"The Entire System Has Been Utterly Destroyed By The MF Global Collapse" - Presenting The First MF Global Casualty

Submitted by Tyler Durden

on 11/17/2011 14:19 -0500 .

Presented without comment, merely to confirm that the market as we know it, no longer exists.

BCM Has Ceased Operations (source)

Posted by Ann Barnhardt -

November 17, AD 2011 10:27 AM MST

Dear Clients, Industry Colleagues and Friends of Barnhardt Capital Management,

It is with regret and unflinching moral certainty that I announce that Barnhardt Capital Management has ceased operations. After six years of operating as an independent introducing brokerage, and eight years of employment as a broker before that, I found myself, this morning, for the first time since I was 20 years old, watching the futures and options markets open not as a participant, but as a mere spectator.

The reason for my decision to pull the plug was excruciatingly simple: I could no longer tell my clients that their monies and positions were safe in the futures and options markets – because they are not. And this goes not just for my clients, but for every futures and options account in the United States. The entire system has been utterly destroyed by the MF Global collapse. Given this sad reality, I could not in good conscience take one more step as a commodity broker, soliciting trades that I knew were unsafe or holding funds that I knew to be in jeopardy.

The futures markets are very highly-leveraged and thus require an exceptionally firm base upon which to function. That base was the sacrosanct segregation of customer funds from clearing firm capital, with additional emergency financial backing provided by the exchanges themselves. Up until a few weeks ago, that base existed, and had worked flawlessly. Firms came and went, with some imploding in spectacular fashion. Whenever a firm failure happened, the customer funds were intact and the exchanges would step in to backstop everything and keep customers 100% liquid – even as their clearing firm collapsed and was quickly replaced by another firm within the system.

Everything changed just a few short weeks ago. A firm, led by a crony of the Obama regime, stole all of the non-margined cash held by customers of his firm. Let’s not sugar-coat this or make this crime seemcomplex” and “abstract” by drowning ourselves in six-dollar words and uber-technical jargon.

Jon Corzine STOLE the customer cash at MF Global. Knowing Jon Corzine, and knowing the abject lawlessness and contempt for humanity of the Marxist Obama regime and its cronies, this is not really a surprise. What was a surprise was the reaction of the exchanges and regulators. Their reaction has been to take a bad situation and make it orders of magnitude worse. Specifically, they froze customers out of their accounts WHILE THE MARKETS CONTINUED TO TRADE, refusing to even allow them to liquidate. This is unfathomable. The risk exposure precedent that has been set is completely intolerable and has destroyed the entire industry paradigm. No informed person can continue to engage these markets, and no moral person can continue to broker or facilitate customer engagement in what is now a massive game of Russian Roulette.

I have learned over the last week that MF Global is almost certainly the mere tip of the iceberg. There is massive industry-wide exposure to European sovereign junk debt. While other firms may not be as heavily leveraged as Corzine had MFG leveraged, and it is now thought that MFG’s leverage may have been in excess of 100:1, they are still suicidally leveraged and will likely stand massive, unmeetable collateral calls in the coming days and weeks as Europe inevitably collapses. I now suspect that the reason the Chicago Mercantile Exchange did not immediately step in to backstop the MFG implosion was because they knew and know that if they backstopped MFG, they would then be expected to backstop all of the other firms in the system when the failures began to cascade – and there simply isn’t that much money in the entire system. In short, the problem is a SYSTEMIC problem, not merely isolated to one firm.

Perhaps the most ominous dynamic that I have yet heard of in regards to this mess is that of the risk of potential CLAWBACK actions. For those who do not know, “clawback” is the process by which a bankruptcy trustee is legally permitted to re-seize assets that left a bankrupt entity in the time period immediately preceding the entity’s collapse.

So, using the MF Global customers as an example, any funds that were withdrawn from MFG accounts in the run-up to the collapse, either because of suspicions the customer may have had about MFG from, say, watching the company’s bond yields rise sharply, or from purely organic day-to-day withdrawls, the bankruptcy trustee COULD initiate action to “clawbackthose funds. As a hedge broker, this makes my blood run cold. Generally, as the markets move in favor of a hedge position and equity builds in a client’s account, that excess equity is sent back to the customer who then uses that equity to offset cash market transactions OR to pay down a revolving line of credit. Even the possibility that a customer could be penalized and additionally raped AGAIN via a clawback action after already having their customer funds stolen is simply villainous. While there has been no open indication of clawback actions being initiated by the MF Global trustee, I have been told that it is a possibility.

And so, to the very unpleasant crux of the matter. The futures and options markets are no longer viable. It is my recommendation that ALL customers withdraw from all of the markets as soon as possible so that they have the best chance of protecting themselves and their equity. The system is no longer functioning with integrity and is suicidally risk-laden. The rule of law is non-existent, instead replaced with godless, criminal political cronyism.

Remember, derivatives contracts are NOT NECESSARY in the commodities markets. The cash commodity itself is the underlying reality and is not dependent on the futures or options markets. Many people seem to have gotten that backwards over the past decades. From Abel the animal husbandman up until the year 1964, there were no cattle futures contracts at all, and no options contracts until 1984, and yet the cash cattle markets got along just fine.

Finally, I will not, under any circumstance, consider reforming and re-opening Barnhardt Capital Management, or any other iteration of a brokerage business, until Barack Obama has been removed from office AND the government of the United States has been sufficiently reformed and repopulated so as to engender my total and complete confidence in the government, its adherence to and enforcement of the rule of law, and in its competent and just regulatory oversight of any commodities markets that may reform. So long as the government remains criminal, it would serve no purpose whatsoever to attempt to rebuild the futures industry or my firm, because in a lawless environment, the same thievery and fraud would simply happen again, and the criminals would go unpunished, sheltered by the criminal oligarchy.

To my clients, who literally TO THE MAN agreed with my assessment of the situation, and were relieved to be exiting the markets, and many whom I now suspect stayed in the markets as long as they did only out of personal loyalty to me, I can only say thank you for the honor and pleasure of serving you over these last years, with some of my clients having been with me for over twelve years. I will continue to blog at Barnhardt.biz, which will be subtly re-skinned soon, and will continue my cattle marketing consultation business. I will still be here in the office, answering my phones, with the same phone numbers. Alas, my retirement came a few years earlier than I had anticipated, but there was no possible way to continue given the inevitability of the collapse of the global financial markets, the overthrow of our government, and the resulting collapse in the rule of law.

As for me, I can only echo the words of David:

This is the Lord’s doing; and it is wonderful in our eyes.”

With Best Regards-
Ann Barnhardt

The European Central Bank

Brink think

The Bundesbank’s chief and the ECB’s Italian president have much in common

Nov 19th 2011

WHEN Mario Draghi took over as president of the European Central Bank at the beginning of this month, it was felt that he had to prove his credentials in Germany. That task is made harder by calls on the ECB to act as backstop to troubled Italy, Mr Draghi’s home country, and to contain a sovereign-debt crisis that is raising borrowing costs for most euro-zone countries, while driving them down in Germany.

This week Jens Weidmann, the head of the Bundesbank, Germany’s central bank, raised the bond-market pressure on Italy and on Mr Draghi by saying that central-bank support for government finances would be illegal. Mr Weidmann told the Financial Times that the ECB could not act as a lender of last resort for countries, because in doing so it would transgress EU treaties banning direct financing of states. It would be counter-productive as well, argued Mr Weidmann. The roots of the euro-zone crisis lay with governments, and providing them with cheap financing would only reduce pressure for reform.

With bond markets so febrile, Mr Weidmann’s comments were ill-timed. Yet his views were scarcely surprising. He became head of the Bundesbank in May after Axel Weber resigned because of his discomfort with the ECB’s (then small-scale) interventions in sovereign-bond markets, which were designed to keep credit flowing to banks and businesses. Mr Weidmann’s views are similarly circumscribed by the tenets of German economic thinking: a distrust of policy discretion; an emphasis on the long term; a deep-seated fear of inflation; and an obsession with moral hazard. For Mr Weidmann, rules are paramount. Italy is not in danger of default and can turn itself around and the ECB’s independence must be preserved at all costs.

Bundesbank-watchers say Mr Weidmann’s comments were directed at his domestic audience in Germany, which fears that the ECB is losing its bearings. But was the bank’s new president also among the intended audience? Mr Draghi comes from a different tradition from Mr Weidmann. He completed his PhD in economics at the Massachusetts Institute of Technology (MIT) in the 1970s. His advisers included Stanley Fischer, now head of Israel’s central bank, and Rudiger Dornbusch, a German economist known for his work on currency markets. In that way Mr Draghi shares an intellectual heritage with Ben Bernanke, the Federal Reserve chairman, Olivier Blanchard, the IMF’s chief economist, and Paul Krugman, a New York Times columnist. All are MIT alumni from about the same time.

That background might predispose the new ECB president to the sort of monetary-policy activism that the Fed has gone in for. Yet his worldview is probably closer to Mr Weidmann’s than it appears at first. Italy’s technocratic class is quite Germanic, observes Julian Callow of Barclays Capital, an investment bank. The academic work that suggests budget-cutting is good for growth (a popular belief among German economists) has been largely produced by Italian economists.

An early and influential paper in the literature was co-authored by Francesco Giavazzi, who was at MIT with Mr Draghi and is still a close associate. A chapter of Mr Draghi’s thesis addressed the issue of how an economy can boost its long-term growth when it faces immediate financial pressures.

Moreover, Mr Draghi’s experience in Italy makes him wary of giving politicians a soft option. After a spell in academia and six years at the World Bank, he spent a decade from 1991 as a senior official at the Italian Treasury. There he was in charge of privatisation and managing the public debt, which had exploded in the late 1980s and early 1990s. Italy adopted economic and public-finance reforms only under heavy bond-market pressure. So Mr Draghi will probably be wary of swiftly stepping in to cap Italy’s interest rates. His knowledge of Italian politics, public finances and financial markets may make him willing to play games of brinkmanship, says Marco Annunziata, the chief economist at GE.

Indeed, Mr Weidmann’s strong opposition to ECB purchases of government bonds might even be helpful to Mr Draghi, who said at his first press conference that unlimited lending to governments would be outside the ECB’s remit. If the ECB gives the impression that it will do the minimum to abate the bond-market panic, it would increase the pressure on Italy’s politicians to support a reform-minded cabinet and to push through the right policies quickly. The markets may be panicking but Mr Draghi is said to be calm in a crisis. That calm will sit well with the Bundesbank’s view that panics blow themselves out, and that what matters most is long-term stability. The hope is that reform (and high yields) will tempt buyers back into Italian bonds and that markets will calm down.

Sadly, it seems that panic is not abating but is spreading to the heart of the euro zone and is no longer easily explained by deficits or public debts. Public finances in France are not nearly as bad as in Britain. But yields on French ten-year bonds are now far higher than for the equivalent British bonds (see chart). The growing gap between borrowing costs in Germany and those in other euro-zone countries suggests that investors now fear a break-up of the euro zone.
.As much as reform in Italy and elsewhere is needed, it seems unlikely that promises to be austere will halt what looks like a run from all euro-zone bonds but German ones. The ECB, despite its misgivings, is the only institution with the power to reverse a self-fulfilling panic. If the pressures become so great that a break-up of the euro seemed likely, could even the Bundesbank really say no?


Voters versus creditors

Market discipline works when other controls fail

Nov 19th 2011

ANGELA MERKEL, the German chancellor, spoke for many Europeans when she said last year that “We must re-establish the primacy of politics over the markets.” The Europeans created the euro to prevent the crises caused by currency speculators, only to find themselves pushed around by bond investors.

Politicians have often cursed the markets. Harold Wilson, a British prime minister, used to fulminate against the “gnomes of Zurich” who speculated against the pound. In the mythology of the British Labour Party, a “bankersramppushed the party out of office in 1931. James Carville, a political adviser to Bill Clinton, wanted to be reincarnated as the bond market so he could “intimidate everybody”.
In theory, there is an easy answer. If you don’t want to be bothered about the bond markets, don’t borrow from them. The finance ministers of Norway and Saudi Arabia have no cause to worry about their borrowing costs because they are net creditors.

Not all nations can be creditors, of course. But John Maynard Keynes’s plans for the post-1945 monetary system were aimed at limiting the imbalances that arose in the interwar system, and have popped up again in the past 20 years. Since this involved restricting the rights of surplus nations, his plans were circumscribed by Washington, a nice irony now that America is a debtor nation.

After the Bretton Woods system collapsed in 1971, trade imbalances ceased to be much of a constraint on the developed world. Financial markets seemed happy to provide the money to allow countries to run deficits on both the fiscal and trade accounts. This may have led to a fatal complacency on the part of governments, which assumed that their credit was limitless. But rather like Northern Rock, the British bank that became too dependent on the wholesale markets for funding and collapsed in 2007, countries such as Greece and Italy have discovered that investors can suddenly withdraw their favours.

Is the latest run the action of speculators, as Silvio Berlusconi mused in his farewell statement? On the contrary, the sell-off is probably down to caution. The Greek debt deal required private-sector investors to take a 50% hit, while official investors would be repaid in full. This made private-sector investors worry about potential losses elsewhere. They have shifted their assets into the perceived safety of Germany and Britain. In addition, it seems that banks are selling off bonds in an attempt to shrink their balance-sheets and meet new rules designed to make them safer.

Countries can escape from the tyranny of the markets by turning to official lenders: other countries, the International Monetary Fund or the European Financial Stability Facility. But such creditors are just as keen on extracting their pound of flesh (in terms of economic reform) as the private sector.

Vague plans for a fiscal union seem to depend on a bargain in which Germany agrees to transfer money to debtor countries but the debtors agree to limits on their ability to run a deficit. This implies that someone in Brussels (or Frankfurt) will have a veto over a debtor country’s budget.

In short, having lost their ability to control their monetary policy, voters may have to lose control over their fiscal policies as well. National politics will be reduced to dealing with social issues, such as smoking bans.
Perhaps this is inevitable. Just as voters cannot repeal the laws of gravity, they cannot insist that foreign creditors lend them money. Domestic wealth, alternatively, can be taxed or confiscated, although this is a strategy that is likely to be successful only in the short term or during national emergencies such as the second world war. Capital controls worked under the Bretton Woods system but it is not clear whether they can be enforced in an age where money can be transferred through the click of a mouse.

The prospect of financial ruin was one reason why many people feared the introduction of democracy. “The ignorant majority, when unrestrained by a superior class, always sought to tamper with sound money,” said Thomas Hutchinson, a lieutenant governor of Massachusetts in 1753. Alexander Hamilton described the progressive accumulation of debt as “perhaps the natural disease of all governments.” Over the centuries, countries have tried various rules—the gold standard, balanced-budget requirements, independent central banks—in an attempt to limit government profligacy. But when those rules fail, the markets assert their own grim discipline.

November 16, 2011
Europe’s Contagion

Two years of gross mismanagement of the euro-zone debt crisis have all too predictably produced a wider crisis of market confidence that now threatens the entire 17-nation euro zone. This week’s formation of new technocrat-led governments in Greece and Italy has not calmed fears. Practically every euro zone country is paying the price in higher interest costs and ebbing economic growth.

The only country that isn’t suffering — yet — is Germany, whose competitive export-driven economy feeds on foreign demand and an exchange rate held down by its neighbors’ troubles. But all European countries cannot be Germany and run net surpluses, especially if Berlin insists on policies that keep factories shuttered and workers unemployed.

And German leaders are wrong if they think their country will remain unscathed as its major trading partners and neighbors unravel.

Chancellor Angela Merkel of Germany has been talking a more pro-European line. But she is still insisting on growth-killing austerity as the price for European bailouts and still blocking the European Central Bank from printing more euros and acting as a lender of last resort.

Mrs. Merkel’s advisers insist that she is doing what the German people want. That is not leadership. She needs to challenge her voters’ simplistic stereotypes of southern European sloth and tell them the truth: The real threat to Germany isn’t inflation; it is an economic collapse across Europe. And Germany has a huge amount to lose from a fracturing of the European Union.

European stock and bond markets are already treating that as an ever-more-realistic possibility, shunning even moderate levels of risk and pushing interest rates to unsustainable levels. As far as they can see, Mrs. Merkel and her fellow euro-zone leaders haven’t come up with an adequate plan, sufficient political will or sufficient cash to halt the contagion. As far as we can see, they are right.

The political changes at the top of Greece and Italy are promising. Greece’s new prime minister, Lucas Papademos, and Mario Monti of Italy are internationally credible economists, committed to making painful but much needed reforms, including liberalizing labor markets, shrinking overgrown bureaucracies, shedding state properties and rooting out corruption.

Given their training, they surely understand that their economies are not now strong enough to absorb more austerity, including broad new taxes or further sweeping service cuts. Mr. Papademos and Mr. Monti should press their fellow European leaders for a new and better deal. Even with the best leadership, neither Greece nor Italy will be able, on their own, to restore their fiscal health and help slow the spreading financial contagion. That will require substantial and immediate help from their euro-zone partners, starting with Mrs. Merkel.

An all-out effort by the European Central Bank to buy bonds, lower interest rates and inject new liquidity into the markets may still calm the contagion if it begins in the next few days. The bank’s new president, Mario Draghi, may be willing to play this role, if Germany stops standing in the way.

Mrs. Merkel must make clear that she will support the central bank taking on this expanded role. And now that new, credible leaders are in office in Athens and Rome, she and other euro-zone leaders need to meet with them and negotiate more growth-friendly reform packages. There is very little time left to avoid financial catastrophe.       

November 15, 2011 8:44 pm

Spain’s new government will ‘have to act quickly’

Mariano Rajoy and
Mariano Rajoy (left), leader of the Popular party, and Socialist prime minister Jose Luis Rodriguez Zapatero

Juan Roig, chairman of the family owned supermarket chain Mercadona, captured Spain’s mood with characteristic bluntness when he made a prophetic comment about the country’s economy in March. “The year 2011 has one good thing going for it,” he said. “And that is that it’s better than 2012.”

Spaniards are desperate for change. They have endured more than three years of economic crisis that began with the collapse of Lehman Brothers in 2008 and led to bail-outs of Greece, Ireland and Portugal, followed by last week’s ousting of George Papandreou and Silvio Berlusconi, prime ministers of Greece and Italy. In the meantime, they have been squeezed by welfare cuts, reduced wages for civil servants and higher taxes.

Now Spain looks set to be the next eurozone country to throw out an incumbent government tainted by the way it has managed the crisis. In a general election on Sunday, Spanish voters are predicted by opinion polls to deliver a resounding victory to Mariano Rajoy and his centre-right Popular party (slogan: “Join the change”) after seven years and two Socialist administrations under José Luis Rodríguez Zapatero.

Mr Zapatero accepted months ago a change of government was inevitable when he stepped down as his party’s candidate and called the early election amid the escalating sovereign debt crisis, but even the prospect of a more technocratic administration from December has not soothed investors, who are now wary of almost any eurozone bonds except Germany’s.

At a Treasury bill auction on Tuesday Spain paid more than 5 per cent in annual interest to borrow money for a year, higher than the rate it paid for 10-year bonds only last month. Spanish bond yields, like those of Italy, are close to euro-era highs.

Spain, together with Italy, is therefore perilously close to needing a bail-out that neither the European Union nor the International Monetary Fund could afford and that could end in a financially catastrophic break-up of the euro. Spain is also saddled with 5m unemployed, equivalent to more than 21 per cent of the workforce, and recorded zero economic growth in the three months to September. The election campaign has been focused on domestic issues, but Mr Rajoy, if elected, will have to convince the bond markets and Spain’s European partners – and his fellow citizens – that he can engineer a recovery.

To understand what went wrong – and the scale of the challenges a new government will face – it is worth examining a Mediterranean region such as Valencia, where Mr Roig and Mercadona are based. Valencia displays many of the worst symptoms of the Spanish economic disease – a variant of the affliction that has struck parts of the eurozone and other western countries.

In the years until the market peaked in 2007, property developers built tens of thousands of homes and holiday apartments, spawning grandiose infrastructure projects, sucking in immigrant labour and luring teenagers out of school to take on well-paid building jobs.

These were the years that seemed to confirm Spain’s status as a developed nation whose living standards had finally caught up with those of its European partners.

Each “peripheraleurozone nation handled the bonanza of easy credit from northern Europe in a different way. Successive Spanish governments at least invested in road and rail infrastructure that will serve the country well for decades to come, but also turned a blind eye to the follies of an overheated construction market.

It was, says Francesc Colomer, an ethics teacher turned Socialist politician and now the party’s leader in the Valencian province of Castellón, “the prodigal decade”. He likens the tale of Castellón’s new but empty €150m airport, and the unbuilt Mundo Ilusión theme park and housing estates that were to have supported it, to the Milkmaid’s Tale, an Aesop’s fable popular in Spain in which the girl dreams of a succession of increasingly lucrative business ventures starting with butter and ending with a successful marriage – before she drops the milk.

Valencia, like much of the rest of Spain, is now suffering the combined effects of the bursting of the country’s domestic housing bubble and the sovereign debt crisis that swept across the southern and western fringes of the eurozone shortly afterwards.

“We’ve had more than 10 years’ warning here in Valencia and in Murcia that we can’t base everything on the monoculture of construction,” says Mr Colomer, lamenting the “pharaonic caprice” of the theme park plan and the emblematic tragedy of Castellón airport. “We have an empty airport and we have nothing of the industry, of the dynamism, of the activity that justified its existence.”

One person in four in the Valencia region is unemployed, and for those under 25 the number rises to one in two. Companies that profited from the construction bonanza have been hard hit. More than 130,000 new homes lie empty.

Two of the region’s banks are struggling under the weight of bad loans. Banco Cam, the old Caja Mediterráneo, was bailed out with €2.8bn of taxpayers’ money and its director-general fired by the official bank rescue fund. Banco de Valencia, a listed bank, might also need a bail-out, according to Elena Salgado, the Spanish finance minister.

Francisco Camps, the Valencian regional premier, has resigned and faces trial on a charge of bribery. Prosecutors allege he received at least a dozen expensive suits in exchange for awarding event management contracts, but he says he is innocent.

For those unfamiliar with the political geography of Spain, it might seem obvious that Mr Rajoy and the PP are the right team to sweep away the policies and practices that have so evidently failed Valencia and the rest of Spain under the Socialists during the crisis.

Unfortunately, it is not as simple as that. Mr Camps is from the PP and it has run Valencia since 1995 under the highly devolved political system. Indeed, so strong is the PP in Valencia that, despite the party’s problems in the region, the normally undemonstrative Mr Rajoy leapt into the air at a rally there on Sunday and said publicly for the first time he thought his party would win the election.

Yet the power of the regions (some of those run by the Socialists have been equally wasteful) is only one of the obstacles Mr Rajoy will face if he defeats Alfredo Pérez Rubalcaba, the Socialist candidate. Assuming the polls are right and the PP wins an absolute majority in the lower house of parliament, Mr Rajoy could immediately come under intense pressure from the bond markets to show that he can transform Spain’s economic prospects. Pressure, in fact, is already being applied, with the 10-year bond yield rising above 6 per cent on Monday for the first time since the European Central Bank started buying Italian and Spanish bonds in summer to try to soothe investors concerned about the eurozone.

People talk about the dictatorship of the market and it’s true that markets are very cruel and very tough,” says Jordi Canals, dean of Iese, a Barcelona-based business school. Things are changing really quickly and I think the new government will have to act very, very quickly.”

Mr Rajoy has unveiled a 100-point programme of reforms, almost half of them dealing with the economy. He says the party’sobsession” is to create jobs with the help of incentives for small businesses, changes to labour laws and a complete overhaul of a collective bargaining system that dates back to the Franco era.

Without giving too many details for fear of alienating crisis-weary voters, Mr Rajoy has also promised to accelerate a clean-up of the banking system and pursue the budgetary austerity programme begun by Mr Zapatero.

“The situation we confront is difficult, perhaps the toughest that a government will have had to face in the democratic era,” Mr Rajoy said in a speech on the campaign trail.

As in other struggling European economies, the incoming government will have to impose the austerity demanded by financial markets without throttling the economic growth needed to help finance the budget and cut public debt, while simultaneously earning popular support at home and generating confidence abroad.

In its favour, the PP under the uncharismatic Mr Rajoy has overwhelming support from Spanish business leaders who accuse Mr Zapatero of economic incompetence.

Asked if Mr Rajoy, 56, who held various portfolios in the PP governments of José María Aznar between 1996 and 2004, would act boldly to save the Spanish economy, the head of one of Spain’s biggest companies said: “He has no sex appeal, so it’s difficult for him to entice voters to vote for him. But his record as a public administrator is good.”
.. . .
.Another advantage for the next government is the robust performance of Spain’s tourism businesses and its industrial exporters, whose successes have helped to cut the country’s current account deficit from 10 per cent of gross domestic product in 2007 to less than 4 per cent forecast for this year.

While Spain’s construction-heavy domestic economy is notorious for having lost competitiveness since the advent of the euro a decade ago, the country has maintained its market share of world exports since 1999.
Spain is not a competitiveness problem, it’s a construction problem,” says Jacques Cailloux, chief European economist at Royal Bank of Scotland.
This suggests, according to Iese’s Prof Canals, that a new government could restore confidence in Spain provided it creates jobs, persuades the whole country to embrace austerity and hard work, rationalises the public sector and lays out a strategy for economic growth just as both the Socialists and the PP did – in 1985 and 1996 respectively – after previous crises.
Mr Roig attributes Spain’s poor image abroad to the fact that it has lived beyond its means. The crisis, he said when he made his gloomy prediction for next year, “will end when the country’s productivity corresponds to its living standards”.
From Sunday, it is likely to fall to Mr Rajoy to engineer that adjustment to the satisfaction of two very different constituencies: the Spanish people and the international bond markets. No one thinks it will be easy.
ZAPATERO’S LEGACY: social reforms likely to survive
José Luis Rodríguez Zapatero, the Socialist prime minister who will step down after Sunday’s election, has never been enthused by economic policy. He responded dutifully to the 2008 crisis, however, first with stimulus measures and then with austerity programmes, writes Victor Mallet.

On social issues, however, he is passionate. Mr Zapatero’s mood would brighten when interviewers at the prime minister’s Moncloa palace turned their attention from budget deficits to women’s rights or abortion.

“The gay marriage law has actually made me feel extremely proud,” he told the Financial Times last year when asked whether he had polarised Spanish society with the social legislation enacted since he first won power in 2004.

“We were told that we were killing the family in Spain and yet the Spanish family is in rude health, and a lot more people are happy. We’ve managed to recognise the right of people who have been discriminated against and harassed for many years because of their sexual orientation, and I hope that is an unstoppable trend in advanced societies.”

This and other social laws – including one decriminalising abortion, another on equality of the sexes and yet another to allow accelerated divorcesangered some conservative Roman Catholics and members of the opposition Popular party.

The PP is expected to win a sweeping victory on November 20, but opinion polls suggest voters will punish the Socialists for high unemployment and other economic failures, not because abortion is easier.

Mariano Rajoy, PP leader, has tried to move his party to the centre and attract undecided voters, including young, socially liberal Spaniards who might previously have voted for the Socialists. The best way to succeed, his advisers say, is to create jobs and govern competently.

That is why Mr Rajoy has been reluctant to yield to the PP hardliners by promising any wholesale reversal of Mr Zapatero’s liberal legacy. His most specific commitment is to tweak the abortion law to prevent 16 and 17-year-old girls undergoing the operation without the consent of their parents.

Mr Zapatero’s reputation as an economic manager is just another piece of wreckage in the ruins of the eurozone sovereign debt crisis. But his social reforms are likely to remain largely intact.
Copyright The Financial Times Limited 2011.