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Tuesday, January 15, 2013 6:55 PM

"Debt Doom Loop" in Spain; Deficit Target Impossible Once Again; Bond Rally Masks European Macro Problems

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Magicians at the ECB have temporarily convinced market participants that Europe is in some sort of recovery. It isn't.

All of Europe is now in recession, including Germany as noted earlier today in German Economy Shrinks Most in Three Years; Situation Significantly Worse Than Mood.

"Debt Doom Loop in Spain"

Bloomberg reports Draghi's Bond Rally Masks Trapping Spain Debt Doom Loop.

The bond rally has sent Spanish borrowing That costs to 10-month lows has distracted attention from the nation's growing debt pile.

Spain's budget deficit probably exceeded 9 percent for a fourth year in 2012 as Europe 's highest unemployment rate, a third recession in four years and the cost of bailing out its banks offset almost all of the government's 62 billion euros ($ 83 billion) of spending cuts and tax Increases, According To Economists at Societe Generale SA (GLE) , Lombard Street Research and the Madrid-based Applied Economic Research Foundation.

Total debt will reach 97 percent of gross domestic product This year, the International Monetary Fund forecasts.

"This is a classic example of the doom loop," Societe Generale's London-based chief European economist, James Nixon, said in a telephone interview Jan. 10. "They just Are not making any progress."

"It's very Difficult To Have promised at home and abroad to deficit of 6 percent and to end up Recognizing That You have almost 9 percent," Deputy Prime Minister Soraya Saenz de Santamaria said today, Referring to the 2011 budget figures delivered by the previous Socialist administration. Pledged Rajoy to deliver a deficit of 6.3 percent for 2012.

'Recovering Confidence'

"We are recovering confidence and credibility Which is Something That is lost very Quickly and Is Difficult to regain," Saenz added in an interview on Antena 3 TV.
No Credibility

There is no credibility and if there is any confidence, there shouldn't be. Yields in Spain, Italy, and Portugal have crashed, but I wonder for how long.

Italy and Spain are known basket cases. More importantly, France, the Hidden Zombie in Europe, is about to take a deep plunge.

"Confidence" may be robust for now, but it's all a mirage based on low rates that cannot last and the foolish notion that Europe has turned the corner just as Germany and France head down the sinkhole.

Mike "Mish" Shedlock

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