While the debate over Greek haircuts still lingers on, Spain Slipping on Deficit Means Chances of Contagion Increase

Spain will struggle to meet its deficit-reduction target this year as economic growth slows, threatening further debt-crisis contagion as Europe fails to erect a fail-proof firewall.

“They will never make it,” said Ludovic Subran, chief economist at credit insurer Euler Hermes SA in Paris. “Our September forecast sees Spain’s deficit at 7 percent” of gross domestic product this year, he said, adding that the prediction was made before the nation’s credit rating was cut this month.

Spain’s region of Castilla-La Mancha was cut five levels to junk on Oct. 20 by Moody’s, which also downgraded nine other regions on “growing liquidity pressures” and difficulties “reining in their cost base.” It’ll be “very difficult” for the 17 regions to reach their 2011 deficit goal of 1.3 percent, opposition leader Mariano Rajoy said on Cope radio yesterday.

There is insufficient firepower to meet all the potential liquidity needs,” David Mackie, chief European economist at JPMorgan Chase & Co., said of the proposed EFSF enhancements in an Oct. 18 note to investors.

Firepower Insufficient

Reader Ernst is tired of the “overused” term “firepower” and threatens to scream if main stream reporting uses the term anymore.

No doubt Ernst is screaming right now on the usage by Bloomberg and me repeating it.

Inquiring minds can find 379,000 usages of “EFSF Firepower“.

Yet the idiocy of it all is that increased “firepower” will do nothing but make matters worse. Please see EU Weighs Insurance, SPIV Leverage, Needs Rating Agencies to Go Along; German-French Spread at New Record High 1.20%; Fear “of” Reaching a Deal for further discussion of the hopelessness of increased “firepower”

Spain 10-Year Government Bond Yield

Portugal 10-Year Government Bond Yield

It should be clear to everyone that Portugal will be the next country to blow. It is equally clear there is insufficient “firepower” to save Portugal, Spain, and Italy.

Don’t scream too loud Ernst. Usage will drop of as soon as the EU clowns come up with their non-solution in a few days. Unfortunately, when the “firepower” proves insufficient, expect Krugman and others with non-solutions to chant “I told you so”.

Please see Recapitalization Agreement Set at 108 Billion Euros; Krugman Argues for ECB Printing; Contagion Spreads to Insurance Sector for more on Krugman’s preposterous proposal to fix this mess via ECB printing.

Mike “Mish” Shedlock
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