Cristobal Montoro, the Spain's finance minister has made a liquidity destroying proposal to tax short-term financial transactions at an astonishing 56% tax rate. Businesses are already upset over hikes in the VAT and have threatened to leave Spain.
Interestingly, in spite of raising taxes elsewhere, the VAT was lowered on the highly subsidized renewable energy sector.
Why? Here is the answer: "Secretary of State for Finance, Ricardo Martinez Rico, is the leading advisor in the industry".
Prepare for Spanish Implosion
Here is the "as-is" Google translation of the El Econimista article Waiting for the Intervention. Emphasis in bold not added.
The Bundesbank is opposed to the purchase of deduda, the only thing that can save Spain and Italy. Autonomy, conflict, power and government crisis rumors complicate everything.Countdown To Self-Destruction
The situation is out of control. The government approved last week the biggest adjustment of his story in hopes that it would serve to calm the markets. But it was not. The risk premium yesterday overcame the barrier of hundred basis points, something never seen, and the bond closed at 7.27 percent. The first question that arises is what should make efforts so painful as the increase in VAT or removal of the extra pay of officials if markets continue to punish us hard. It would be naive to think that just announced a big cut, things would begin to change. There are still many uncertainties that sow mistrust.
The fine print of 65,000 million adjustment shows that there is more emphasis on income than expenditure. Tax revenues provide about 38,000 million, compared to 27,000 in less spending. This, coupled with the rise in income tax, makes Spain one of the countries with the highest direct and indirect tax burden on the planet Earth. Economists warn that this tax increase may cause a contraction in gross domestic product (GDP) higher than expected by the Government. Especially in 2013, in which the drop exceed 1 percent, twice the official estimate.
Apart from the contradictions of the official figures of the adjustment and the controversy, was put in doubt the 22,000 million in revenue under VAT, only so far this year has accumulated a fall of 10 percent. The increase will boost the economy submerged and can neutralize the expected increase in revenue, defended himself as finance minister, Cristobal Montoro, as opposed to undertake this measure. The general impression is that more cuts are to be decided. Montoro himself fed this thesis to warn this week in Congress that state coffers are empty.
The other settings should focus on the regions and aim to remove 427,000 employees created by them during the last ten years (see story on Monday in elEconomista). However, this week has been strong resistance from regional governments to make further cuts. The call of the President of the Generalitat, Artur Mas, a regional rebellion against the Government is a paradigm for stimulating this international distrust.
Many people wonder, moreover, what moral authority left to the PP's general secretary, Maria Dolores de Cospedal, to convince the rest of communities governed by their party, when his government of Castilla-La Mancha is among reprimanded. No, of course.
I do not think right now an investor in and outside our borders who believe in the autonomy will obey Montoro. The finance minister was guilty of naivete in advance at the beginning of the year 5.176 million for half of the estimated settlement funding system because it has stopped to tighten their belts. In addition, ICO 15,000 million in loans to cover the debt did not help anything.
In the energy sector also confusion reigns. Vice President, Soraya Saenz de Santamaria, yesterday attributed the delay in reforms that several ministers were outside Spain, including Industry, José Manuel Soria. But the reality is that Soria travel left after slamming the door and refuse to accept the distribution of tax burden and renewable power on the table by Montoro. Some companies threatened to move the headquarters of their business outside Spain to avoid the very strong tax hike planned by the minister of finance.
The reduced charge provided for solar energy, although it is one of the most subsidized, and the fact that former Secretary of State for Finance, Ricardo Martinez Rico, is the leading advisor in the industry, Abengoa, raises many critical and casts suspicion on the cleaning process. If autonomy is not yet speak openly of rebellion, in power so clearly.
To add more uncertainty, Montoro announced his willingness to levy confiscatory rates close to 56 percent of the purchase or sale of short-term securities. An initiative incomprehensible allegedly coming from a government liberal or right, we like a capricious regime such as the populist Venezuelan President Hugo Chavez.
To complete the clinical astonishing about our rulers, the rumors of clashes between the ministers of finance and economics, Luis de Guindos, or between it and the head of the Economic Office, Alvaro Nadal, have given way to a possible government crisis to designate a single responsible in economic affairs. The recent article by Foreign Minister, Jose Manuel Garcia-Margallo, El Pais, dedicated to solving economic problems rather than addressing the many international crises, pitted the bonfire of the vanities. Margallo with Josep Pique are the secrets to a hypothetical vice presidential candidates economy. It is true that in Europe caused a great embarrassment to the current division of responsibilities between the Treasury and between them and the Economic Bureau, which serves as a minister in the shade to chair the Executive Committee for Economic Affairs in the absence of Rajoy.
The spark that triggered this Molotov cocktail on black economic forecasts and instability of the government team is highly liquid Treasuries. The data show that the mattress is exhausted debt issued earlier this year at affordable prices, so from now the Treasury must pay prohibitive prices, which make untenable the vote.
The mere request of the autonomous community of Valencia to qualify for the liquidity fund announced by the Treasury market sparked fears and attacks on the risk premium. The alarm was given by the auction on Thursday, because it showed no there is a demand for government debt beyond the lyrics to one year. With banks in retreat, because they have run out of ammunition delivered earlier this year by the ECB, nobody can predict how they will renew the 28,000 million coming due next October.
The German Parliament gave strong support for the bank bailout. But the statements by Bundesbank President Jens Weidmann, the end of last week, encouraging all to seek the intervention Rajoy, are a sign of strong opposition within the ECB to resume purchases of debt of Spain and Italy, all that could save us. It is also an indication that Germany is not aware of the risk to the single currency. Experts predict that if Spain is operated, the eye of the hurricane will move over Italy and eventually destroy the entire European project. The countdown to self-destruction of the euro is already underway. We'll see if we can stop it.
Some of that translation is a bit choppy, but it is certainly easy enough to understand the entire gist of the article.
Spain certainly needs reforms such as shedding government workers, removing subsidies, and revising work rules to make it easier to fire (and thus hire) workers.
However, Spain does not need increased VAT taxes and it certainly does not need a 56% tax on financial transactions.
In short, Spain is resisting the measures that would be productive, and implementing those measures that will do the most harm.
Spain Set to Implode
Spain is set to implode. I agree with the author that "a countdown to self-destruction" is underway. Also see Death Spiral in Spain; Six Spanish Regions Seek Aid; Bankrupt Spain to Bail out Bankrupt Regions
Mike "Mish" Shedlock