Thursday, April 12, 2012

Will There Be A “Corralito” In Spain?

Yes, it’s a metaphor. Of what, I dunno.

How Spain could exit the eurozone—a practical guide.

In late 2001, while everyone was in shock over 9/11, the Argentines were going through a little shock of their own: The “Corralito”.

Argentina was bankrupt, a product of a stagnant economy, rampant crony-corruption, and—most important of all—of having its currency fixed to the dollar. This currency peg had created a huge credit bubble, and of course massive capital outflows as a result, eventually leading to the depletion of foreign reserves by the government and an inability to raise more funds on the open markets.

In other words, sovereign bankruptcy.

Coupled to these problems, in the months leading up to the December 2001 crash, people were aware that the country was going bankrupt—so they were quickly converting all their Argentine pesos into dollars, and then sending this money to safe havens overseas.

To solve these problems of sovereign insolvency and massive capital flight, and at the same time to stabilize the situation, on December 1, 2001, the Argentine government imposed the infamous corralito—literally, the “little bullpen”: A series of measures designed to hold in capital and prevent it from fleeing the country, while devaluing the currency to a more realistic, sustainable rate of exchange.

As part of the corralito measures, the Argentine government froze all dollar-denominated bank accounts; converted those dollars into Argentine pesos on a one-to-one basis—that is, confiscated people’s dollars; limited all withdrawals in Argentine pesos to a weekly maximum of AR$250 (you read right: per week); and of course—the cherry on the sundae—it devalued the Argentine peso against the dollar.

The devaluation was at first a “mere” 40%—but shortly thereafter the Argentine peso was allowed to float: And it dropped to a rate of four to one against the dollar.

Literally millions of people lost their life-savings in one fell swoop. The local equity market tanked catastrophically, as did the local bond markets. People on a fixed income also got clobbered, as their pensions lost their purchasing power by 40% overnight—and then eventually by 75%.

Chaos ensued.

Now, the situation in Europe today is virtually identical to that of Argentina in 2001: Overleveraged, with an insolvent banking sector, a flatlining economy and growing unemployment.

But of all the countries, Spain in particular is the biggest trouble.

Spain today has a stagnant economy: 24% unemployment, 53% youth unemployment, an economy shrinking at an annualized rate of at least –1.75%, a banking sector with a collective insolvency that runs some €78 billion, a government that needs €190 billion this year alone to fund itself (on a total GDP of barely €1 trillion)—

—and most important of all: Spain has a looming inability to meet its debt payments, coupled with a rapidly deteriorating reputation among bond buyers.

In other words, Spain today is the Argentina of 2001.

Now, as I’ve written here before, the euro is essentially one giant currency peg: Monetary union over the past ten years meant that all the eurozone economies have pegged their currencies to the German currency.

During boom times, this meant that all the peripheral eurozone members enjoyed access to cheap and limitless credit—which they of course took advantage of. But during down times—like now—those debts become insurmoutable—like now.

I argued last week that Spain would leave the eurozone, probably before the end of the year. But the issue is, What would that exit look like? How would that exit be carried out, on a practical basis?

Let’s assume that the decision has been taken by Spain to exit the eurozone. Let’s further assume that on the day of the exit, Spain will initially value the New Peseta (NP$) at par with the euro—but that a devaluation will happen immediately thereafter, of say 30%.

Before anything else, the Spanish government would have to make sure that nobody—and I mean nobody—knew that the decision had been made until after the decision had been implemented.

Foreknowledge of a Spanish exit of the eurozone and a return to a local currency would cause a bank run of staggering proportions: People would realize that the government was going to devalue the currency, so they would rush to their banks to withdraw their euros and either send this money out of Spain or else hold it in cash under their mattresses. Either way, such a bank run would crater the entire banking sector instantly—because the banks certainly do not hold reserves to meet such a run.

Brothers in Debts
In point of fact, this is exactly what happened in Argentina: Because of the rampant cronyism, oligarchs and the well-off got wind of what the government was planning—and instantly pulled all of their money out of Argentina’s banking systeam, and sent their money to overseas safe havens. There were literally lines of truck with money, driving away with the oligarchs monies. And ultimately, it was this run which triggered the December 2001 crisis in Argentina.

So secrecy—and surprise—would be key. This is the reason that, if and when there is in fact a Spanish exit of the eurozone, we will not hear a whisper about it until it actually happens.

Now, if and when there is a Spanish eurozone exit and devaluation, this is the order of events as they would happen:

Once the trigger is pulled for Spain to exit the eurozone and go back to a local currency, the Spanish government would order all banks in Spain—both foreign and domestic—to convert all their customers’ accounts and all of the banks’ cash holdings from euros to New Pesetas. The Banco de España, Spain’s central bank, would then take receipt of these euros from the private banks, and exchange them for New Pesetas on a one-to-one basis. Because of the modern electronic banking infrastructure, the entire currency exchange operation could be done over a weekend.

Because of the prevalence of credit cards and cash machines, very few people carry more than €100 on their person at any given moment. Therefore, the Banco de España wouldn’t bother getting the actual physical cash from people, and obliging them to exchange those euros for New Pesetas. It would simply not be worth the effort: The amount of money that people have—assuming the people are caught by surprise—would be minuscule compared to what the banking sector would have.

Immediately after the banks had surrendered their euros to the Banco de España and received their New Pesetas, the Banco de España would devalue. An initial devaluation of 30% seems reasonable.

After conversion and devaluation, the next step would be to impose a corralito on the Spanish economy: No one would be able to withdraw more than, say, NP$500 per week.

Why would a corralito be imposed on the Spanish economy? For the same reason it was imposed in Argentina in 2001: To prevent a massive bank run.

Don’t misunderstand the corralito: People (and corporations) would be able to trade funds via the banks. For instance, someone buying a house would be able to transfer the funds to the seller’s account—so long as the seller’s bank was Spanish. The point of a corralito is not to end trade—the point of a corralito is to prevent capital flight.

The corralito in Spain would end once the internal domestic situation had stabilized—and this would be signaled by a stable exchange rate between the New Peseta and the euro.

The quicker a stable exchange rate between the New Peseta and the euro is reached—no matter how low—the better for the Spanish economy. Because once the true exchange rate has been discovered by the markets, only then can trade and economic activity restart and rebound.

Though the New Peseta would be immediately devalued by 30% in my hypothetical discussion, the ultimate exchange rate is unknowable at this point in time. But it seems to me that a stable rate of NP$2.50 to €1.00 is reasonable. But I repeat: Only the market can determine the true rate of exchange; my guess is just that—a guess.

The immediate effect of a currency exit and devaluation would be a spike in unemployment as businesses shut down temporarily or permanently, until the true exchange rate is reached.

But once the New Peseta reached a stable floating exchange rate—say within six months—the Spanish economy would reignite, because of the principal benefit of a currency devaluation: Its exports are now cheap, as are its capital goods. A doo-dad which sold for €10 euros before the conversion and devaluation is now NP$10—which would be equivalent to €4 million at a NP$2.50 exchange rate. A factory worth €1 billion would now be worth NP$1 billion—or in other words, €400 million at a NP$2.50 exchange rate.

So once a stable rate of exchange is reached, Spain would experience strong exports and strong capital inflows—which would reignite Spain’s economy.

Which after all is the whole point.

In Argentina, the corralito ended about a year after it was imposed—it ended after the Argentine peso had reached a stable exchange rate with the dollar. The same would happen in Spain, though at this time it is impossible to say how long that would be.

Insofar as the insolvent Spanish banking sector is concerned, with all these confiscated euros on its balance sheet, the Banco de España would have the ability to nationalize any insolvent bank, pay off it losses, then turn around and sell the now-healthy bank on the open markets.

So in two moves—eurozone exit and subsequent devaluation—the Spanish economy would be essentially reset, with a now healthy banking sector, a reignited export-driven economy, and a now-attractively priced capital goods.

Sounds pretty good—so who would suffer?

Bondholders, and those living on a fixed pension.

Obviously, pensioners and others living on a fixed income—who are predominantly the elderly—would suffer terribly. The purchasing power of their pensions would be reduced by the amount of the devaluation, which I’ve hypothetically stated could reach 60%—but it could easly reach 70% or even 80%. It reached 75% in Argentina.

Workers also would suffer, but less so. They would certainly suffer immediately after the exit-and-devaluation, as many of them would lose their jobs. But as exports began reigniting the Spanish economy, it would be reasonable to expect that within a year or two, workers would be able to demand salary and wage increases without breaking the nascent economic boom.

Bondholders would take the biggest hit. Bond prices would suffer a Greek-scale collapse in value—but it would not be self-evident that such a collapse in value was justified.

Insofar as Spanish debt is concerned, since so much of it is in Spanish banks, the Banco de España would be able to palliate the balance sheet holes with the euros it confiscated during the exit-and-devaluation.

Insofar as the Spanish debt held by foreign players is concerned, the initial collapse in value might be a mistake—because the Spanish might in fact be able to make good on their bond payments, now that they’ve exited in the eurozone. It’s reasonable to think that the Troika—the ECB, the EC and the IMF—would negotiate Spain making the Spanish bondholders whole, in exchange for assistance or Debtor-In-Possession credit or some other such bankruptcy assistance.

Because after all, a eurozone exit and devaluation would essentially be a Spanish bankruptcy.

Initially, like anyone else who’s gone through bankruptcy, Spain would certainly be a pariah in the international bond markets—but only for a time. Eventually, as the Spanish economy improved under the devalued New Peseta, lending to Spain would become attractive again. Consider Iceland: They defaulted in 2008—yet within three years, they were able to successfully auction a bond issuance on the international markets.

Anyway, in the early days of the exit-and-devaluation, Spain would not need foreign cash. After all, by forcibly converting to the New Peseta and then devaluing, the Spanish government’s liabilities would be discounted by the percentage amount of the devaluation. Thus they wouldn’t need access to foreign credit markets—because their liabilities would have been severely discounted.

The key, of course, is rapidly reaching a stable, free-floating exchange rate. Only then can the corralito be ended. Only then will economic activity reignite, as Spanish products became cheap on the international markets, and thus Spanish domestic production took off. Only when a stable exchange rate is reached would foreign capital be willing to enter the Spanish market.

Crazy as it may sound, all those half-built summer houses on the Costa Brava might well get snapped up by foreign money, if Spain exits-and-devalues. But that’s what happens when you devalue your currency: Everything becomes cheap for foreigners, who rush in to buy.

The more you look at the situation cold-bloodedly, the more obvious it is that a eurozone exit and devaluation is the absolutely best thing for the long term health of the Spanish economy.

It remains to be seen if the Spanish leadership will have the cojones to do what has to be done, to save the Spanish economy: Exit the eurozone, devalue, and rebuild.
This article is adapted from a larger Supplement that appeared in my Strategic Planning Group. If you’re interested, check out SPG’s preview page to see what it’s all about.


  1. Another great article thanks GL.

    So in essence would it be a good time to buy a dream villa in spain with a 95% Spanish mortgage or alternatively wait for the 70% devaluation of the new Peseta and pay cash?

    The vultures will be circling and their are a lot of expats who will look to sell in th coming months.


  2. Great article, as usual.

    The pic: it's a metaphor of a metaphor (m²): the bull is feeling increasingly lonely.

    I'm wondering if everything would be as rosy for Spain. A deal of the murky issue involves a demographic shift (aging population), resulting in a decreasing vitality of society as a whole and a State bearing the financial burden of this shift. I don't think any nation in old prosperous Europe could afford to condemn its elderly to such a draconian diet.

    So I have my doubts on such a black white scenario. I'm wondering if the EU isn't planning another kind of demographic stunt altogether: letting-in the Turks to inject new blood in Europe's ailing body. This will be at great cost, but they'd be betting on the long-term benefits and the dynamic effects of such a program.

    In the meanwhile, never underestimate the faculty to kick the can down the road until the next, new (inevitably undemocratic) treaty.

  3. Yeah, I've got the same question as Gazaar... and additionally, you mention which groups of people fair the worst in this scenario, but who comes out ahead? I'm going to suppose anyone that can get their hands on gold/silver first... or even someone that hordes their cash under their pillow in Swiss Francs or something?

    1. Greetings,
      The answer to you question is Everybody gets the shaft, EXCEPT those that are connected. There is a blogger over @ that has been writing about what happened in Argentina since the collapse. He recently emigrated to Ireland because he couldn't beat the legal paper work to come to the USA. To paraphrase, gold/silver and cash were king and it also helped to have a weapon to answer the door, go to work or the grocery store. It's a very bad thing what happens to a country that transitions all in to totalitarism.

    2. What happened to Euro deposits in Argentine banks and what will happen to USD deposits in Spanish Banks if Spain exits the Euro?

  4. Good read as always GL! Thanks.

    Something came to my mind:

    This may be true for Spain:
    "Because of the prevalence of credit cards and cash machines, very few people carry more than €100 on their person at any given moment."

    But not Italy:

    But maybe this is a preparition step by the Italian government to get less people hold cash?

  5. Wouldn't a Spanish exit destabilize the whole of the Eurozone as it seems it would severely damage the value of the Euro. If Spain can convert your Euro holdings to a debased local currency at the drop of the hat, why not Portugal? Why not Italy? Wouldn't a Spanish exit lead to a mass flight across the EZ out of the Euro and into less risky currency... like the Dollar? Couldn't this lead to a collapse across the EZ that would make Spain's efforts to devalue against the Euro very difficult? Wouldn't it suddenly be that all EZ exports would be dropping in price against Dollars, RMB, etc? So would Spain be saved or would all of the EZ be in a desperate race to the bottom that would leave no real winner on the continent.
    If Spain looked like it was going to exit wouldn't the rest of the EZ be motivated to keep them in the union? A motivated Germany wanting to forcibly keep Spain in the EMU sounds like a war just waiting to happen.

    1. That is one of many possibilities but it is one of many. Only when it happens will we know. What is also one of many possibilities is Spain leaving the EZ voluntarily. These are all possibilities of possibilities or possibilities within possibilities.

  6. Yes, HAWKS5999, this is what I was thinking, as I read GL's essay. One country cheapens its products, the others are more or less forced to follow suit. "Beggar thy neighbor" it used to be called. A race to the bottom, as you say.

    So we are back to square 1; the ONLY currency that works is GOLD. Period. But the world's egghead economists are in love with artificial currency, or pretend they are, so that those who run the financial systems can continue to pay them off with their false reasonings. Gold works, always has, but - GOLD IS VERBOTEN. Because gold cannot be created out of nothing - and WOW! what power is granted to those who manage to create "value" out of thin air!

  7. Could something like this ever happen in the U.S.?

    1. No. Spain is in trouble because it uses a currency shared among many countries, the Euro. Spain can't decide to print more Euros to devalue it. The US has it's own currency, and is presently printing massive amounts of new money, effectively devaluing it against other currencies, but they are not alone.

      The moral of the story is if you don't have control of your currency, you'll be in deep trouble when your economy tanks, and that is always just a matter of time.

    2. Absolutely, and worse! Remember when FDR made ownership of gold illegal in the 1930s? ANYTHING can happen when power-drunk control freaks gain office, and that's what we have now, both in Congress and Executive branches.
      Diversify (but keep an eye on IRS regs; currently, you can own land overseas without reporting, but cash accounts over $10k must be reported). Or expatriate - and get away from these bastards, before they get to you.

    3. CAN happen? IS HAPPENING! We are losing our hold on the petrodollar, countries are now trading in native currencies and gold for oil. Once that becomes common people will start wondering why they need settle in dollars for international transactions. Once THAT happens, demand for Treasuries will drop like a rock. We're already buying 61% of new issues. You tell ME, how long can that last?

    4. Louis, the Fed has bought 91% of new issues since the inception of Operation Twist.

      It is worse than you think.

      K Smith

  8. Hi,

    Any person of any means in these countries would have to be insane not to ALREADY have money prepositioned in foreign accounts in anticipation of possible devaluation. I believe that's already happening from what I read.

    Besides, with the awful level of corruption which characterizes our era, I don't expect that Spain, or any other country, will be able to keep such a decision secret from their own "elites".

    Seriously. Spain won't tell Mario, Ben, the Barry-Mitt creature, or even darling Angela? Some Spanish official who used to work for Goldman won't tell a hundred of his very close friends? See H. Paulson. Nobody will tell their wife or their brother in law? I imagine international banks and intelligence agencies already own people in Spain's government, on the payroll of course, for just this kind of information?

    No. There likely WILL be massive front running by the wealthy and the well informed, and ordinary people will be crushed - again. Another massive shift of wealth from the 99% to the 1% as they say these days. And the minute people in other countries become aware, capital flight from these other countries will accelerate.

    Wealthy people who got their euros out, or who already have their euros out (banked as euros, dollars, loonies, Swiss francs) will return later and buy up assets at 60% discount. Nice.

    To counter this, you'd have to confiscate the currency gains in all foreign bank accounts held by Spanish citizens by levying an immediate capital gains tax for all transfers made, say, withing one year preceding the devaluation, and for every year thereafter until the corralito was lifted, whether or not these gains were "realized". Think that will happen? Well, if the Americans were doing this, maybe. But that's another story.

    Otherwise, has anyone considered the political consequences of all this?



  9. A bit surprised that GL did not mention a word on the impact to the Euro as a result of this bankruptcy scenario.

    I think many of us can see the shock to the Euro due to the failure of one of its major Zone country. But its nice to hear GL take. After all Spain-Euro v. Argentina-USD is the big difference.

  10. In the picture entitled "Brothers in Debt" you show the Spanish Flag and another, UNIDENTIFIABLE one. If that unidentifiable flag was meant to represent the Argentine flag, then I'm sure you know FULL WELL that it should have a full SUN in the middle and not a fucking BROCCOLI.

    Seguro que lo pusiste a proposito, chileno de mierda.

    1. For those of you who don’t know Spanish, the last line reads, “I’m sure you put it there on purpose, you piece of shit Chilean.”

      Actually, I hadn’t noticed that the sun on Argentina’s flag had been replaced with something that indeed looks like a head of broccoli.

      I got the picture from the manufacturer of those flag pins—here’s the link:

      I am positive that the manufacturer of the pins did not intend for the sun in the Argentine flag to look like a head of broccoli.

      However, considering how corrupt and pathetic Argentina is—how its people allow their leadership to cheat them out of their national wealth, and keep them at an average income that is half of what it is in Chile—I don’t think a head of broccoli should be on the Argentine flag.

      No, I think a turd of dogshit should be on the center of the “alba y celeste” (“white and light blue”). It would remind the Argentine people of the corrupt reality of their sad little country.


    2. puta que les duele saber que lo tuvieron todo y terminaron quedando sin nada argentinos flojos, mediocres, corruptos e ignorantes. Argentina the shit of Southamerica only comparable to Nigeria in terms of credibility. Argentina will never come back, will never be the same, it's gone!!...its people are way too fucking lazy and corrupt..Argentina is gone for ever.

    3. But it's so very "patriotic" to fall in line and do what the President tells you to do. What a satisfying feeling is must be to sacrifice for the good of [the State] all. ;)

    4. Wow, Gonzalo, that was really very poor class. What an uncalled-for reply. They guy was an asshole, but you? come on.

    5. Wow, Gonzalo. You took it to a whole new level. Instead of responding to that particular person you made it general to the entire country. Why would you do that? It sounds to me like for some reason you don't like Argentina. Like somebody else said, very poor class. I don't know whether you're a piece of what that person said but you certainly are not a professional as I thought you were. And that's very disappointing.

  11. Spain-out?....Spain-remains? GL, in order to round-out your gloomy future-cast, you might ought to write a follow-up of what's instore for Spain if they follow their current policies within the Euro. Does it follow, that it's going to happen to all of the Euro countries anyway, so why not get first in line with a simi-sneaky plan to exit the fire escape hatch before the herd sees the fire or smells the smoke? When one stands back and looks at the magnitude of the Euro crisis, the "Corralito" looks more like a cluster-F*** that's already taking-on a much bigger arena with many other countries looking into that abyss of that pathetic looking bull waiting for "El Momento Verdad".

  12. "Crazy as it may sound, all those half-built summer houses on the Costa Brava might well get snapped up by foreign money, if Spain exits-and-devalues. But that’s what happens when you devalue your currency: Everything becomes cheap for foreigners, who rush in to buy."

    It does not work like that. When foreigners come to buy, the prices will go up to compensate for the devaluation...

    1. This is true, more or less. All properties in Buenos Aires are still listed in USD, at least those foreigners would be interested in. And, surprise surprise, I can tell you that prices have increased IN USD by well over 50% since 2001.

  13. When you said that "On March 20, Greece Will Default", I took it a a brave prediction. Certainly not an event that would have 100% chances happening. But some kind of useful prediction helping to reshape the picture. By the way, the event wil of course take place. But not on your (or WS or London) premises.

    At this stage you are now having your bets on similarities between current Spain and Argentina at its worst....

    I do not buy the stuff. Not at all.

    Mind you, I was one of those commenting on Spain early, say 2006, minding the Euro-MBS market and reading Edward Hughes. I never took it mildly.

    But I do not buy your stuff.

    Why this won't happen? Why is Spain not Turkey or Argentina at the turn of this century?

    1) Because Spain belongs to the Eurozone. And the Eurozone is certainly a better - say more amiable - environment than South America second part of the XXth century.

    In spite of its financial anarchy, the Eurozone is a political construct. With a a better governance by the way than its international counterparts. China governance? US governance? Give me a break, please! You do not like Brussels. So do I. But please spare me with Beijing or Washington DC!

    2) Because the European market is an open structure with reasonably sound money. Of course the initial currency rules are getting seriously transgressed. But the current monetization remains in line with initial the inflation-targetting.

    Because the system is based on reasonably sound principles, it system is moving on. Fast? Certainly not. Europe is an place with an old people and mature demographical structures. Do not expect spectacular results. Une sortie de crise décente? Oui, tout à fait.

    Already a significant number of industries are quietly relocating their Asian production into Southern Europe. Does it show? No. Will it? Yes, in due time.

    Will that make it in the press now? No. Later? Yes. When? A long time after those things have happened.

    Are these rough times? Certainly. Are these rough enough that people may in some countries not have gas in their car. Certainly.

    Rough enough for cost of life and RE prices in Southern Europe to get back to more reasonable benchmarking values? Sure.

    So rough that people cannot survive or feed themselves! Certainly not. Is Europe a dreadful place to work in? Yes! An unbearable place to live in? Certainly not.

    Back to work, everyone!

    1. But the current monetization remains in line with initial inflation-targetting? That would only be the case if the whole Eurozone was nothing more than a complete fraud right from the start initially!

  14. Bueno se formò la sampablera!
    Oigan chilenos y argentinos,,,mejor dejen la peleadera que despuès de todo son la misma vaina y sòlo la cordillera andina los separa. Pero sigan,sigan con peleas e insultos mientras sus gobernantes se lo siguen metiendo, sin vaselina y hondoooooo,,,, cuerda de huevones!!!

    1. y este de donde salio?, nunca compares a un argentino con un Chileno idiota. Y si de gobernantes se trata Chile es un pais serio, limpio, profesional y con un capital humano imcomparable en la region en donde la gente tiene el control, todos los demas son paises bananeros, incluyendo el tuyo.

    2. Vea caballero, sòlo espero que el resto del "iMcomparable" capital humano no sea como Ud.

    3. Esto de manejar tres idiomas a veces me juega una mala pasada con la ortografia. Pero te digo colombianito, nunca compares a ninguno de la region con un Chileno, en especial un Argentino. Oh, a proposito Chile se esta llenando de colombianos que vienen arrancando de españa, me pregunto porque no van a su pais a buscar oportunidad, no?

    4. I agree with you. Only the Andes separate those two people who are basically the same-Argentina and Chile. It's like the wars between the Irish and the English. When you get some perspective and some distance, you realize that those two people look the same. They are the same people. And when you get even more perspective and more distance, you realize that all people on Earth are basically the same. We are all the same human race. We are all particular expressions of the same general structure-homo sapiens.

  15. p.d.
    ahhh...y se me olvidaba: Gonzalo, hay un dicho que reza... "lo cortès no quita lo valiente"
    Còmo que no te lo sabes eh!?

  16. But there are differencies between AR and SP:
    - There is no peso circulating in SP, the EURo is there
    - Above US and AR there was no ECB. There was no EK and ECB willing to maintain the status quo at any costs

    And one more: Who usually leaves the monetary union? Historically it is not the weakest, but the strongest!

    And another one: EU/EZ isn't an economical project, it is a political project. And you don't consider it. It doesn't matter that leaving the EZ makes economic sense for SP. EZ won't allow it, they'll do anything.

    And one question: are those weaker US states going to leave USA as well?

    But if it would happen - yes, bondholders will suffer. Not only holders of SP debt, because if SP can leave, IT and even FR might leave soon so their bonds will fall rapidly.

  17. Great article! but why Spain would enter in such a revolution especially against its principal economic partners (consequences would be also disastrous for other Euro countries) when the results would be exactly the same if the country decided to cut salaries by 30%?

    Nevertheless a "Corralito" lookalike still seems necessary

  18. "Anyway, in the early days of the exit-and-devaluation, Spain would not need foreign cash."

    Uh, excuse me Mr Lira but there is the little thing spelled p-e-t-r-o-l-e-u--m in which Spain has one of the highest rates of importation vis-a'-vis the size of its economy. How, pray tell, are the Spanish going to import oil with their newly instituted fiat toilet paper? Is Senor Chavez going to ride to the rescue? Are the Arabs going to trade their oil for more villas on the Costa del Sol?

    1. The Spanish will import less oil, and their economy will contract because of that. Oil will be more expensive in terms of New Pesetas. So if companies and people try to consume the same amount of oil as before, it will cost more of their total income. They will have to either cut back on oil usage, cut back on other expenses, or decrease savings/personal discretionary funds.

  19. I don't think any country will leave Euro. Not now, not later. Even Greece and Portugal won't be allowed to leave Euro. It will be just too expensive for the remaining members. ECB has a wonderful thing called a printing press, and they will print money as there's no tomorrow. And Federal Reserve will do the same. They will provide money to banks, buy sovereign debt, and do a lot of other questionable things, but they won't allow peripheral economies to leave. Any country leaving Euro will immediately disintegrate plunging into complete chaos, economic and political.
    If I have to bet, I would bet on 1) ECB printing enormous amounts of money; 2) orderly debt write-off to the tune of 75% (similar to Greece.) This will probably last them for some time. What I don't have high hopes for is their ability and willingness to liberalize their economies and labor laws, the only path that could potentially take them to a more solid ground.
    But this would be common sense that neither European nor American policy makers have not demonstrated so far.

  20. Peron is to Argentina what FDR and Obama are to the USA.

  21. But as exports began reigniting the Spanish economy? Where would exports of a country suddenly come from after devaluation of the currency when its crisis was caused by the fact that most of its industry left the country in the first place? How can a country start exporting again after devaluation with something that doesn't exist anymore?

  22. I doubt that any of these current politicians will choose to leave the EU voluntarily. Why? Because thatr would put them out in the COLD. It would expose them to the merciless world of true decision making. They would not be able to hide behind their mothers skirt ... i.e. the ECB and the swathe of useless bureacrats in Brussels. They would have to start making difficult decisions about where the future lies, and how to get their country truly productive again.

    Don't you realize that NONE of the politicians or leading bankers in the USA, Europe or Japan has the slightest idea how to fix things? None of them has got any idea what it would take to restore the world to a truly productive path. So they keep hiding in their cloistered meetings, fobbing off the public with ridiculous pronouncements, and trying to "save" the current system.

    Spain's leaders are no different.

    In anything changes ... it will be because mobs of unemplyed youths set the country on fire. Perhaps when that happens we will see some real political change. Until then ... nothing.


    1. You are correct. The situation in Europe and the U.S. will stumble on with can kicking until these areas get as bad as GDP ratio as Japan.

      It will take a Black Swan event to bring the whole lot down.
      Civil unrest may probably trigger this. 50%+ youth unemployment may eventually find some group that starts out with some high profile political or technocrat assassinations.

    2. +10 for what you're trying to say brother, but I STRONGLY disagree. They know PRECISELY what they're doing and the effect it will have, but they're doing it ANYWAY. I can't even say I blame them because they are acting in their intelligent self interest, which we all ought. The real question is, how can we get THEIR intelligent self interest to coincide with OUR intelligent self interest? I think the answer is to make the laws the same for all of us - with no exceptions for this industry or carve-outs for that industry.

  23. Spain and Italy have officially reared their ugly heads once again this week and, once again, the European markets are in meltdown mode. As it turns out, Spain borrowed €316.3 billion from the ECB in March, which was a record for the country, and nearly double what they borrowed in February. Now traders are apprehensive, to say the least, about upcoming bond auctions for Spain next week. Consequentially, prices for Spanish credit default swaps hit a new record high.

    Spain's IBEX 35 is down a nauseating 3.5% and Italy's FTSE MIB is off 3.3%. Not to mention Germany's DAX (-2.4%) and France's CAC 40 (-2.6%).

    1. That’s not accurate: Spain’s total borrowing came to €316 billion at the end of March. The rise in March was €144 billion. The stats are from the Banco de España:

      Look at the latest Banco de España report here, to get a better sense of what’s been happening to their sovereign balance sheet:


  24. The only real question is: when will the Spanish Gov't decide enough is enough ? The EU and the US will continue to pressure Rajoy into a regimen of print, borrow, extend and pretend. Also an immediate devaluation would play h&ll with the other EU states (and their banking systems) to whom Spain owes money; the markets would rightly bail on any major bank associated with Spanish debt, be it sovereign or banking. Given the complexity, overleveraged banks and interconnectedness of EU banking system, such a clean and easy devaluation is likely to prove anything but. Here's a worst case scenario:

    1. Print Borrow Extend Pretend are engraved on Bernanke's stationary.

  25. Isn’t it the case that if Greece does not get out of the Euro - then no one will? Nothing seems to change - the calamitous event is always put off. Argentina was not part of a financial union, so it could go its own way - Spain is different - Spain will do what is good for the Euro union.

    Isn’t it currently true that only a mass uprising by “the people” will really change things. Aren’t the people of Greece more or less economic slaves to the banksters. Argentina did what was right for Argentina. Who among the Spanish elite is going to do what is right for the Spanish people? Make no mistake - the oligarch Rothschilds rule!

    1. There is a model to get out of these debt troubles. In the late 1980’s Japan had the mother of all commercial property bubbles. Instead of crashing the system - the Japanese went to low interest rates. The government funded economic activity by selling almost zero interest bonds to its people and then spent the money on infrastructure. For over twenty years this activity kept the economy going and the Yen to be a valued currency. What they created was a virtuous economic cycle, where the people received no interest on their money - but they continued to work and receive a paycheck. The result of this is that the Japanese economy does not have a boom and bust economic cycle and it has one of the best infrastructures in the world.

      The Japanese had one major advantage in all this, they did not have the Rothschilds to contend with! In the West the Rothschilds will not let this low/no interest system to prevail --- they want their pound of flesh from every man, women, and child in Europe.

    2. Yeah. But japan has an insurmountable debt to GDP ration of 500% (includes all public, banking and private debt).
      This debt ratio will get much worse trying to recover from last years Tsunami and the cleanup of Fukashima.
      The Japanese also have an ace up their sleeve. Fukashima is in a parlous state. A Mag 6.5 - 7.0 earthquake under Fukashima could cause Plant 4 to collapse.This would result in TEOTWAWKI.

    3. The problem of repayment of this government no-interest debt can be handled, because the people owe themselves the money - not some greedy banksters. Surly an equitable way of righting off this debt can be found by the Japanese people.

      Interest baring banking is the problem - it is inherently unstable. The next step in this scenario of a no interest economic system, is for a central bank to issue interest free money to private banks that will in turn loan it out to borrowers. As the money is paid back by the borrowers to the private banks, it is then returned back to the central bank. In this way money always would be available for new creativity, and as the value of what was created in the past diminishes, the money that created it, will be taken back out of the system. This way the total amount of the money floating out in the system will always match to the value the goods of the culture.

      Within interest banking systems, the total volume of money always is greater then the value of what it created and the excess ends up in the hands of the greedy Rothschilds who use it to control the culture and its government.

  26. If getting out of the euro, establishing capital controls and devaluing was such a nice, neat and easy solution to the debt problems - why, pray tell, didn't Greece do exactly the same?

    Could it be because, uhm, it's NOT such a nice, neat and easy solution to the debt problems? ;-)

  27. If Spain exits the euro, there will be unstoppable demands from the Basque County. Up to now, the pro-Spanish elements in the Basque Country have used arguments such as 1. the Basque Country would be out of the euro once independence is achieved 2. The Spanish market would be closed to Basque exports.

    Seeing that the Spanish market has tanked anyway, the exit from the euro would be the last straw. Now, besides the usual cultural and historical arguments (and with the insane, murderous ETA out of the way and an interloper pro-Spain government in the Basque County to be voted out with all certainty next year), the economic arguments of leaving Spain, now seen as a sinking ship with little prospect of refloating, are gaining ground.
    Perhaps this might make Mr. Rajoy think twice before Spain pulls out of the euro. Moreover, after a hypothetical Basque exit, the Catalans won't be far behind.

  28. Let's compare the stats of Spain to those of the US, shall we?

    24% Spain
    23% US

    Youth unemployment
    53% Spain
    46% US

    Annualized economic growth
    -1.75% Spain
    1.0% US

    Federal budget
    Spain - €190 billion on a total GDP of €1 trillion
    US - $ 4 trillion on a real GDP of $10.5 trillion.

    Banking sector
    Spain - Insolvent
    US - The Walking Dead

    Debt repayment plan
    Spain - Looming inability to pay
    US - Pay it with debased currency

    Spain is indeed a sad case, but we've got plenty to cry about right here at home.

    K Smith

  29. You know, I like K. Smith. So far, I agree with two of his comments.

  30. Agreed. K. Smith's observations: accurate, well-stated. Kudos.

  31. The scenario described is badly designed in one respect. Spain should simply declare 100% default on all euro loans. Wipe the debt clean. This creates a vastly more dynamic economy for everyone by removing the never-ending debt burden rather than just reducing the magnitude from "astronomical" to "overbearing".

    Furthermore, sovereign and individual DEBT IS DISEASE and should never again be accepted. The only debt that makes any sense is [almost] fully-secured debt to expand an already profitable business. PERIOD. Sovereign debt to bribe voters and debt to consume is POISON and must be abandoned by the human species if the species is to survive much less prosper.

    Of course reckless debt would naturally become almost non-existent if "grams of real, physical gold" become the medium of exchange - as long as no fractional reserve practices exist. ANY fractional reserve practices instantly destroy the honesty and viability of any economic system.

  32. jajaja GONZALITO,,,,,, te descubrieron PAYASO-HABLAPAJA. Pero me imagino que no te importa, total es publicidad y: GRATIS!!!!

  33. I've not yet seen any comment as to the impact of Spain's currency conversion (and resulting devaluation) on credit default swaps. CDS has been the elephant in the room driving the Eurozone machinations, i.e., to protect the big boys like UBS and Deutschebank from having to face the consequences of their rotten exotic instruments. If this action by Spain were to generate a "credit event" (as it surely must), the systemic repercussions would be huge; it cold potentially bring down the entire international banking system.

  34. Gonzalo, thank you for your effort to elaborate scenarios regarding the split of Eurozone and all the hassle in Europe. Please, though, remember, that the whole shit in the world will hit the fan when it will do so, and also that the later it does, the nastier it will be. Now try make scenarios about that ...

  35. Gonzalo, given that "savers & pensioners" are the ones screwed thru currency devaluation, what happened to Argentine debt and/or Spanish debt?

    If one "owed the bank" $100,000 USD mortgage, and the bank account devalued by 75%, is the debt also converted to the new Peso currency also?

    If I have a business in Spain that owes 100,000 Euro & the bank seizes all Euro accounts and converts them to Pesetas, then is the debt now 100,000 Peseta payable in Pesetas? Or do the banks just confiscate all of the houses and businesses which can no longer service the debt in devalued currency?

  36. Hi Gonzalo, very interesting article indeed. I am curious, what would happen with the Spanish Stock Market? would it also be devalued and converted from euros to NP? Thanks

  37. What a crock of s...Can you believe this guy?
    Always buy an argentinean/chilean for what they're worth and sell them for what they say they're worth....
    Chile ran out of copper, is totally bankrupted...The chicago boys BS does not hold anymore. Do they plan to support their economy selling cheap wine? They're poop.
    Same with the argentinians....They recovered back in 2001 just because Chavez bought up all its debt, but with the recen expropriation of Repsol we can see they just haven't recovered from el corralito....
    They are literally dead....Hungry cubans with italian surnames....
    So don't pay any attention to these guys....Everything is a Paquete Chileno (a setup, a con, a decoy)...Spain is bigger and stronger than all that

  38. With regards to foreigners buying property in Spain . . . "But once the New Peseta reached a stable floating exchange rate—say within six months—the Spanish economy would reignite, because of the principal benefit of a currency devaluation: Its exports are now cheap, as are its capital goods. A doo-dad which sold for €10 euros before the conversion and devaluation is now NP$10—which would be equivalent to €4 million at a NP$2.50 exchange rate. A factory worth €1 billion would now be worth NP$1 billion—or in other words, €400 million at a NP$2.50 exchange rate."

    I understand you to be reasoning that the new Pesata would convert as: 100 Pesata = $2.50 American dollars. (Currently 1 Euro = $1.30). I am currently looking at a property in Spain for 300,000 Euros ($390,000) If the new Pesata is a 1 to 1 exchange, then my cost in American dollars would be $750,000, right?

  39. There is a difference. All contracts are in Euros, including labor contracts, contracts for goods and services, outstanding bonds, etc. I think that would make it harder by far than in the Argentine case.

  40. The reason why European countries and American states were united under one currency was currency monopoly. Sovereigns going back to another, competing currency would shrink the monopoly, and the owners of the monopoly wouldn't like that.

    One day I think they hope to monopolize the whole world with their one currency. And then people will really be sorry.

  41. Smart post admin
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    Map of Ancient Greece and Ancient Greece Timeline

  42. We are witnesses of bad financial situation occurring in the whole world. I could say the world is falling apart financially. Just on August 2012, Spain reached the record unemployment rate of 25%, and unfortunately I think it will be worse during the next months. In my opinion Spain will go in default or bankruptcy in less than twelve months.

    The question is:
    Will this situation affect other countries in the world?
    The answer is YES. We are interconnected in so many ways.

    All world countries export and import through so many products, and if they have Spain as a trading country, all exporting countries to Spain will decline their revenue, due to lack of buying capacity in Spain, because they will be not able to buy any more, correct?

    On both sides, the export and import will be affected.

    We are living amid this "Global Recession" and very close to "The Next New Depression" that might get started around 2016-2108. This is fact 100%.

    For that reason we have to Prepare and Get Ready Against More Inflation


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