatically and threaten the unity of many nation-states.

The Third Wave places enormous pressures on the nation-state from below.

It is happening.