Welcome to the Mexican Paradox.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Mexico is nothing if not a land of bewildering contrasts. Economically speaking, the country is a regional powerhouse. On the one hand, it boasts one of the richest “official” billionaires on the planet; on the other, some of the worst income inequality rates in the Western hemisphere. It places 20th on the list of countries with the most millionaires but it’s also home to the 15th largest population of poor people on the planet.
A new study released this week reveals that the wealthiest Mexicans, equivalent to 1% of the population, own roughly the same amount of wealth as 95% of the people further down the wealth scale.
The study, titled “The Distribution and Inequality of Financial and

“Significant economic damage” is a “price worth paying.” But businesses are not so sure.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Europhiles hoping that time might heal or at least narrow the rift separating the UK and the EU after last year’s Brexit vote are likely to be sorely disappointed by the findings of a new poll jointly conducted by Oxford University and London School of Economics.
The survey reveals that there is more support for harder Brexit options because Leavers and a substantial number of Remainers back them. The survey’s findings bolster the case for the hard-Brexit-or-nothing position favored (at least publicly) by British Prime Minister Theresa May. The alternative — a so-called “soft” Brexit — would imply having to accept full freedom of

Tourism is now bigger than construction was during the real estate bubble.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Since hitting rock bottom in 2013, Spain has been one of the biggest engines of economic growth in Europe, expanding at around 3% per year. But according to a report by the Bank of Spain, most of the factors behind this growth — such as cheaper global oil prices, the ECB’s expansionary monetary policy, and the subsequent decline in value of the Euro — are externally driven and transitory in nature.
This is particularly true for arguably the biggest driver of Spain’s economic recovery, its unprecedented tourism boom, which some local economists are finally beginning to call a bubble.
In large part the boom/bubble is a result of the recent surge in

Footloose hot money that has flooded Mexico can quickly dry up.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
After several consecutive months of predominantly positive developments, including the governing Institutional Revolutionary Party’s recent electoral victory in its key state, Estado de Mexico, the outlook for Mexico’s economy is no longer negative; it’s stable. That’s according to rating agencies, Fitch and Standard’s & Poor.
It’s a remarkable turnaround for a country that began the year in the most ominous fashion, with a crumbling currency, surging inflation and a popular revolt against gasoline price hikes.
But the peso, after plumbing to new depths of 22 pesos to the dollar on January 19, has clawed its way back to 17.8 pesos to the dollar– a 22% surge in

Even Italian banks are dumping Italian government bonds.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
New statistical data from the investment bank Jefferies LLC has revealed a startling new trend that could have major implications for Europe’s economic future: Italian banks have begun dumping unprecedented volumes of Italian sovereign debt.
Holdings of government debt by Italian financial institutions slumped by a record €20 billion in June — almost 10% of the total — after €9.4 billion of sales in May. As the FT reports, the selling by Italian banks is the most emphatic example yet of a broader trend: banks sold €46 billion of government paper in June across Europe, taking the total reduction since the start of this year to €257 billion.
The banks’ mass sell-off is

“Why did no one senior at the company say, ‘This will come back to haunt us’?”
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Fallout from he UK’s ground rents scandal, which we reported on a week ago, is beginning to take a financial toll on some of the companies most implicated in it. That includes the country’s third largest home builder, Taylor Wimpey, which took a 24% hit to first-half profits after setting aside £130 million ($170 million) to help home buyers affected by the leasehold scandal. The government is investigating. Depending on how new legislation and pending lawsuits pan out, the company could end up owing a whole lot more.
Leaseholds have been around in the UK for centuries and are commonly used for apartment buildings, where there’s some semblance

It’s not just the weather that’s heating up in Spain’s second city.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
It’s finally happened. After years of surging public opposition to unrestrained growth of the city’s tourist industry, Barcelona has witnessed a rash of coordinated attacks against tourist targets in the last week. It all began last Friday when a gang of four masked men slashed the tires of an open-top bus filled with holidaymakers and sprayed the windscreen with the slogan “Tourism kills neighborhoods.”
Responsibility for the ambush was claimed by Arran, the youth wing of the radical separatist CUP (Popular Unity Candidacy) party, which was also behind a video posted this week of members vandalizing tourist bicycles. In recent months at least seven hotels

Where Did All the Workers Go?
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Two years ago, the total number of unemployed in Spain, officially speaking, was 5.5 million — the equivalent of 23.2% of the country’s active population. It was the second-highest unemployment rate in the EU, far worse than third-place Hungary (18.5%) but not quite as terrible as Greece (26%).
At that time, Spain was also proud home to the five European regions with the worst levels of unemployment. At the top of the heap was the southern province of Andalusia whose unemployment rate was close to 35%! Even fifth place, Castilla-la Mancha, had an unemployment rate of 29%.
Now, after two years of consecutive quarters of robust GDP growth and an unprecedented tourist boom, things appear to have

Desperate Times, Desperate Measures.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Following a spate of drastic banking interventions in Spain and Italy earlier this summer, the European Commission is preparing new legislation to prevent bank runs from completely wiping out Europe’s hordes of zombified lenders. According to an Estonian document seen by Reuters, that legislation would include measures allowing EU governments to temporarily stop people withdrawing money from their accounts, including by electronic fund transfers.
The proposal, which has been in the works since the beginning of this year, comes less than two months after a run on deposits pushed Banco Popular over the brink in Spain. In its final days, Popular was bleeding deposits at a rate of €2 billion a

The Global Rentier Economy is now on steroids.  
By Don Quijones, Spain, UK, Mexico, editor at WOLF STREET.
Imagine buying a house with a 30-year mortgage only to discover months later that you have to pay rent on the ground upon which it is built. That rent can go up just about as high and as fast as the real owner wants it to. Plus, if you want to make any structural changes to the building you’ve bought but don’t own, you must first seek permission from the owner; if he or she concurs, you then must pay a hefty fee.
Absurd as this arrangement may sound, it is surprisingly common in the United Kingdom today. Banished from most advanced economies, including those with English common law like Australia, North America, or even Scotland, this archaic leasehold arrangement has in

Will Spain’s central government blink (again)?
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Madrid’s standoff with Spain’s north eastern province of Catalonia, which plans to hold a forbidden referendum on national independence on October 1, grows more and more complex by the day. Just in the last week alone the following developments have taken place:
Spain’s Civil Guard has raided Catalonia’s parliament and government HQ as part of its investigation into political corruption in the region. As new research has shown, this investigation forms part of a broader police operation that has served as a means for Spain’s governing People’s Party to spy on political rivals.
Catalonia’s government has replaced the region’s chief of police with a die-hard separatist. It has also

More than just a few “fallen angels.”
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
As part of its QE operations, the ECB continues to pour billions of freshly created euros each month into corporate bonds – and sometimes when it buys bonds via “private placements” directly into some of Europe’s biggest corporations and the European subsidiaries of non-European transnationals. Its total corporate bond purchases recently passed the €100 billion threshold. And it’s growing at a rate of roughly €7 billion a month. And it’s in the process of becoming the biggest “bad bank.”
When the ECB first embarked on its corporate bond-buying scheme in March 2016, it stated that it would buy only investment-grade rated debt. But shortly after that, concerns were raised about what might

Oh the irony: EU capitals are trying to attract the very institutions that caused some of the worst financial scandals of the last ten years.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
In a sign of growing desperation, the City of London Corporation, the enigmatic city within the city that serves as the ultimate bastion of privilege in the UK, is now trying to appeal to brute populist sentiment to defend its position as the world’s most important financial center.
In a memo to the British Treasury, MPs, and financial institutions, the City’s Brexit envoy to the EU, Jeremy Browne, bemoaned that the French are pushing for the most damaging Brexit possible, even if France doesn’t directly benefit. The memo was duly leaked to one of the UK’s most anti-EU newspapers, The

What will Draghi do? 
After two controversial bank rescue operations that stretched Europe’s bank resolution laws beyond recognition, things are beginning to look a little less desperate for Italy’s banking sector. The initial market reaction to the interventions has been overwhelmingly positive. For the first time in years Italian banks are leading Europe’s Stoxx 600 bank Index — upwards, not downwards.
Even the recent announcement of a capital raising and bad-loan sale plan by troubled bank Banca Carige was met with enthusiasm, sending its shares up 30%.
One of the Italian banking sector’s biggest problems — its sky-high bad loan ratio — will soon be under control, claimed Bank of Italy Governor Ignazio Visco in a recent speech to the Italian banking association. The interventions

But the IMF has suggestions on how to win the War on Cash.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
In January 2017 the European Commission announced it was exploring the option of imposing upper limits on cash payments, with a view to implementing cross-regional measures as soon as 2018. To give the proposal a veneer of respectability and accountability the Commission launched a public consultation on the issue. Now, the answers are in, but they are not what the Commission was expecting.
A staggering 95% of the respondents said they were opposed to a cash ceiling at EU level. Even more emphatic was the answer to the following question:
“How would the introduction of restrictions on payments in cash at EU level benefit you, or your business or your organisation

“You could sell ten flats in a day” to Chinese investors on real estate excursions.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
A few blocks from where I live in the solidly middle class (but gentrifying) Eixample Dreta district of Barcelona, a newly renovated modernist building is about to be inaugurated. Outside the building is a huge billboard displaying some of the lavish charms offered by the refurbished apartments inside, including Jacuzzis, spacious roof terraces, a swimming pool, and an elegantly attired concierge. The images are headed with cheesy aspirational slogans like “Art, Prestige, Life” and “A Dream to Live In.”
Not a single word of the ad is in Catalan or Spanish, the two official local languages. Everything is in English.
These properties are not meant

And this might become a problem for the Fed.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
ECB President Mario Draghi wields more power than just about any other public official in Europe, perhaps even including Angela Merkel. The organization he heads not only controls the monetary policy levers of the entire Eurozone, it also supervises the region’s 130 biggest banks. As we’ve seen in recent weeks, it even has the power to decide which of Europe’s struggling banks get to live and which don’t.
Yet it is answerable to virtually no one. Until now.
Emily O‘Reilly, the EU Ombudsman, an arbiter for the public’s complaints about EU-institutions, has just sent Draghi a letter asking him to explain his role in the potentially compromising Group of Thirty (G30) and how he makes

Markets are still complacent.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Even if you take into account the ECB’s binge buying of public debt in the Eurozone, the degree of complacency of market players over Catalonia’s worsening ties with the Spanish government — and any potential financial fallout — is surprising. Spain’s northeastern province can no longer issue its own debt, which is in deep junk territory, and depends on the central government’s national liquidity fund (FLA) for about 60% of its funding. Moody’s warned if Catalonia defaults, given the debts it owes Spain, markets would see it as a Spanish default.
Fitch Ratings warned in April that Catalonia has grave liquidity problems that will require “proactive management” and “close collaboration with the

Only two things keep these banks alive: “a State willing to support them and a regulator that does not declare them insolvent.”
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Dozens of Greek, Italian, Spanish and even German lenders have volumes of troubled assets higher or similar to that of Spain’s fallen lender Banco Popular. They, too, are at risk of insolvency. This stark observation came from Bridget Gandy, director of financial institutions for Fitch Ratings, who spoke at a conference in London on Thursday.
The troubled banks include:
Greece’s HB, Piraeus, NBG, Eurobank and Alpha;
Italy’s Monte dei Pachi di Siena (which is in the process of being rescued with state funds), Carige (9th largest bank, now under ECB orders to raise capital or else), CreVal, and the two

What would a disorderly bank collapse in Spain and Italy have done?
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
New information has revealed just how serious a threat a disorderly collapse of Spain’s sixth largest bank, Banco Popular, might have posed to Spain’s banking system. In its final days, Popular was bleeding deposits at a rate of €2 billion a day on average.
Much of the money was being withdrawn by institutional clients, including global mega-fund BlackRock, Spain’s Social Security fund, Spanish government agencies, and city and regional councils, prompting accusations that Spain’s government was using insider knowledge to withdraw large amounts of public funds, which of course hastened Popular’s demise.
All the while, Spain’s Economy Minister was telling the

Organized criminals from Russia are subletting apartments to tourists, as locals struggle with soaring rents.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Relations between the ultimate disruptor of global tourism, Airbnb, and Barcelona City Council just took another turn for the worse following news that organized criminals from Russia are making massive profits by subletting apartments in Barcelona to tourists through the online site.
For the San Francisco-based company, any further damage to its Barcelona market could be very costly. With over 23,000 registered dwellings, the city is far and away the most important Spanish destination for the platform’s users and the sixth biggest in the world, behind Paris (1), London (2), New York (3), Rio (4) and Los Angeles (5),

This is how desperate the Italian Banking Crisis has become.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
When things get serious in the EU, laws get bent and loopholes get exploited. That is what is happening right now in Italy, where the banking crisis has reached tipping point. The ECB, together with the Italian government, have just this weekend to resolve Banca Popolare di Vicenza and Veneto Banca, two zombie banks that the ECB, on Friday night, ordered to be liquidated.
Unlike Monte dei Pachi di Siena, they will not be bailed out with public funds  only. Senior bondholders and depositors will be protected. Shareholders and subordinate bondholders will lose their shirts. However, as the German daily Welt points out, subordinate bondholders at Monte dei Pachi di Siena

Even the “elite” is not totally on board.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
2017 has been a surprisingly kind year for the European Union — so far! Staunchly pro-EU candidates not only survived the gauntlet of national elections in France and the Netherlands but emerged triumphant. The once-imminent threat of political populism is now on the wane, we are led to believe. As if to prove that point, even the UK government is struggling to preserve a united front to see out Brexit after recent elections delivered a hung parliament.
The governments of the EU’s two core nations, Germany and France, appear to share a unified sense of purpose. Merkel has expressed a willingness to go along with two central French demands — the appointment of a Eurozone finance minister

They know: the Eurozone would plunge into a sovereign debt crisis all over again, only worse this time.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
These days it’s easy to tell when general elections are approaching in Germany: members of the ruling government begin bewailing, in perfect unison, the ECB’s ultra-loose monetary policy. Leading the charge this time was Finance Minister Wolfgang Schaeuble, who on Tuesday urged the ECB to change its policy “in a timely manner”, warning that very low interest rates had caused problems in “some parts of the world.”
Werner Bahlsen, the head of the economic council of Merkel’s CDU conservatives, was next to take the baton. “The ongoing purchase of government bonds has already cost the European project a great deal of credibility

At first, deny, deny, deny. Then taxpayers get to bail out bondholders.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Spain’s Banco Popular had the dubious honor of being the first financial institution to be resolved under the EU’s Bank Recovery and Resolution Directive, passed in January 2016. As a result, shareholders and subordinate bondholders were “bailed in” before the bank was sold to Santander for the princely sum of one euro.
At first the operation was proclaimed a roaring success. As European banking crises go, this was an orderly one, reported The Economist. Taxpayers were not left on the hook, as long as you ignore the €5 billion of deferred tax credits Santander obtained from the operation. Depositors and senior bondholders were spared any of the fallout.
But

Stockholders and junior bondholders fear a “bail-in.”
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
After its most tumultuous week since the bailout days of 2012, Spain’s banking system is gripped by a climate of fear, uncertainty and distrust. Rather than allaying investor nerves, the shotgun bail-in and sale of Banco Popular to Santander on Tuesday has merely intensified them. For the first time since the Global Financial Crisis, shareholders and subordinate bondholders of a failing Spanish bank were not bailed out by taxpayers; they took risks in order to make a buck, and they bore the consequences. That’s how it should be. But bank investors don’t like not getting bailed out.
Now they’re worrying it could happen again. As Popular’s final days showed, once confidence

Many Banco Popular investors wiped out. Taxpayers off the hook. What it means for Italy.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Banco Popular, until today Spain’s sixth biggest bank, is no more. Its assets, including a massive portfolio of small-business clients, now belong to Banco Santander, Spain’s biggest bank. The global giant now has 17 million customers in Spain, a country of just 45 million people. The price was €1.
Spain’s Ministry of the Economy revealed that by 3 pm Tuesday, Popular was no longer able to contain the deposit outflow. “It had exhausted all its lines of liquidity, both ordinary and extraordinary.” It had run out of collateral to cover any further lines of emergency liquidity.
This apparently triggered the intervention by the ECB’s Single

Has the time finally come to test the EU’s bail-in law?
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
The shares of Spain’s sixth biggest bank, Banco Popular, plunged 36% this week to €0.43, reducing the bank’s market capitalization to €1.7 billion. Just three weeks ago, when there was still a glimmer of hope that things could be turned around, it was worth almost double that. Its shares traded at €15 ten years ago, before the collapse of Spain’s mind-boggling housing bubble that left Popular holding billions of euros of real estate assets.
Popular may not be a systemically important institution, but it’s nonetheless an institution of great import. It has the largest portfolio of small business customers in Spain and enjoys the patronage of one of Spain’s most influential

The government’s giant debt is already “vulnerable to market turbulence.”
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
For the last five months, Italy’s third largest bank, Monte dei Paschi di Siena, has been locked in talks with the Italian government, the European Commission and the ECB’s regulatory arm, the Single Supervisory Mechanism, over the design of a taxpayer-funded rescue. The negotiations have no led to a preliminary rescue deal, prompting speculation that Italy’s banking sector may finally be on the mend. But the progress has been painfully slow and as time drags on, the deep-seated problems affecting Italy’s broader banking system continue to metastasize.
Bank of Italy Governor Ignazio Visco warned on Wednesday that weaker Italian banks that will probably

“This sales process is atypical, as the seller itself cannot at this point make a rough calculation of what the value of the entity is, and if they can’t, neither can we.”
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
The current share price of Spain’s sixth biggest bank, Banco Popular, at €0.67, is just pennies above its lowest point ever. According to analysts at 20 different investment banks consulted by Bloomberg, the “objective” value of those shares could be anything from €1.50 (Oddo & Cie) to €0.25 (Kepler Cheuvreux).
There’s good reason for this uncertainty: Popular’s books are filled with impaired real estate assets that date back to before the collapse of Spain’s gargantuan real estate bubble. They are now in varying stages of decomposition. And the prices at