Preliminary results show that India’s moderate Congress Party has swept national elections, re-electing Prime Minister Manmohan Singh with a parliamentary majority which promises to see much needed political reforms instituted in the world’s largest democracy.  State television says Congress’s alliance has won or is ahead in 263 seats, compared with the BJP’s (154), the Third Front (60) and others (66).

NPR Reports:

Defying almost all predictions of a tight national election, a hung parliament and weeks of political horse-trading, hundreds of millions of Indian voters have given the incumbent prime minister, Manmohan Singh, and his centrist United Progressive Alliance an unexpected and surprisingly decisive victory.

The winning margin was so large that Singh’s Congress party and his closest allies, with 260 seats and two races undecided, came close to a 272-seat majority in the 543-seat parliament. The assumption that India, with its many divisive communities and ideologies, was doomed to weak coalition governments for the foreseeable future was swept away in ballot boxes across the country.

This result has the potential to do away with the tense coalition politics of his last term in which the communists fiercely opposed any reforms put the brakes on moves to free up the economy.

India’s Sensex index gained 17% on the news, forcing the Bombay Stock Exchange to shut down for the day.

Bloomberg reports:

“This is an absolute game changer,” said William Nobrega, the co-author of ‘Riding The Indian Tiger,’ who advises U.S. companies on investing in the world’s largest democracy. “It can truly move India in a much faster pace to where it deserves to be in the global economy.”

Political stability will make India a more attractive investment destination as Singh, 76, seeks the funds to stimulate Asia’s third-largest economy.

“There were so many major initiatives that were sidelined,” Nobrega said. “It will have a phenomenal boost on the Indian economy this year and next.”

Singh is the first Indian Prime Minister to be re-elected to office after serving a full five-year term since first PM Jawaharlal Nehru.

AFP Reports:

As finance minister in the early 1990s, Singh initiated the sea change that began the opening of India’s inward-looking economy to the world, earning him the sobriquet of the country’s economic “liberator.”

A former governor of the International Monetary Fund, Singh became the first Sikh prime minister of [India]… when he was nominated for the job by Sonia Ghandi when the Congress Party returned to power in 2004.

After a heart bypass operation in January, Singh took only a minor role in the elections, leaving the campaigning to Rahul Gandhi, the heir of the Nehru-Gandhi clan, and his mother Sonia Gandhi, who is president of the Congress party.

Now Singh — a married man with three daughters — is expected by many observers to step aside midway through his new five-year mandate for Rahul.

In what could amount to extraordinarily serious and dangerously destabilizing global event, the government of India announced today that Pakistani extremists may already be in  control of nuclear weapons sites in Pakistan.  This is particularly concerning given that Pakistan already has the world’s worst record for proliferation of nuclear technologies to date.  (In 2004 the founder of Pakistan’s nuclear program,  A.Q. Kahn confessed to being involved with a clandestine international network which was engaged in proliferation of nuclear technologies to Iran, North Korea and Libya — and is believed to have supplied Iran and North Korea with gas centrifuges and uranium hexaflouride.)

The Times of India reports:

India’s Prime Minister Manmohan Singh has told President Obama that nuclear sites in Pakistan’s restive frontier province are “already partly” in the hands of Islamic extremists, an Israeli journal has said, amid considerable anxiety among US pundits here over Washington’s confidence in the security of the troubled nation’s nuclear arsenal.

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There was no official word from either Washington or New Delhi about the exchanges, with India in the throes of an election and US winding down for the weekend. But US experts have been greatly perturbed in recent days about what they say is Washington’s misplaced confidence in, and lackadaisical approach towards, Pakistan’s nuclear assets. The disquiet comes amid reports that Pakistan is ramping up its nuclear arsenal even as the rest of the world is scaling it down.

“It is quite disturbing that the administration is allowing Pakistan to quantitatively and qualitatively step up production of fissile material without as much as a public reproach,” Robert Windrem, a visiting scholar with the Center for Law and Security in New York University and an expert on South Asia nuclear issues told ToI in an interview on Thursday. “Iraq and Iran did not get a similar concessions… and Pakistan has a much worse record of proliferation and security breaches than any other country in the world.”

Windrem, a former producer with NBC whose book “Critical Mass” was among the first to red flag Islamabad’s proliferation record going back to the 1980s, referred to recent reports and satellite images showing Pakistan building two large new plutonium production reactors in Khushab, which experts say could lead to improvements in the quantity and quality of the country’s nuclear arsenal. The reactors had nothing to do with power-production’ they are weapons-specific, and are being built with resources who diversion is enabled by the billions of dollars the US is giving to Pakistan as aid, he said.

Windrem also pointed out that Khushab’s former director, Sultan Bashiruddin Mahmood met with Osama bin Laden and his deputy, Ayman al-Zawahiri, and offered a nuclear weapons tutorial around an Afghanistan campfire, as attested by the former CIA Director George Tenet in his memoir “At the Center of the Storm.” Yet successive US administrations had adopted an attitude of benign neglect towards Pakistan’s nuclear program and its expansion at a time the country was in growing ferment and under siege within from Islamic extremists.

US officials, going up to the President himself, have repeatedly said in public that they have confidence the Pakistani nuclear arsenal will not fall into the hands of Islamic extremists, and they have Islamabad’s assurances to this effect. But scholars like Windrem fear Pakistan’s nuclear program may already be infected with the virus of radicalism from within, as demonstrated by the Sultan Bashiruddin incident.

This comes on the heels of last Wednesday’s announcement by Pakistani president Zardari’s announcement that Pakistan’s nuclear facilities are secure:

As the AP reported last Wednesday:

Pakistan’s president is rejecting concerns that his country’s nuclear arsenal was in jeopardy.

The concerns are prompted by a surge in Taliban activity, and growing instability.

In London today, Asif Ali Zardari said Pakistan’s secret nuclear sites are secure. But he wouldn’t specify what safeguards are in place.

He says “anyone who is responsible in any government” will say that they are not concerned about the situation in Pakistan.

With due respect, Mr. Zardari — it would be the height of irresponsibility to not be overtly concerned at this juncture.  By many accounts, the government of Pakistan is currently perched at the tipping point, and by some estimates could fall to opposition within a matter of days.  .

President Obama has downplayed the situation, calling the threat of proliferation “overblown”.

The Atlanta Journal Constitution reports:

The Pakistani government and President Barack Obama say concern over the security of the nuclear weapons is overblown, and the country’s still-powerful army gives top priority to guarding them.

“I’m confident that we can make sure that (they are) secure,” Obama told reporters last week, adding the army “recognizes the hazards of those weapons falling into the wrong hands.”

But we must address the semantics of “proliferation”.  At this time, the potential of an outright theft of an intact nuclear weapon is likely to be an extremely low-level threat (although India’s announcement today certainly raises the threat level), and actually launching a missile would be impossible without acquiring centralized control.  Furthermore, it is believed that Pakistan’s nuclear arsenal is stored in an incomplete, disassembled state for security reasons, with warheads and missiles stored separately (although one must assume, within some geographic proximity).

Complicating the matter of monitoring the situation, is that Pakistan’s nuclear arsenal is stored on Soviet-style mobile launchers and rail-freight lines — making sattelite tracking of Pakistan’s weapons difficult for foreign intelligence agencies.

But “proliferation” of dangerous radioactive materials is indeed a real threat at this time .

Reuters reports:

Two scenarios are particularly worrying, analysts say.

If the Taliban encroached close to an area where warheads are stored, the military may feel it needs to try to move them — and the convoy could be vulnerable to capture.

“The Pakistani military say their procedures for moving nuclear weapons are very well thought out, but that is always a weak point, moving your nuclear assets,” Kuusisto said.

The second, and likelier, scenario would be that despite the vetting procedures in place, Taliban or al Qaeda sympathisers managed to get employed in a nuclear facility and were able to steal enriched uranium or other radioactive material.

Vetting of personnel can never be foolproof.

“What chills me is that the military says personnel assigned to sensitive nuclear facilities are all vetted by the Pakistan intelligence service,” said Steve Vickers, president and chief executive of FTI-International Risk and a former head of criminal intelligence for the Hong Kong police.

Now, in light of the government of India’s statement that “nuclear sites” may already be compromised, we must ask specifically which scenario they are describing?  Neither one of course, bodes well for global stability or for keeping the lid on the nuclear genie.

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Abdullah Toukan and Anthony Cordesman of the Center for Strategic and International Studies have produced an extensive and detailed strategic  analysis of Israel’s offensive options regarding a military strike on Iran’s nuclear facilities.   The 114 page study examines in exhaustive detail, all available data on Israel’s offensive capabilities, Iran’s arial defense capacities, Iran’s nuclear technology and the respective long range missile arsenals of both nations.

The report’s conclusion: “A military strike by Israel against Iranian nuclear facilities is possible … [but] would be complex and high-risk and would lack any assurances that the overall mission would have a high success rate”.

Complicating any military operation are the following factors:

1. Intelligence regarding underground or secret enrichment facilities is incomplete. As such, the strategic effectiveness of a 100% destruction of  known facilities cannot be precisely determined — since unknown facilities could potentially survive an Israeli strike.
2. Israeli intelligence regarding a completion date for an Iranian weapon is imprecise. Estimates vary between 2009 and 2012.   US intelligence estimates put a completion date closer to 2013.    The date is important because Israeli estimates favor a strike sooner than later.  The window of opportunity may already be closing.  It is widely agreed that no strike can or will occur after Iran has obtained a nuclear weapon.

While issue #2 above raises the question of “when”, it is issue #1 that presents the greater challenge:  Is any strike likely to be effective?

A Partial Strike?

To this question Toukan and Cordesman introduce the scenario of a partial strike:  What if only the three primary sites for nuclear research and refinement were destroyed?  Would there be any effective strategic result from a partial destruction of Iran’s nuclear facilities?   The study examines a likely scenario involving the destruction of the installations at Arak (plutonium production), Isfahan (uranium enrichment) and Natanz (heavy water production).  The study estimates that the destruction of these primary facilities would set Iran’s program back by only a few years.

Offensive Requirements

The study estimates that a strike on Iran’s nuclear infrastructure would require at least 90 aircraft in total, including:

1. All 25 F-15E’s
2. Approximately 65 F16I/C’s
3. 5 KC-130H’s for re-fueling
4. 4 B-707’s for re-fueling

Flight Routes

A detailed analysis of potential flight paths concludes that the likely flight path would follow the Syrian/Turkish border, traversing Iraq near it’s northeastern territory into Iran.  Additional flight routes over Jordan, Saudi Arabia and Iraq were also analyzed — and although shorter, include more complex political issues.

We believe these political issues to be overstated in the report due to a shared Iraqi, Jordanian and Saudi fear over a nuclear Iran.

Defense Assessment

First, there are fortification issues at Natanz (The facility is buried 8 meters underground and is fortified with a 2.5 meter thick concrete wall.  The centrifuge facility is buried 25 meters underground and has a protective concrete wall which is at least several meters thick).  Israel possesses over 600 US made “bunker busters” which could be used to penetrate the fortifications — bit the efficacy of bunker busters is mitigated by the necessity for extreme pilot accuracy in deployment.

Secondly, there are there are Iran’s considerable arial defense systems.  These include:

1. Batteries of Hawk SA-5 and SA-2 surface-to-air missiles.
2. Rapier, Crotale and Stinger anti-aircraft missiles.
3. 1700 anti-aircraft guns directly protecting the strategic targets.
4. Iran’s 158 combat aircraft
5. The S-300V anti-aircraft defense system supplied by Russia to Iran last year.

The latter is a considerable concern as the S-300V is a highly sophisticated, modern anti-aircraft defense system which could potentially eliminate 20% to 30% of Israeli’s strike aircraft.

Collateral Damage

The report also notes that a strike on Bushehr would result in mass deaths due to radioactive contamination over 100’s of square miles.   Cancer deaths in later years would likely reach the hundreds of thousands.  Additionally, the environmental impact of radionuclides would extend north (due to wind dispersal) to Bahrain, Qatar and the UAE.

Military Response

Iran’s direct military response would likely include a counterattack with Shahab-3 ballistic missiles — which are capable of reaching 100% of Israeli territory.  (There is also a threat of a chemical warheads being used.)

Proxy attacks would also occur through Hamas and more directly Hezbollah — whose missile capacity has been more than restored since the cessation of hostilities during the last conflict.

In addition to the certainty of a direct military response, the report estimates that Iran’s nuclear ambitions would likely emerge undetered — if not accelerated.

Political Impact

The CSIS report summarizes the political fallout from a surprise Israeli attack on Iran’s nuclear facilities succinctly:

It is possible that Israel will carry out a strike against Iranian Nuclear Facilities, if the U.S. does not, with the objective of either destroying the program or delaying it for some years. The success of the Strike Mission will be measured by how much of the Enrichment program has it destroyed, or the number of years it has delayed. Iranian acquisition of enough Uranium or Plutonium from the Arak reactor to build a nuclear bomb.

The U.S. would certainly be perceived as being a part of the conspiracy and having assisted and given Israel the green light, whether it did or had no part in it whatsoever. This would undermine the U.S. objectives in increasing stability in the region and bringing about a peaceful solution to the Arab-Israeli conflict. It will also harm for a very long period of time relations between the U.S. and it‘s close regional allies. [emphasis ours]

Arab States have become extremely frustrated with the U.S. and the West double standard when addressing the Proliferation of Weapons of Mass Destruction in the Middle East. Arab countries will not condone any attack on Iran under the pretext that Iran poses an existential threat to Israel, whilst Israel has some 200 to 300 nuclear weapons, and the delivery means using the Jericho missiles. In addition to Israel still occupying the West Bank and the Syrian Golan Heights.

It is doubtful that an Israeli strike on Iranian Nuclear Facilities would bring Syria into a direct conflict with Israel. Syria knows very well that alone it‘s military forces are no match to Israel. However, proxy actors such as Hizbullah would engage Israel in ant-symmetric attacks, with Syrian and Iranian assistance.

Threat Assessment

Somewhat disturbing in our minds is the report’s assessment of overall risk to Israel in world with a nuclear-capable Iran.  The report weights heavily the deterrent of mutually-assured-destruction should a nuclear capable Iran conduct a nuclear first-strike on Israel, and concludes that even if Iran had nuclear weapons it would likely never use them.

While we agree with Toukan and Cordesman that the threat of a direct nuclear exchange between a nuclear armed Iran and Israel would be mitigated due to the threat of mutually-assured-destruction, one must consider firstly, that Iran’s preferred method of military confrontation with Israel  has been indirect and by proxy of well-known extra-national military groups; and secondly, that proliferation of nuclear weapons in the Middle East is in and of itself deeply threatening to Israeli security and would represent a new and extraordinarily dangerous phase for Israel.

US Foreign Policy Today

Last Thursday, US State Department spokesperson Ian Kelly reiterated the desire for a “multilateral track” for dealing with Iran’s nuclear ambitions:

“We believe that the multilateral track is the way to go…  Our goal is to make them abandon their nuclear program in a verifiable way, and we will continue with this track. We decided that we want to let Iran get back to the table, to engage them, because the previous approach of isolating Iran didn’t work. But we don’t have a clear timetable.”

Ha’aretz reports today:

U.S. President Barack Obama has sent a message to Prime Minister Benjamin Netanyahu demanding that Israel not surprise the U.S. with an Israeli military operation against Iran. The message was conveyed by a senior American official who met in Israel with Netanyahu, ministers and other senior officials. Earlier, Netanyahu’s envoy visited Washington and met with National Security Adviser James Jones and with Secretary of State Hillary Clinton, and discussed the dialogue Obama has initiated with Tehran.

The message from the American envoy to the prime minister reveals U.S. concern that Israel could lose patience and act against Iran. It is important to the Americans that they not be caught off guard and find themselves facing facts on the ground at the last minute.

We find this response from the White House to be somewhat lacking in any real policy initiative.  It is also hard to interpret concepts like “last minute” and “caught off guard” when the issue of a rapidly approaching nuclear Iran has been on the radar of policy makers for years now, and all efforts to use diplomacy, incentive, inspections, sanctions and threats have failed to deter Iran’s progress.

We continue to watch with concern as Ireland’s economic condition worsens.  The country is undergoing a painful economic deflation as liquidity evaporates and their monstrous housing bubble collapses.  A report released last Thursday showed retail prices dropping 3.5% in April as consumer spending waned.  The current deflation in Ireland is the worst the country has seen since the 1930’s.

The AP reports:

“Consumer Prices in April, as measured by the Consumer Prices Index, decreased by 0.8 percent in the month. This compares to an increase of 0.1 percent recorded in April of last year,” the CSO said in a statement.

“As a result, prices on average, as measured by the CPI, were 3.5 percent lower in April compared with April 2008.”

In January, a 0.1-percent 12-month decline was the first time the country had experienced falling prices since the early 1960s. The annual rate of inflation stood at minus 1.7 percent in February and minus 2.6 percent in March.

To date the Irish government has embarked on a massive program of borrowing in an effort to stabilize the downward plunge.    The government has increased social spending a whopping 63% since 2003.   Now the devastated economy is decimating tax receipts leaving the government with an 11% budget deficit — making Ireland the weakest economy in western Europe.

Barron’s reports:

The risk is that Ireland will lose control of its destiny. Some believe that if the government doesn’t soon begin to cut costs, it may not be able to borrow enough to meet its needs and then will have to be rescued by its European neighbors. This could destroy Ireland’s allure for foreign investors such as Intel, HP, Microsoft , and Pfizer that helped make it a shooting star for almost two decades.

“An international bailout will wreck our competitiveness,” says the blue-jean-clad O’Leary, sipping vending machine espresso bought with a euro bummed from a flight attendant. “For a company the only reliable way to restore profits is to lower costs. The government needs to get off its backside and radically cut spending.”

As its troubles mount, Ireland also stands in danger of losing a rare gift: its image as a beacon for talent – and as the EU’s leading land of opportunity. Chefs from France, construction workers from Poland, and accountants from the Czech Republic are heading home. In 2007, 67,000 more people arrived than departed. This year 30,000 more workers are expected to leave than arrive, reversing 14 years of strong immigration and raising fears that the curse of the ’70s and ’80s – the steady exodus of the best workers – is again exerting its grip.

We see Ireland’s mandate quite simply at this point:   The country must reduce it’s private labor costs, and steer clear of raising taxes as its government deficit soars.  Crucial to the latter, and to maintaining Ireland’s low tax environment will be a lowering of wages for public-sector workers as well.  Fortunately, the nation isn’t bound by the same labor and union regulations as its neighbors on the continent — a flexibility which should in theory allow Ireland to reduce labor costs with greater ease than many other nations in the Eurozone.   While the cure for Ireland’s ills may be simple to describe, the treatment itself promises to be painful both socially and politically.

The Wall Street Journal and  The Financial Times both ran euphoric stories this week about recent gains in emerging markets, driven primarily by US and European funds pouring back into markets such as Brazil and Russia and supported by recent positive movements in oil and metals prices.

Both articles quote identical statistics:  Brazil’s Bovespa equity index is up 75% from market lows.  Russia’s RTS index is up 80 per cent from its low last year.  The MSCI Emerging Markets index has risen more than 50 per cent since its low last October, with a large proportion of the gains coming in the past few weeks.  Neither article mentioned that the MSCI Emerging Markets Index is still down about 60% off its peak in 2007 or that  steel is still on average more than 40% off its highs in June 2008.

According to the FT, “Strong performance has been fueled in part by a realization that these markets were oversold at the end of last year. Investors, spooked by the banking crisis in the UK and US, suddenly became risk-averse and withdrew large amounts of capital from BRIC markets.”

“Behind the optimism,” adds the WSJ, “are signs the worst of the global slump may have passed, and that China’s massive stimulus plan is kicking in, heralding a pickup in demand for commodities and agricultural products.”

But is this all only so much wishful thinking?  Brazil’s central banker Henrique Meirelles strikes a more realistic tone:  “Brazil is showing signs of recovery on the margins, but that doesn’t mean [the crisis] is over.”

Nonetheless, foreign capital is pouring into the country – about $3.7 billion this year.  Meirelles is in a situation now where the Brazilian Real has appreciated 5% against the dollar in the past week, largely the result of over $1 billion of new capital entering the country in the past two weeks.

China’s Stimulus Program

Recent data suggests that despite persistently weak demand for Chinese exports in overseas markets, the effects of China’s fiscal stimulus are beginning to appear.  Beijing has pumped billions of dollars into construction projects and other spending aimed at stimulating demand and propping up growth.  Without a recovery in the export sector, however, these initial results may be short lived.

According to Li Shufu, chairman of Geely, one of China’s largest private carmakers, last month’s 10 per cent rise in passenger vehicle sales “is driven by a temporary policy” and represents “superficial growth.”  “Only a strong recovery of the economy can help the Chinese auto market,” he concluded.

Michael Pettis, a professor at Peking University’s Guanghua School of Management, explains:

China is not likely to collapse economically, and we may see one or more “rebounds” over the next few years, but the glory days of growth are well and truly behind us until the financial system is sufficiently reformed that it leaves behind governance constraints that almost automatically assure systematic and massive capital misallocation. That will take many years. Meanwhile the transition to a healthier and more balanced economy – which was slated to be long and difficult in the best of cases – is likely to be longer and more difficult as a consequence of the fiscal and banking response to the crisis.

Admittedly, China’s financial stimulus efforts and more specifically their moves to replenish strategic commodities reserves are moving metals prices globally.  The real movement in emerging markets equities, however, seems to be purely American in origin.  Billions in quantitative easing, bailouts,and the recent ‘investor-sponsored’ bank recapitalization of the current US stock market rally have led to an environment in which Wall Street investors are optimistic about an economic recovery and are willing to gamble on depressed emerging market energy and commodities plays outperforming in the event of a recovery.

We’re sorry to say, but it smacks of a gambling addict doubling down in a casino in a desperate effort to win back everything he’s just lost.

Politically, Thailand is still experiencing a difficult period of conflicting interests — but just as concerning are the nation’s current economic difficulties, and their proposed remedies of fiscal stimulus which could create a potentially dangerous debt to GDP imbalance for the mid-  to long-term.

Xinhua reports:

Thailand’s public debt in the future may exceed 60 percent of the country’s gross domestic product (GDP) as the outcome of the government’s economic stimulus packages to shore up the sluggish domestic economy, Prime Minister Abhisit Vejjajiva said Thursday.

However, the public should not panic since foreign countries still have confidence in the Thai economy, he told participants of the National Economic and Social Council meeting, the Thai News Agency reported.

Abhisit made the remarks after Pongpanu Svetarundra, director-general of the Public Debt Management Office, said earlier this week Thailand’s public debt at ending of February stood at about 3.59 trillion baht (101.85 billion U.S. dollars), or 40 percent of GDP.

During 2010 to 2012, the Thai government plans to spend 1.57 trillion baht (44.54 billion U.S. dollars) in investment projects to jumpstart the economy.

This is of course, a dangerous game:   Massive infrastructure spending to the tune of 1.57 trillion baht could indeed provide much needed economic stimulus in the short term, but debt created from such fiscal policies could just as easily become  a ball and chain around the ankle of the Thai economy for years to come.  Foreign financiers remember only too well, the rapid depreciation of the baht in 1997 which precipitated the Asian financial crisis.  Abhisit’s call to “not panic” because foreign financiers still have “confidence” in the Thai economy may indeed be true for the time being, but one has to ask “for how much longer?”, particularly when public debt represents the lion’s share of GDP.

While we watch Thailand’s economic health with deep concern, we do see a potential silver lining within the proposed stimulus:  A possibility for a return to social stability within the kingdom and a reconciliation of the  political differences which have flared in recent months. (Especially if a portion that $44.5 billion stimulus is spent to the benefit of less developed areas of the nation, which have participated less fully in the past decade’s economic growth).

While economic conditions grow worse across Western Europe, Spain’s woes are particularly acute.   Coming down from housing and credit bubbles that dwarfed those of  neighboring nations, Spain’s deflationary collapse is now hitting levels of intensity which will soon have profound repercussions on greater Europe.  In Spain, no one is talking about a potential recovery in 2009 — or 2010.

The numbers are grim.  Once a primary engine of growth in Europe, Spain is now one of the leaders on  the way down.  Official numbers on unemployment are a staggering 17.5% and are expected to top 20.5% this year.  Bankruptcies have quadrupled this year, and industrial production has withered by an alarming 25%.  The construction industry, so vital to their economic health over the past 5 years, has imploded as construction projects are scrapped nationwide.

Zapatero has pledged 50 billion in stimulus, but there is widespread sentiment that such efforts may not be sufficient, given that the economy has contracted by 3.2% even with efforts to kickstart the economy.

Bloomberg reports:

“This has gone on a lot longer than a lot of people expected,” said Ben May, economist at Capital Economics in London. “There is much further to go in terms of the labor market downturn.”

Spanish bonds erased early gains after the report. The yield on Spain’s benchmark 10-year bond due 2019 rose 1 basis point to 3.92 percent, after falling as low as 3.89 percent in early trading.

Government Response

The number of unemployed industrial workers rose 62 percent in April from a year earlier, data showed yesterday, compared with 56 percent in the economy overall. Prime Minister Jose Luis Rodriguez Zapatero plans to hold a special cabinet meeting today in Madrid to discuss ways to curtail the rise in unemployment.

Zapatero’s government has already committed 50 billion euros ($66 billion) to stimulus measures for this year, wiping out three years of budget surpluses and putting it on track for a shortfall of 8.3 percent of output this year, according to the Bank of Spain.

The greatest number of companies that were in bankruptcy proceedings were construction or real estate firms, while 324 of the companies were industrial or energy businesses, the report from the National Statistics Institute showed.

Housing Bust

Spain’s housing boom had been the main driver of economic growth and allowed the economy to expand faster than the EU average for a decade through last year. Home prices, which almost doubled over about a decade, have fallen for five quarters, as banks rein in lending. Mortgage lending fell 37 percent in February from a year earlier, the 19th monthly decline.

Enagas SA, Spain’s natural-gas grid operator, said demand for gas fell 17 percent in the first quarter from a year earlier, led by a 31 percent drop in consumption from power producers. Acerinox SA, Spain’s largest stainless-steel producer, made a loss in the first quarter as sales tumbled 61 percent. The company said in February it planned to cut working hours at a Spanish plant by 50 percent.

Automakers are also cutting output and laying off workers as new car registrations, a proxy for sales, fell 44 percent in April from a year earlier. Ford Motor Co. said on March 16 that it plans to drop a production shift at its factory in Valencia, affecting 1,000 employees, even after the government pledged 800 million euros ($1.1 billion) in aid to the industry.

This Thursday, the European Central Bank purchased an additional 60 billion Euros worth of Eurozone covered bonds in an effort to shore up the rapidly deteriorating housing prices in Spain and Ireland.  At this point, national debt levels within Spain are past reaching critical levels and additional capital required to mitigate the economic downturn is becoming harder to come by.  Where the bottom is, nobody knows, but there are certainly no green shoots breaking ground in this corner of Europe.

Spain remains a critically weak pillar in the Eurozone.  We continue to watch this issue closely.

In an excellent piece published in Foreign Policy, historian Niall Ferguson illustrates the broad geopolitical ramifications of economic decline.  Ferguson contrasts the willful malice of George Bush’s “Axis of Evil”, against the less intentionally destabilizing influence of regimes undergoing waves of political and fiscal turbulence.

Ferguson’s “Axis of Upheaval“, as he calls it includes Russia, Somalia, Mexico and other nations desperately fighting to stay afloat through the gale-force winds of  political instability:  An instability magnified by a world undergoing economic deflation.

Now the third variable, economic volatility, has returned with a vengeance. U.S. Federal Reserve Chairman Ben Bernanke’s “Great Moderation”—the supposed decline of economic volatility that he hailed in a 2004 lecture—has been obliterated by a financial chain reaction, beginning in the U.S. subprime mortgage market, spreading through the banking system, reaching into the “shadow” system of credit based on securitization, and now triggering collapses in asset prices and economic activity around the world.

After nearly a decade of unprecedented growth, the global economy will almost certainly sputter along in 2009, though probably not as much as it did in the early 1930s, because governments worldwide are frantically trying to repress this new depression. But no matter how low interest rates go or how high deficits rise, there will be a substantial increase in unemployment in most economies this year and a painful decline in incomes. Such economic pain nearly always has geopolitical consequences. Indeed, we can already see the first symptoms of the coming upheaval.

As the economic conditions within his “Axis of Upheaval” disintegrate rapidly, so too do the socio-political moorings of society –  A deterioration which will likely result in radical power-shifts, militarization, social divisions and other bad eggs which are often mitigated during eras of economic prosperity.  Ferguson also points out that these ill-effects are compounded by our decreasing ability to intervene through the traditional means of financial incentive or military intervention:

The problem is that, as in the 1930s, most countries are looking inward, grappling with the domestic consequences of the economic crisis and paying little attention to the wider world crisis. This is true even of the United States, which is now so preoccupied with its own economic problems that countering global upheaval looks like an expensive luxury. With the U.S. rate of GDP growth set to contract between 2 and 3 percentage points this year, and with the official unemployment rate likely to approach 10 percent, all attention in Washington will remain focused on a nearly $1 trillion stimulus package. Caution has been thrown to the wind by both the Federal Reserve and the Treasury. The projected deficit for 2009 is already soaring above the trillion-dollar mark, more than 8 percent of GDP. Few commentators are asking what all this means for U.S. foreign policy.

The answer is obvious: The resources available for policing the world are certain to be reduced for the foreseeable future. That will be especially true if foreign investors start demanding higher yields on the bonds they buy from the United States or simply begin dumping dollars in exchange for other currencies.

Economic volatility, plus ethnic disintegration, plus an empire in decline: That combination is about the most lethal in geopolitics. We now have all three. The age of upheaval starts now.

Ferguson’s essay is an excellent read and highly recommended by The Analytic:

http://www.foreignpolicy.com/story/cms.php?story_id=4681