Hace unas semanas recibí un correo de un viejo y buen amigo americano con el siguiente enlace.
Preocupado por lo que oía y veía en la televisión sobre Grecia quería saber mi opinión al respecto y, sobre todo, si estábamos bien.
Me puse a escribir con la idea de darle un poquito de información sobre la situación y me salió lo que pongo a continuación. No sé si se lo leerá, pero creo que puede ser útil para poner la situación en perspectiva.
Hi Dick!
Hope life is treating you
well!!
I´ve been wanting to answer
this email but couldn´t find the time to do so. I thought it was worth a proper
answer, at least for you to feel better about your Spanish friends…
Let me just tell you that we
are far from Greece´s situation. Both from a financial and from a social point
of view. On the other hand, it is true we are facing a severe economic and
political problem, the origin of which rely primarily in the last 4 years of
socialist government together with the extraordinary long lasting growth cycle
experienced from 1996 until 2006.
It is worth noting that during
the expansion cycle, Spain witnessed one of the highest growth rates not only
of Europe but of the developed world. The entry of Spain in the European
Monetary Union, coping with the mentioned Maastricht requirements (Inflation
not higher than 1% above the average of the EU, Debt to GDP below 60% and Government
Deficit below 3%), allowed an incredible drop of Spanish interest rates from
circa 10% to the European standards (average of 2% to 3%) and provided an
unknown period of price and budget stability for the Country. This was achieved
during the 8 years mandate of the Popular Party (PP).
In order to achieve those
figures, severe measures were taken in the first mandate of the PP (1996
onwards). Spain needed to cut down its deficit from circa 6% to the required
3%. To bring down inflation from +5% to the European average +1% (2%-3%) and to
cut its debt from +70% to below 60%. Besides, and most critical, the
country was suffering one of the largest unemployment rates of the Developed
world, reaching 24% at the end of 1995!. Not an easy job for a country exiting
a severe real estate crisis that exploded after the 1992 events (Barcelona
Olympics and the Seville World Trade exhibition). Privatizing public companies
(Repsol, Telefonica, Endesa, Argentaria…), Budget and price control, reducing
the public sector presence in the economy, strengthening and providing the
Central Bank with an independence status (and applying a very conservative
approach to Banks provisioning policy), and adopting productivity measures were
key in succeeding.
During the years that followed,
Spain relied specially on Public Works (roads, railways, hospitals, airports,
ports,…) and private construction. Three factors, among others, had most to do
with growth in this areas: European Union funds, minimal interest rates for
Spanish standards and demographics (from 40M to 46M population). Although
construction wasn´t the only source of growth (private consumption and capital
investment followed suit), it is true it was the most important part of GDP,
together with Tourism and Agriculture. The once called “Spanish miracle”
can be seen while travelling around Spain. The most extensive Speed Train
network, the most modern airport network, the most modern road network, the
most sophisticated hospitals (Public) and so forth and so on. In summary, an
average +3,5% GDP growth from 1996 till 2007. -60% Debt to GDP and Budget
Surplus in 2006 and 2007 with an always above the average but controlled CPI
was our visit card before the break out of the crisis. Besides, and for the
first time in Spanish modern history, our companies, from Banks (Santander,
BBVA) to Service and Construction companies (Ferrovial, FCC, Acciona, ACS),
including Utilities, Energy and Telecoms (Endesa, Iberdrola, Repsol or
Telefonica) became truly known and respected multinationals.
During those rosy years, a few
things originated today´s problem. Most of it has to do with the Spanish
government and institutional model and with the financial sector. To make it
simple:
-
decentralization of services (health, justice, security, taxes,
education, some infrastructures…) among Spanish 17 Comunidades Autonomas (a
sort of regional States) have multiplied Administration costs dramatically
during all these years. Much of these expenses were financed by the “ever
growing real estate sector” since the granting of licensing both for local
works and homes lied in the hands of local authorities.
-
At the same time, half of the Spanish financial sector was managed by
Saving Banks (Cajas de Ahorro), in origin local lending entities with a
non-profitable commitment. The growth of these entities was exponential since
the beginning of the Comunidades Automas development (from the Constitution of
1978). The reason: local authorities took control of Cajas and, during the
booming years, used them to provide financing for local projects and, what is
much worse, for local entrepreneurs.
-
These Cajas, in the majority of cases, were managed not by banking
professionals but by politicians and friends and, although supervised and ruled
by Banco de España (Bank of Spain – BE), local politicians could de facto use
their veto in many decisions.
-
The result: huge leverage of these Cajas (again 50% of the sector), much
of which addressed to real estate developers with a poor risk control.
-
And, at the regional level, huge leverage in order to cope with the
newly acquired responsibilities.
From here on the story goes
much faster.
-
2004 the Socialist Party (SP) wins the general election after the March,
11 terrorist attacks in Madrid. Nobody expected this result, not even the SP,
which didn´t even have an economic program. Pedro Solbes was appointed Minister
of the Economy. Note that he was also Minister of the Economy from 1993 to
1996…
-
The next four years, little changes in the economic front in Spain. Low
interest rates, higher real estate prices, higher private and public leverage,
less risk control at Cajas…
-
The Government starts increasing its presence in the economy…
-
Instead of trying to cool the economy with tighter regulations and
fiscal policy (remember monetary policy is no longer at BE but at the European
Central Bank), the government introduces new stimulating measures.
-
Besides the alarms started by Bank of Spain regarding the size and
continuous growth of leverage in the banking sector and the lack of risk
controls at the Caja´s level, no measures are taken. BE loses its independence in 2006 when the new
Governor, an experienced and well trained economist but also a member of the
Socialist Government, is appointed.
-
In 2007 at the start of the Subprime Financial Crisis, the Government
believes Spain will not suffer at all because of its lack of exposure to
Subprime assets...
-
The SP wins the 2008 election on the basis that Spain will not suffer
from the international financial crisis. They even call anti-patriots those who
warn of the deterioration of the Spanish economy and the risk of suffering a
deep recession.
-
Instead of adopting cost cuts, reducing real estate exposure and
controlling the banking industry, the government introduces new stimulating
measures on the fiscal front and launches an expenditure plan without any
logic. Amount of such plan exceed a full +1% of GDP.
-
Result: Debt/GDP from 56% in 2007 to 65% in 2010; Public Budget from
surplus in 2007 to 11% deficit in 2009; unemployment from 9% to 20% in 2011…GDP
growth from +3% in 2007 to -1.9 in 2008; -3.2 in 2009 and +0.6 in 2010.
-
The banking sector, in the light of the international financial crisis,
starts having problems in refinancing itself.
-
It is not until May 2010 that Mr. Zapatero, still President (he has call
early elections for November, 20th) faces reality and starts taking
measures forced to a large extent by European and international leaders.
-
He stopped praying the banking sector good
wills. He, and the rest of the Cabinet realizes that Spain has its own
“subprime”, that is, the developers´ loans.
The good news:
-
Severe measures have been taken with regards Central expenditure and Income. It is true that
it will affect growth, but, it is essential in order to recover confidence from
international lenders. It has also been proven by experience than low deficits
set the base for strong growth.
o
Public workers´ salaries were reduced by 5% in 2010.
o
Pensions were frozen in 2010.
o
Value Added Tax was raised from 16% to 18% in 2010. Still below European
average.
o
Capital gains tax was raised from 18% to 21% (195 for less than 6.000€).
o
Special taxes (alcohol, tobacco and oil) has been raised. Still below
European average.
o
Public Deficit has diminished from 11% in 2009 to 9.3% in 2010 and to an
estimated 6 to 6.5% in 2011. Aim is to reach 3% in 2013. Question: Does the
author know where does US public deficit stand as of today? +9%
o
Debt to GDP is still below 70%. Does the author know where does US ratio
stand as of today? +90%. By the way, Greece, +150%, Italy +120%, Japan, +200%.
France and Germany +80%.
o
Financial sector under severe restructuring: From 47 Cajas to 15 via
mergers or acquisitions. Of the 15, 3 of them have gone public through IPOs and
private placements. Two of them have already been sold. One is in the process
and three have just been acquired by a special purpose vehicle (FROB). Most of
Cajas have become banks and are in a recapitalization process. 32BN € have been
provided to Cajas (of which 15bn is private money) and this vehicle could
leverage itself up to 90BN€ with both public and private money. Official
estimates are that in a worst case scenario, the banking sector would need
extra 50BN€. Were these resources to be invested by the Estate, it would
represent extra 5% in terms of DEBT/GDP…still below developed countries´
ratios. Remember Reinhart and Rogoff: above 90%, severe risk for future growth.
Does the author remember how much public money was at stake with TARP in the
US?
o
The recapitalization of the Spanish banking sector is key for allowing
credit to flow to the private sector.
o
Cajas´ working force has been reduced by almost 10%. Another 10% is
expected to follow suit during 2012.
o
Local politicians have lost much of its former control over Cajas.
o
Deleveraging is still marching, measured by any standard measure.
o
Delinquencies in the banking sector close to historical levels (1995):
true, but still manageable considering generic and specific provisions,
benefits still generated by larger entities such as Santander, BBVA,
Caixabanc,…and restructuring under way.
o
Debt limits have been imposed at a Constitutional level in order to
avoid exceeding 3% deficits. Will be enforced from 2014.
o
Pension reforms have been adopted (although timidly). Retiring age will
grow gradually from 65 to 67 years. Nothing to do with current 50 years of
Greece or 56 of Portugal…
o
The worst of all, unemployment at +20%. True. But, unfortunately, hidden
economy is a reality in Spain. It has always been. Probably somewhere in the
area of 20% to 25% of GDP although, obviously, no official figure is given.
This doesn´t mean unemployment isn´t a reality, only that the real figure
should be much less. Measures taken:
§ Labor reforms have been adopted (timid, but valid).
Essential to encourage hiring
o
Local entities, after local elections held in May which represented a
historical victory for PP, are implementing severe cost cutting measures in
order to comply with limits imposed by Central Government. Some are even
considering returning competencies to the Central Government.
o
And last, but not least: Opinion polls give PP a huge victory at the
coming general elections. PP has already established key lines which include
severe cost cutting, budget control, fiscal incentives for job creation in
certain key areas, deep labor market reforms, liberalization of key areas
(transport, telecoms, energy sectors), reactivation plans for homes and a deep
restructuring of the Central and Autonomous regions government structures.
In summary, yes, Spain is
suffering a big crisis and faces hard times. Especially now, with the financial
sector in the eye of the storm (not only in Spain but in Europe) and with a
political change that will allow for deep structural changes in the short and
long term. These changes will bring social unrest since the left wing
controlled Unions will try to “gain” the streets. But, there are very little
similarities (in the economic and social front) between Spain and Greece and I
am sure we will be able to start growing (generating jobs) and control the
situation at some point during 2012.
I would be more than happy to
welcome you and Pat to prove what I am saying and enjoy some delicious Spanish
food and wine!!
“Your Spanish friend”
