Sunday, February 28, 2010

Europe's Bank Exposure

From Bloomberg:

German and French banks’ “enormous” exposure to Portugal, Ireland, Greece and Spain explains why Europe’s biggest economies are moving to rescue their southern neighbors, Societe General SA said today in a report titled “Shotgun Greek Wedding.” The CHART OF THE DAY shows how much money German, French, Swiss and U.K. banks have at stake in the so-called PIGS countries. Banks in Germany and France alone have a combined exposure of $119 billion to Greece and $909 billion to the four countries, according to data from the Bank for International Settlements. Overall, European banks have $253 billion in Greece and $2.1 trillion in the so-called PIGS.

“The exposure is enormous,” said Klaus Baader, co-chief European economist at Societe Generale in London. “The crisis in Greece isn’t Greece’s problem alone but a concrete problem for Europe’s whole banking sector. That explains the interest of finance ministers in stabilizing the situation.”

Leaders from the 16-nation euro area said today they have agreed to act if necessary to help Greece reduce its budget deficit and safeguard financial stability in the region. Debt-stricken Greece is struggling to convince investors it is able to reduce its deficit from 12.7 percent of gross domestic product, sparking turmoil on financial markets.

Spain, Portugal and Ireland, also suffering from gaping deficits after the worst recession since World War II, have been sucked into the swirl of widening bond spreads and soaring credit default swaps. The premium investors demand to hold 10-year bonds of the so-called PIGS countries instead of benchmark German bunds, and the cost of insuring against default, have surged this year.

“The countries’ situations put the finances of fiscally stronger countries in jeopardy,” Baader said. “That’s one reason why the tone changed.”

Friday, February 26, 2010

More Greek Deals

Details on those other Greek debt deals
Posted by Tracy Alloway on Feb 25 15:38.

Goldman’s been getting plenty of heat over the currency swap it arranged for Greece.

But the swap itself is not the only issue here. Securitisation also plays a factor and it seems Titlos — the special purpose vehicle (SPV) created to securitise the swap — is not the only Greek debt-concealing securitisation deal undertaken by the Hellenic Republic.

The FT has mentioned that banks including Morgan Stanley and Deutsche arranged transactions that also enabled the Greek government to raise cash for budget spending without having to label the proceeds as public debt. In particular, they cite a securitisation in which Greece raised €2bn backed by grants the finance ministry expected to receive from European Union structural funds.

The New York Times alluded to a few others in its recent story on the Goldman-Greece issue:

In dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books. Greece, for example, traded away the rights to airport fees and lottery proceeds in years to come.

Indeed, it seems Greece went on a state asset-securitising spree in a fit of mythologically-named deals between 2000 and 2001. The deals are:

Aeolos SA (2001) – A €355m securitisation backed by air traffic control fees owed to Greece by airlines. The deal was managed by Morgan Stanley, Alpha Bank and EFG Eurobank, according to a 2001 article from EuroWeek.

Ariadne SA (2000) – A €650m deal backed by cashflow from OPAP — the state lotteries. The arrangers were Morgan Stanley Dean Witter, Schroder Salomon Smith Barney and UBS, according to a 2000 story from EuroWeek. Alpha Bank and Commercial Bank were joint leads.

Atlas Securitisation SA (2001) – That €2bn deal backed by European Commission (EC) payments under the third Community Support Framework EC-Greek development plan. That one was jointly lead managed by BNP Paribas, Deutsche Bank, EFG Eurobank and NBG International, according to a 2001 story from EuroWeek.

How did the securitisations help conceal Greece’s debt?

The Evil B’s Bitter Pill blog explains it simply:

But in Greece, the financial wizardry went even further. In what amounted to a garage sale on a national scale, Greek officials essentially mortgaged the country’s airports and highways to raise much-needed money. The arrangement they called “Aeolos”, a legal entity created in 2001, helped Greece reduce the debt on its balance sheet that year. As part of the deal, Greece got cash upfront in return for pledging future landing fees at the country’s airports. A similar deal in 2000 called “Ariadne” . . . devoured the revenue that the government collected from its national lottery. Greece, however, classified those transactions as sales, not loans, despite doubts by many critics.

These kinds of deals have been controversial within government circles for years. As far back as 2000, European finance ministers fiercely debated whether derivative deals used for creative accounting should be disclosed. The resounding answer was hell no. But in 2002, accounting disclosure was required for many entities like Aeolos and Ariadne that did not appear on nations’ balance sheets, prompting governments to restate such deals as loans rather than sales. Of course, Greece did not see the need to restate such deals because they were executed before the 2002 rule change.

In a statement issued on Thursday, Eurostat, the body charged with collating eurozone statistics, said it asked Greece in 2002 to reclassify the securitisations according to the new accounting guidance.

Conspicuously absent from the statement: Greece’s response to the body’s 2002 request.

And why Eurostat didn’t chase them up on it.

Thursday, February 25, 2010

In Hungary, Potential Lessons for Greece?

Published: February 19, 2010

BUDAPEST — Despite the fiscal crisis engulfing Greece and some other Southern European nations, Hungary is more committed than ever to adopting the euro as soon as possible, its caretaker prime minister said this week, even if that means enduring a further bout of austerity to reach the goal.

“If I have a vision, it would be to have the euro by 2014 and have an economy with sustainable growth,” the prime minister, Gordon Bajnai, said in an interview in his spacious 19th-century office overlooking the Danube.

The experience of Hungary, which became a member of the European Union in 2004 but still has a ways to go to meet the conditions for joining the 16 nations of the monetary union, suggests just why the euro retains its allure to so many of the emerging countries of Europe.

Indeed, not just Hungary but also countries like Poland, Latvia and Estonia remain convinced that it is worth going through a lot of pain to build the conditions for a more enduring prosperity.

At the same time, Hungary’s experience points to some of the flaws in the E.U.’s monetary union, which lacks the financial tools to help countries like Greece through a crisis the way the International Monetary Fund helped Hungary during its economic trauma.

In late 2008, with the global financial meltdown ravaging countries that took on too much debt, the I.M.F., with support from the European Union, stepped in to provide €20 billion, or about $27 billion, to bail out Hungary, which was on the verge of default. In return, the I.M.F. imposed strict conditions on the government in Budapest, requiring it to cut pensions, increase the retirement age from 62 to 65, sharply trim the public sector and restructure the public transportation system.

“The package gave us a breathing space,” Mr. Bajnai said. “It bought us time.”

Because Greece is inside the euro zone, the European Union, which comprises 27 countries, has kept the I.M.F. at arms length but so far refused to provide Athens with any sort of similar loan package itself. Nonetheless, Mr. Bajnai said, Greece should take advantage of the moral support Brussels has offered and move ahead with its own austerity program. In the end, he said, that was the only way to build an economy capable of competing with the most successful countries in Europe, like Germany, France and the Netherlands.

Mr. Bajnai said he had delivered that message directly to George Papandreou, the Greek prime minister, who wanted to know how Hungary had managed to restore confidence among investors and clear the way for a resumption of economic growth.

“I met George Papandreou last week,” Mr. Bajnai said. “I have talked to him a couple of times. I told him, I am coming with a T-shirt, with the sign, ‘I have been there.”’

George Soros, the billionaire hedge fund manager who was born in Hungary, agrees that Hungary’s effort should serve as example for Greece, as well as Portugal and Spain.

At the World Economic Forum in Davos, Switzerland, last month, Mr. Soros said that being forced to impose harsh spending cuts in the midst of an economic downturn was “very, very hard.” But Mr. Soros added: “Hungary did it, and in a remarkably short time, re-established itself. So it is doable.”

Mr. Bajnai, the prime minister, is in an unusual position. An independent with no ties to any particular political party, he came into office last April after the Socialist government lost a no-confidence vote and turned to Mr. Bajnai to take charge. With elections for Parliament scheduled for April, he expects to be out of power soon.

The question is whether the policies that Mr. Bajnai favors will endure after a new government, expected to be led by the conservative Fidesz party, takes over. But his stature, the Hungarian public’s commitment to fully embracing Europe, and the need to remain in compliance with the I.M.F.’s austerity program, all suggest that he has started working on an economic overhaul.

“Hungary has to be competitive enough so that the arrival of the euro will not put us in an unsustainable position,” Mr. Bajnai, 41, a former business executive, said during the interview. “That is why these structural reforms are also very important in the coming years.”

“Most Hungarians,” Mr. Bajnai added, “have drawn the conclusion that it is good to be in the euro zone because the euro gives you a source of security.”

In its quest to join the euro, he said, Hungary needed to keep labor costs under control and build an economy more robust than its neighbors. The goal, he said, should be sustained growth of two percentage points above the E.U. average. During the first quarter of this year, growth appears to have resumed, though at a relatively subdued pace. Still, that is a sharp improvement over the contraction of 6.7 percent in 2009.

Improving growth over the longer run, he said, would require maintaining a tight budget leash in a country where Mr. Bajnai, after a long period of heady public spending under the previous government, has presided over a series of politically painful measures.

“It will require a very strict fiscal policy, a continuation of structural reforms for the country,” he said.

Zsolt Darvas, a macroeconomist at Bruegel, an independent economic research center in Brussels, said that he believed Mr. Bajnai has helped put Hungary on the right track.

“The Bajnai government has started to introduce some real reforms,” Mr. Darvas said. Of course, he added, given the constraints imposed by the I.M.F., his government has had little choice.

Mr. Bajnai was put in charge last year mostly because neither the Social Party nor Fidesz, the major opposition party, wanted to call early elections and accept the responsibility for the tough measures demanded by the markets and the I.M.F.

Mr. Bajnai introduced a plan to raise the retirement age from 62 to 65 years. He has succeeded in consolidating the budget, bringing down the deficit to 3.8 percent of gross domestic product this year from nearly 9 percent in 2006.

“He has tried to circumvent political interests,” Mr. Darvas said.

Mr. Bajnai’s predecessor, Ferenc Gyurcsany, began the process of fiscal restraint in 2006, but only modestly and only under pressure from the European Commission after Brussels noticed the spiraling budget deficit and the government’s loose monetary and fiscal policies.

Economists hold Mr. Gyurcsany responsible for the parlous state of Hungary’s finances, which spun out of control after the governing Socialists embarked on a big spending spree to win votes in the 2005 election. Mr. Gyurcsany later acknowledged that he had lied to voters about the true state of the Hungarian economy.

Can Greece, whose finances are in even worse shape than Hungary’s, follow its example, particularly if Athens does not receive any outside help to ease the pain?

“I think what the prime minister of Greece is doing now with the support of the European Commission is a very heavy package,” Mr. Bajnai said. “He is talking about cutting 4 percent of gross domestic product” from the budget deficit this year alone.

With support from the I.M.F., Hungary was successful in accomplishing a similar task. Since mid-2009, it has cut its budget deficit by 5 percent of gross domestic product.

“This is huge, compared to any other country,” Mr. Bajnai said.

Budapest had little choice. When the global financial crisis hit in 2008, Hungary was particularly vulnerable, largely because it had taken on far too much debt but also because it was not under the sheltering umbrella of the euro. During its boom, more than 1.7 million families took out foreign currency loans to finance their mortgages. When Hungary’s currency collapsed, the cost of making the payments on those loans soared.

But now the markets are responding favorably to the government’s efforts. Mr. Bajnai pointed out that Hungary returned to the U.S. market two weeks ago with a $2 billion 10-year bond that was three times oversubscribed.

Mr. Bajnai, who plans to take six months off after leaving office, hopes that Hungarians have learned their lesson. And he suggests that other countries ignore its example at their peril.

“Confidence or trust in the financial markets is like the air that you breathe,” Mr. Bajnai said. “You do not realize the importance of it until you begin to choke.”

Wednesday, February 24, 2010

Wednesday, February 17, 2010

Sunday, February 14, 2010

Just What Is The Real Level Of Government Debt In Europe?

“If you don’t fully understand an instrument, don’t buy it.”

To the above advice from Emilio Botín, Executive Chairman of Spain’s Grupo Santander, I would simply add one small rider: Don’t sell it either, especially if you are a national government trying to structure your country’s debt.

In a fascinating article in today's New York Times, journalists Louise Story, Landon Thomas and Nelson Schwartz begin to recount the mirky story of just how the major US investment banks have been able to earn considerable sums of money effectively helping European governments to disguise their growing mountain of public debt.
Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide their mounting debts.

As worries over Greece rattle world markets, records and interviews show that with Wall Street’s help, the nation engaged in a decade-long effort to skirt European debt limits. One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels.

Even as the crisis was nearing the flashpoint, banks were searching for ways to help Greece forestall the day of reckoning. In early November — three months before Athens became the epicenter of global financial anxiety — a team from Goldman Sachs arrived in the ancient city with a very modern proposition for a government struggling to pay its bills, according to two people who were briefed on the meeting. The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.

In fact, concerns about what it is exactly Goldman Sachs have been up to in Greece are not new, and the Financial Times have been pusuing this story for some time, in particular in connection with the investment bank's ill fated attempt to persuade the Chinese to buy Greek government debt (and here, and here). Nor is the fact that the Greek government resorted to sophistocated financial instruments to cover its tracks exactly breaking news, since I (among others) have been writing about this topic since the middle of January - Does Anyone Really Know The Size Of The Greek 2009 Deficit? - following the arrival in my inbox of a leaked copy of the report the Greek Finance Minister sent to the EU Commission detailing the issues.

What is new in today's report from the NYT team is the extent to which they identify the problem as a much more general one, involving more banks and more countries, since "Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere". I very strongly suggest that our NYT stalwarts take a long hard look at what has been going on in Spain, and especially at the Autonomous Community level.

So the question naturally arises, just how much in debt are our governments, really? As the NYT team point out, Eurostat has long been grappling with this matter, and as far back as 2002 they found themselves forced to change their accounting rules, in order to try to enforce the disclosure of many off-balance sheet entities that had previously escaped detection by the EU, since up to that point the transactions involved had been classified as asset "sales", often of public buildings and the like. Following advice paid for from the best of investment banks many European governments simply responded to the rule change by reformulating their suspect deals as loans rather than outright sales. As we say in Spain "hecha la ley, hecha la trampa" (or in English, when you close one loophole you open another). According to the NYT authors:

"As recently as 2008, Eurostat.... reported that “in a number of instances, the observed securitization operations seem to have been purportedly designed to achieve a given accounting result, irrespective of the economic merit of the operation.”"

So just what is all the fuss about. Well, in plain and simple terms it is about an accounting item known as "receivables". Now, according to the Wikipedia entry:

"Accounts receivable (A/R) is one of a series of accounting transactions dealing with the billing of a customers for goods and services received by the customers. In most business entities this is typically done by generating an invoice and mailing or electronically delivering it to the customer, who in turn must pay it within an established timeframe called credit or payment terms."

However, as we can learn from another Wikpedia entry, often the use of "accounts receivable" constitutes a form of factoring, and this is where the problems Eurostat are concerned about actually start:

Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount in exchange for immediate money with which to finance continued business. Factoring differs from a bank loan in three main ways. First, the emphasis is on the value of the receivables (essentially a financial asset), not the firm’s credit worthiness. Secondly, factoring is not a loan – it is the purchase of a financial asset (the receivable). Finally, a bank loan involves two parties whereas factoring involves three.

But how does all this work in practice? Well, the World Wide Web is a wonderful thing, since you have so much information near to hand, at just the twitch of a fingertip. Here is a useful description of what are known as PPI/PFI schemes, from UK building contractor John Laing:
A Public Private Partnership (PPP) is an umbrella term for Government schemes involving the private business sector in public sector projects.

The Private Finance Initiative (PFI) is a form of PPP developed by the Government in which the public and private sectors join to design, build or refurbish, finance and operate (DBFO) new or improved facilities and services to the general public. Under the most common form of PFI, a private sector provider like John Laing will, through a Special Purpose Company (SPC), hold a DBFO contract for facilities such as hospitals, schools, and roads according to specifications provided by public sector departments. Over a typical period of 25-30 years, the private sector provider is paid an agreed monthly (or unitary) fee by the relevant public body (such as a Local Council or a Health Trust) for the use of the asset(s), which at that time is owned by the PFI provider. This and other income enables the repayment of the senior debt over the concession length. (Senior debt is the major source of funding, typically 90% of the required capital, provided by banks or bond finance). Asset ownership usually returns to the public body at the end of the concession. In this manner, improvements to public services can be made without upfront public sector funds; and while under contract, the risks associated with such huge capital commitments are shared between parties, allocated appropriately to those best able to manage each one.

And for those still in the dark, Wikipedia just one more time comes to the rescue:

The private finance initiative (PFI) is a method to provide financial support for "public-private partnerships" (PPPs) between the public and private sectors. Developed initially by the Australian and United Kingdom governments, PFI has now also been adopted (under various guises) in Canada, the Czech Republic, Finland, France, India, Ireland, Israel, Japan, Malaysia, the Netherlands, Norway, Portugal, Singapore, and the United States (amongst others) as part of a wider program for privatization and deregulation driven by corporations, national governments, and international bodies such as the World Trade Organization, International Monetary Fund, and World Bank.

PFI contracts are currently off-balance-sheet, meaning that they do not show up as part of the national debt as measured by government statistics such as the Public Sector Borrowing Requirement (PSBR). The technical reason for this is that the government authority taking out the PFI contract pays a single charge (the 'Unitary Charge') for both the initial capital spend and the on-going maintenance and operation costs. This means that the entire contract is classed as revenue spending rather than capital spending. As a result neither the capital spend nor the long-term revenue obligation appears on the government's balance sheet. Were the total PFI liability to be shown on the UK balance sheet it would greatly increase the UK national debt.

And here are two more examples of what is involved which were brought to light by a quick Google. First of all, the case of Italian health payments. Now according to analysts Patrizio Messina and Alessia Denaro, in this report I found online from Financial Consultants Orrick:

In the last years many structured finance transactions (either securitisation transactions or asset finance transactions) have been structured in relation to the so called healthcare receivables.The reasons are several. On one side, the providers of healthcare goods and services usually are not paid in time by the relevant healthcare authorities and therefore, in order to gain liquidity, usually assign their receivables toward the healthcare authorities. On the other side, due to the recent legislation that provides for very high interest rates on late payments, the debtors as well as banks and other investors have had the same and opposite interest on carrying out different kind of transactions. In this brief article we will analyse, after a quick description of the Italian healthcare system, some of the different structures that have been used in relation to transactions concerning healthcare receivables and, in particular, we will focus on transactions concerning the so called “raw receivables”, which are lately increasing in the Italian market practice, by analysing the legal means through which it is possible to ascertain/recover such receivables.

This system thus has two advantages (apart from the fact that it effectively hides debt). In the first place the healthcare providers gain liquidity in order to continue to run hospitals, pay doctors, etc, while those who effectively intermediate the transaction earn very high interest rates for their efforts, interest payments which have to be deducted from next years health care provision, and so on.

As the Orrick report points out, Italy’s national healthcare service (servizio sanitarionazionale, “nhs”) is regulated by the legislative decree of December 30, 1992, no. 502 (“decree 502/92”).The reform introduced by decree 502/92, as amended from time to time, provides for a three-tier system for the healthcare service, as outlined below: State level The central government provides a national legislation limited to very general features of the NHS and decides the funds to be allocated to the single regions according to specific criteria (density of population, etc.) for the NHS.

As the Orrick analysts note: "the Healthcare Authorities usually pay the relevant Providers with a certain delay".
Usually, when healthcare funds are allocated, in the national provisional budget, the central government underestimates the amount of healthcare expenditure. Since the central government does not provide regions with enough funds, regions are not able to provide enough funds to Healthcare Authorities, and payments to the Providers are delayed. Since the Providers need liquidity, they usually assign their receivables toward the Healthcare Authorities. To deal with all the above issues, Italian market practice has been developing an alternative system of financing through securitisation and asset finance transactions of Healthcare Receivables.

As the analysts finally conclude:

Despite of the risks concerning the judicial proceedings, Italian market players are still very interested on carrying on securitisation transaction on this kind of asset, principally because Legislative Decree no. 231/02 provides for very high interest rates on late payments (equal to the interest rate applied by ECB plus 7%) - my emphasis

Another technique Eurostat have identified as a means of concealing debt relates to the recording of military equipment expenditure, as described in this report I found dating from 2006. At the time Eurostat were worried about the growing provision of military equipment under leasing agreements. Basically they decided that such provision was debt accumulable.
Eurostat has decided that leases of military equipment organised by the private sector should be considered as financial leases, and not as operating leases. This supposes recording an acquisition of equipment by the government and the incurrence of a government liability to the lessor. Thus there is an impact on government deficit and debt at the time that the equipment is put at the disposal of the military authorities, and not at the time of payments on the lease. Those payments are then assimilated as debt servicing, with a part recorded as interest and the remainder as a financial transaction.

However, a loophole was found in the case of long term equipment purchases:

Military equipment contracts often involve the gradual delivery over many years of a number of the same or similar pieces of equipment, such as aircraft or armoured vehicles, or including significant service components, such as training. Moreover, in the case of complex systems, it is frequently the case that some completion tasks need to be performed for the equipment to be operational at full potential capacity. Some military programmes are based on the combination of several kinds of equipment that may be completed in different periods, so that the expenditure may be spread over several fiscal years before the system, globally considered, becomes fully operational.

In cases of long-term contracts where deliveries of identical items are staged over a long period of time, or where payments cover the provision of both goods and services, government expenditure should be recorded at the time of the actual delivery of each independent part of the equipment, or of the provision of service.

Payment for such items are only to be classifed as debt at the time of registering the actual delivery, which may explain why, if my information is correct, the Greek military as of last December were still officially "testing" two submarines which had been provided by German contractors, since final delivery had still to be formally registered, and the debt accounted.

A lot of information about the kind of things which were going on before the 2006 rule change can be found in this online presentation from Europlace Financial Forum. Here are some examples of private/public sector cooperation in Italy.

And here's a chart showing a list of advantages and possible applications:

Now, at the end of the day, you may ask "what is wrong with all of this"? Well quite simply, like Residential Mortgage Backed Securities these are instruments that work while they work, and cause a lot of additional headaches when they don't. I can think of three reasons why debt aquired in this way in the past may now be problematic.

a) they assume a certain level of headline GDP growth to furnish revenue growth to the public agencies committed to making the payments. Following the crisis these previous levels of assumed growth are now unlikely to be realised.
b) they assume growing workforces and working age populations, but both these, as we know, are now likely to start declining in many European countries.
c) they assume unchanging dependency ratios between active and dependent populations, but these assumptions, as we also already know, are no longer valid, as our population pyramids steadily invert.

Given all this, a very real danger exists that what were previously considered as obscure securitisation instruments, so obscure that few politicians really understood their implications, and few citizens actually knew of their existence, can suddenly find themselves converted into little better than a glorified Ponzi scheme.

And if you want one very concrete example of how unsustainable debt accumulation can lead to problems, you could try reading this report in the Spanish newspaper La Verdad (Spanish, but Google translate if you are interested), where they recount the problems being faced by many Spanish local authorities who are now running out of money, in this case it the village of San Javier they have until the 24 February to pay a debt of 350,000 euros, or the electricity will simply be cut off! The article also details how many other municipalities are having increasing difficulty in paying their employees. And this is just in one region (Murcia), but the problem is much more general, as Spain's heavily overindebted local authorities and autonomous communities steadily grind to a halt.

Italian Receivables

Saturday, February 13, 2010

Lost In The Bermuda Triangle

If Greece is broke, can Spain be far behind? This question put by the Economist to its readers only last week, is surely one many investors and financial market participants are busily asking themselves at this very moment in time. The Economist's own ambiguous answer was hardly surprising, since as they point out while Spain is evidently not a Greece at this stage, there is no shortage of things to worry about. In fact saying you are not actually as bad as the current worst case scenario is not saying all that much, indeed it doesn't even reassure anyone that that least desired of labels might not eventually befall you one of these fine days.

Certainly, ever since Spain's Public Works Minister José Blanco came out with the claim that country is the currently victim not just to a strong speculative attack but also to an “Anglo-Saxon press” lead plot to destroy the euro the rhetorical temperature has only risen and risen, as each of the respective party desperately tries to fend off the attacks of the other. Perhaps the most striking example of this particular war of arguments is to be found in what is surely the latest-generation twist in the old dialectic of blow against blow, where a combination of internet age communication systems and sophistocated data management software furnish yet one more dimension to the current crisis debate: let's call it the birth of the "charts war". And from what we've seen so far it looks to me like the Spanish craft just got itself shot down in the nether nether land.

I think you it would be safe to say that it was Nobel Economist Paul Krugman who kicked off the latest round in the ongoing war of graphs with one simple image on his New York Times blog, one which showed Spain's rising unit labour costs as compared with those to be found in Germany.

Foul Play?

The Kindom of Spain was not amused, cried foul, and struck back during their London roadshow (courtesy of Elena Salgado and Manuel Campa) with their own version of the same topic. Spain is not so badly off we are told, since Italy's position is even worse. Adding insult to injury, they went one step further, and suggested that adding 2 million or so unskilled workers to the Spanish dole queues, and closing down a large chunk of Spain's core construction industry (driving the unemployment rate up to 19.5% in the process) has not been all bad, since in some senses it has been extremely beneficial, given that cleaning out all those low productivity, unskilled workers has meant that the productive power of what is left now looks decidedly better (since the average productivity of those still in work has notably risen). It is like saying that wartime bombing is beneficial if what it does is destroy the oldest part of your housing stock.

But this exit of so many workers from the centre of the economic stage is just where Spain's fiscal deficit problem enters, since those workers who are unfortunate enough to find themselves unemployed are still being supported by the rest of the Spanish labour force via their contributions to the Spanish social security system, and the output loss is hitting the government balance sheet hard via the drop in tax revenue. So the productivity improvement (as far as Spain as a whole is concerned) is simply an optical illusion. It looks nice on one graph (the unit labour cost one) and horrible on another (the government fiscal deficit one).

This is a point that Paul Krugman could have picked-up-on but didn't, although he did follow through with a further post full to the brim with very revealing charts, all intended to demonstrate that Spain's core problem is not essentially a fiscal one, a point which may be clearly seen from a comparison of German and Spanish fiscal deficits over the last decade. As Krugman argues, Spain had no evident fiscal problem till the housing boom went bust - it had a monetary one in that the interest rates being applied were far from the adequate ones, but the ensuing boom that these produced meant that the government's treasury accounts were generally awash with money. Then, naturally, it all went "pop".

Now the need to prop up the economy, and support all that "unproductive" labour which doesn't show up in the unit labour costs chart is producing a massive fiscal deficit. Thus the fiscal issue in Spain is a symptom, not a cause. The root of the problem lies in the structural distortions produced by the massive overheating of the economy during the boom years, an overheating which lead to excessive inflation, large-scale dependence on imports, and a complete loss of competitiveness in the non-tradeable sector - a loss of competitiveness which even the Kingdom of Spain accepts.

The problem with the Spanish government argument is that it focuses on the idea that the tradeables sector is not that uncompetitive. But this seems to neglect the rather inconvenient fact that those workers who are deployed in the tradeable sector also eat bread and go to hairdressers and ride in taxis and buy or rent homes just like everyone else. So they themselves need to pay prices set in the non-tradeable sector, and their salaries have to reflect this. Hence a problem in non-tradeables becomes a much more general one. And it shows up, naturally enough, in the tremendous hole in the current account balance.

The Kingdom of Spain, however, goes even further, and suggests that far from being subject to a continuing deterioration Spain's tradeables sector (on aggregate) has maintained its share of world trade over the last decade. But there is something intuitively wrong with this argument, and what that something is becomes evident if you consider that Spain was running a growing trade deficit over the whole period in question. Now global imports = global exports (by definition, trade is zero sum) and since Spain's trade deficit deteriorated over the period imports grew more than exports. Thus logically Spain's import share grew more than it's export share in world trade. That is Spain became a growing force in world IMPORTS. Somehow no one from the Kingdom of Spain mentioned this inconvenient little detail during their London roadshow since the country's representatives seem to be more focused on winning arguments with the perceived enemy - the Anglo Saxon press - than on finding real solutions to real problems. There is also a simple explanation as to why Spain's tradeable sector gives the appearance of being so competitive, and that is the non-competitive parts were simply driven out of business, and the demand for their products was met by imports. And this is just why Spain's current situation is so unsustainable. To get back to growth Spain has to start supplying a higher percentage of its own needs internally, and it has to find work for a large number of low skilled workers, and there is simply no way round the issue.

Smokin' Gun

Indeed, analysts at PNB Paribas recently took the competitiveness loss argument one step further and, by examining the virtual Real Effective Exchange Rates of the respective countries, showed how, far from addressing the competitiveness issues in Greece and Spain, the recent bout of fiscal spending was in fact making the situation worse.

This is a point I myself have been trying to make by using two simple charts. The ECB eased liquidity in the Spanish banking system last June with a massive injection of one year funding. This money went, via bank purchases of Spanish Treasury Bonds, to fund the government deficit, leading to a large injection of demand into the real economy. But what happened to that demand? Just look at the accompanying chart. The trade deficit started to widen again, as Spaniards availed themselves of their additional spending power to buy yet more foreign products.

So essentially the issues is this one. Spain's economy will not recover, and will not return to sustainable growth till Spanish products become much more attractive in price terms, and this only means one thing: some sort of internal devaluation, and all that talk we keep hearing about an exclusively fiscal correction is simply an attempt to remove the smoke without going to the trouble of extinguishing the fire which is producing it.

Spain Is A Serious Country

Meanwhile José Luis Rodríguez Zapatero, Spain’s prime minister continues to try to reasure his European partners and financial markets alike by telling them Spain is "a serious country and we will fulfil our promises.” In other words, despite the severity of the recession the country is currently suffering, and the major challenges facing its banking system, Spain, as the Economist would agree, is not about to become another Greece. At least, not yet!

And just to prove the point he had Labour Minister Celestino Corbacho and Economy Minister Elena Salgado announce in short order that Spanish citizens are a) going to work two more years each in the longer term, and b) will face continuing and sweeping cuts in services and increases in taxes in the short term. The trigger for this rather unexpected show of determination seems to have been the growing danger of contagion from debt crisis worries in Greece, as Spanish 10 year bond spreads briefly nudged through the psychological threshold of 100 base points above the comparable German benckmark.

Spain's banks have extensive government bond holdings, and as the spread rises the market value of these bonds falls, so - given that another important part of the banks capital base is composed of land and property assets of uncertain value - the prospect of a slide in the value of the bonds they hold leaves Spain's government with little alternative but to be seen to be taking "serious" measures, whatever the cost. What's more, despite the positive impact on unit labour costs of all that unemployment, the impact on the social security fund means there will be a longer term cost for Spain's already badly challenged pension system.

Quite how Spain's citizens will react to the news that their government's policy is now being driven by the need to "calm market fears", and that the country's leaders are actively considering asking them to retire at 67, still remains to be seen. Recent warning shots from political rivals and unions alike may leave their mark in the short term, but it is now clear that things have, in fact, changed, and Spain's politicians (and the bankers who influence them) are now likely to be much more sensitive to market sentiment than they are to public protest.

And what could be nearer to the heart of market sentiment these days than the fiscal deficit numbers. "It's a plan that is essential after our most recent deficit figures," Finance Minister Elena Salgado told journalists when she announced her last batch of measures. The main problem facing the Spanish government now is credibility, and what to do about the impression that the national airplane is flying pilotless over that perilous no-contact zone. Certainly the impression that someone is really in charge took a further unwanted hit when Spain announced an annual deficit of 11.4% for 2009 after previously (only two weeks earlier) saying the deficit was expected to come in at 9.5% of GDP. In fact it is rather surprising that as recently as last September (when the government first presented its budget plans for 2010) the deficit was still being forecast to come in as low as 5.2% of GDP (52 billion euros), while by November the forecast had already risen to 8.5% of GDP (85 billion euros) and finally (just two months later) we are told that it was 11.4% (over 110 billion euros).

A number of questions automatatically arise, like just what level of control the Spanish government actually has over its deficit, and just how convincing is the government's plan to make a three year, 50 billion euro reduction in a deficit which has just shot up in four months by more or less exactly the same amount without anyone (officially) forseeing it!

And Elena Salgado's still incomplete deficit reduction plans critically depend on economic growth forecasts – which rise to about 3 per cent a year in 2012 – that many independent economists regard as totally unrealistic. Even the IMF, with whom Ms Salgado recently took issue, are not convinced by her numbers and forecast a 0.6% (and not a 0.3%) contraction this year. The government now projects a 1.8% gain in GDP in 2011, with growth in 2012 up as high as 2.9%, from a prior 2.7%. Of course, you can pull numbers (like rabbits) out of any hat you like, but that won't bring you growth, and certainly nothing like 3% growth in 2012. So we are heading towards trouble, even as the Brussels control tower seems to be having difficulty maintaining contact with the pilot and his crew.

And time is running out. As Victor Mallet put it in the Financial Times - the recent austerity announcement does little answer the one question which is now uppermost in the minds of all those investors and economists who are busy worrying themselves about the future of Europe: can Spain control its budgets and once more become competitive within the constraints of the single European currency?

Mr Zapatero insists it can, but he and Ms Salgado have yet to prove it. I do hope they have an up to date set of charts to guide them.

Friday, February 12, 2010

Crisi De Confianza

El profesor de la London School of Economics descarta una conspiración contra España y alerta sobre la elevada deuda a corto plazo y las dificultades de la banca

«¿Por qué desconfían de España los inversores extranjeros?», se pregunta Luis Garicano, economista vallisoletano, en un artículo recién divulgado por la Fundación de Estudios de Economía Aplicada (Fedea). Garicano, profesor de la London School of Economics, responde que «los extranjeros tienen razón para estar muy preocupados con la situación a corto plazo de España» y sus cuentas públicas, por más que el Gobierno alegue que el sector financiero nacional mantiene una posición sólida o que los niveles de endeudamiento de la Administración son de los más contenidos de Europa. «No existe conspiración» contra España, sentencia el economista que a finales de 2008 explicó a la Reina Isabel II, durante un acto en la London School, los orígenes de la crisis global, incipiente entonces. Luis Garicano dice ver cuatro razones «que justifican la desconfianza extranjera».

Marcos Ezquerra - Madrid - 10/02/2010

Los máximos responsables del Ministerio de Economía siguen explicando a los inversores extranjeros los motivos por los que deberían confiar en la solvencia del Estado español, pero lo cierto es que las dudas que analistas y mercados plantean sobre la deuda del Tesoro siguen sin remitir. Hay datos sintomáticos de que algo no encaja: la prima de riesgo que paga la deuda a largo plazo de Italia frente al bono alemán (paradigma de solvencia) es casi la misma que la española, es decir, alrededor de un punto porcentual.

Igualmente, el coste de asegurar su impago (los conocidos como credit default swaps) se sitúan en ambos casos alrededor de los 150 puntos básicos. Dicho esto, si las previsiones apunta a que la deuda pública española acabará este año en el 66% del PIB, en tanto que la italiana superará el 115% ¿por qué buena parte de los analistas insisten en colocar a España en el mismo saco que a Grecia o Portugal en cuanto a riesgo de impago, y son más benevolentes con Italia?

Un análisis más amplio de la situación financiera del país puede aportar algunas claves. Al cierre del año pasado, el endeudamiento conjunto de las Administraciones públicas, las empresas, los hogares y el sector bancario suponía unos 3,9 billones de euros, casi cuatro veces el PIB (390% del PIB), duplicando de largo el vigente a comienzos de la década. En este periodo, y pese al avance de los últimos dos años, la deuda del sector público se ha reducido dos puntos en relación al PIB, hasta situarse en el 51%.Mientras, los agentes económicos privados han visto fuertemente incrementado su recurso a la financiación ajena. Las empresas no financieras suman ya el 143% del PIB, por un 107% de las financieras. Con todo, quizá la situación de las familias sea más relevante para explicar las dudas de los mercados.

Endeudamiento familiar

Según los cálculos de Analistas Financieros Internacionales, basados en cifras del Banco de España, el endeudamiento de los hogares se ha duplicado desde 2000 hasta hoy, para situarse en el 89% del PIB. Ese salto cuantitativo coincide con el periodo temporal de la burbuja inmobiliaria, que duró hasta 2007. Las familias pidieron prestado en volúmenes difícilmente sostenibles, y la llegada del ciclo bajo ha traído consigo un ajuste brusco. Al igual que ha sucedido con el resto de los sectores privados, el endeudamiento de las familias se ha moderado drásticamente desde hace dos años. Ese menor recurso a la deuda ha compensado de largo los requerimientos del sector público, hasta el punto de que el déficit corriente, que mide las necesidades de financiación exterior de la economía, se ha reducido prácticamente a la mitad desde el pico del 10% del PIB.

Aunque está sufriendo un incremento relativo muy fuerte, el endeudamiento de las Administraciones públicas sigue por debajo de la media europea, luego no explica por sí sólo los ataques. El problema que observan los mercados es que España puede no generar crecimiento económico suficiente para llevar su déficit público por debajo del 3% del PIB en 2013, como exige el Pacto de Estabilidad. "Fundamentalmente, se duda de los ingresos públicos", explica Sara Baliña, analista de AFI. "La clave se sitúa en el consumo. Los hogares se enfrentan a una tasa de paro de cerca del 20% y a una deuda todavía muy elevada, fruto del boom inmobiliario. Todavía tenemos que ver corrección de ese endeudamiento, de modo que las familias seguirán destinando a ahorro parte de su renta que antes iba a consumo e inversión".

Cuentas irrealizables

Si se cumple esa previsión, el gasto privado, que supone aproximadamente dos tercios del PIB, seguiría sin despegar en el corto ymedio plazo y daría al traste con las previsiones macroeconómicas del Gobierno. La última actualización del Programa de Estabilidad remitida a Bruselas sitúa el crecimiento del PIB en el 2,9%en 2012 y en el 3,1% en el año siguiente. Para dichos periodos, Moncloa cuenta con que el consumo privado crezca 3,3 puntos, algo difícil de conseguir si la tasa de ahorro de las familias se mantiene en los niveles récord de la actualidad: según los datos del Banco de España, al cierre de 2009 estaba en el 18% de la renta disponible, y casi dos tercios del mismo se destinaba a reducir deuda. "Si los crecimientos del PIB se limitan al entorno del 2%, el objetivo de cumplir el Pacto de Estabilidad en 2013 será irrealizable", remacha Baliña.

Habida cuenta de que el paro no se va a reducir significativamente hasta entonces, los gastos seguirán tensados, pese al ambicioso plan de austeridad de 50.000 millones de euros anunciado por el Gobierno. La clave de la solvencia futura puede venir dada por los ingresos públicos y, fundamentalmente, por el comportamiento de las familias.

Como decíamos hace meses, España va camino a la bancarrota y se empieza a sentir esa sensación. Como decíamos hace meses, el sistema financiero español se enfrenta a €240.000 millones de pérdidas y se empieza a sentir esa sensación. Como decíamos hace meses, España necesitará ayuda para salir de esta crisis y pronto se empezará a sentir. Lástima que se reconozcan los problemas cuando ya es tarde.

Antes estos acontecimientos, el Gobierno ha elaborado el Plan de Austeridad para ajustar el déficit al 3% en el 2013. Pero, ¿qué significa reducir el déficit al 3%? ¿Puede un Plan reducir el déficit en 9 puntos en tres años con la coyuntura actual?

El cuadro inferior refleja las estimaciones macro del Gobierno para el periodo 2009-2013:

Con estas previsiones, el límite cuantitativo debería ser de €34.000 millones o menos, 3% del PIB previsto para 2013. Si el 2009 cierra con un agujero de €120.000 millones, las matemáticas no engañan: para cumplir con el 3%, la rebaja tendría que ser de €86.000 millones en cuatro ejercicios cuasi completos.

Según el Plan, el 3% se obtendrá con: a) mejora de ingresos tributarios, b) reducción pago de deuda y c) recuperación económica.

El cuadro adjunto contiene los ingresos no financieros de la Administración. Hasta noviembre del 2009, el descenso con respecto al 2008 era del 19% cifra que se doblaba al 38% respecto al 2007. De hecho, de 2007 a 2009 el Estado ha dejado de recaudar €64.000 millones.

Frente a esta realidad, el Plan prevé recaudar un 21% más subiendo impuestos y reduciendo el fraude. Durante la fase expansiva de la pasada década, el mayor crecimiento recaudatorio fue del 16% (2006). Para recaudar un 21%, el PIB tendría que crecer anualmente un 12.81%. Ni China lo lograría… salvo que se aumentara el tipo máximo al 56% para rentas superiores a €53.407 y al 44% para rentas hasta €33.007… Say decía que los gobiernos son impredecibles, así que cualquier cosa es posible. Dios nos pille confesados.

El cuadro superior refleja la evolución de la deuda en circulación. En 1989, la deuda era €97.552 millones. 2009 cerró en €475.402 millones, +387% de incremento. Solo entre 2007 y 2009, la deuda creció un +54%. Peor aún es su composición: si en 1999 apenas el 1% era a corto plazo, en el 2009 su importe se multiplicó por 9 hasta suponer el 5,7%. Deuda a corto para pagar pagos corrientes.

Solo el servicio anual de la deuda en circulación es de €30.300 millones y según los Presupuestos Generales del Estado, la deuda se elevará en 2010 al 62% del PIB. Sería un milagro reducir estos compromisos en la cuantía suficiente.

c) Recuperación Económica:

Tradicionalmente, la composición de nuestro PIB ha sido consumo privado (56%), formación bruta de capital (29%), sector exterior (5%) y sector publico (19%). De mantenerse estas proposiciones hasta el 2013, sólo se podrían cumplir las estimaciones de crecimiento del PIB destinando el 2.24% del PIB anual a inversión pública. De acontecer, sería la primera vez en la historia económica reciente que ocurriera.

Aún más, las dos últimas crisis prueban que se necesita crecer a tasas anuales superiores al 2.6% para crear empleo neto. Según el Gobierno, solo se crecerá a esa tasa en el 2013.

La previsión de recuperación se basa también en el crecimiento de las exportaciones del 19.5% del 2011 al 2013. El cuadro inferior refleja la evolución del tipo real efectivo del euro. Fíjense en la divergencia Alemania y España desde 1999…

¿Qué conclusiones podemos sacar de lo anterior?

1) Es imposible reducir el déficit al 3% para el 2013 sin destruir todo el tejido productivo.

2) Sólo aumentando anualmente el gasto público en 2 puntos porcentuales se podría crecer al 2.9%.

3) Es imposible que la recaudación aumente un 21% en el periodo 2010-2013.

4) El incremento del Gasto Público solo podrá financiarse con emisión de nueva deuda.

5) Sin recuperación económica, el volumen de la deuda también incumplirá Maastricht.

6) Sería un milagro cumplir la previsión de una tasa de desempleo del 15% para el 2013.

Algunos no comprenden aun la gravedad de la situación. España es imposible que se recupere dentro de la UME bajo estos parámetros. Es imposible reducir el déficit al 3%. No todo es culpa del euro y el ajuste ocurrirá dentro o fuera de la UME. La diferencia es que fuera y con ayuda exterior el ajuste será menos brutal en el 2010, y sobre todo, se evitará estar hasta el 2020 sin crecimiento y con un desempleo perenne en el 20%.

Esta UME solo es una parte de nuestros problemas. Hacen falta las reformas profundas que todos conocemos pero reducir déficit, crecer económicamente y pertenecer al euro son tres conceptos incompatibles para España. En 1999, algunos ya preveían que perderíamos una década. ¿Hay que perder la próxima década también para reconocerlo?

Como la opinión aquí expresada no cuenta, quizás la del Sr. Belka sí: “take Estonia, which is hoping to introduce the euro in 2011. Despite losing one-fifth of its output, it kept its public deficit below 3% of GDP”. A pesar de perder el 20% de su PIB…Ése es el ajuste que nos espera dentro del euro, perder 20% del PIB para tener el 3% de déficit. ¿Para que toda esta pérdida de empleo?: ¿para presidir la Unión por 6 meses?

Reformar dentro de esta UME no nos sacará de la crisis por la forma en la que esta Unión se constituyó. Al menos algunos empiezan a recordar lo que ya dijeron en su día.

P.S. A propósito de China, hace meses comentamos aquí el papel de España en la presente III Guerra Comercial de la que el FT empieza a contar algo ahora. ¿Quien compra últimamente el 19% de nuestra deuda?, ¿quién apoya a España en la propuesta?, ¿las entidades de que país están tomando posiciones en bancos patrios? En Economía todo pasa por una razón. El que se niegue, no significa que no exista.

l La deuda. Garicano pone en cuarentena uno de los argumentos para el optimismo más frecuentados por el Gobierno cuando habla de las cuentas de la Administración: que el Estado español está saneado porque el nivel de endeudamiento público (55,2% del PIB) es 20 puntos inferior a la media de la Eurozona y está a la mitad de camino de los números de Grecia (113%) o de Italia (115%). Pero «las necesidades de financiación de España son más preocupantes de lo indicado», expone el economista en el artículo de Fedea, porque «la financiación está siendo a muy corto plazo». Esto es, España debe menos dinero que otros, pero tiene mucha deuda que habrá que pagar o financiar (con más deuda) en cuestión de meses. «El 70% de la deuda española emitida en 2009 fue a menos de un año», escribe Garicano.

Puede ser, matiza el economista, una «estrategia consciente» del Tesoro: se opta por emitir deuda (letras) a muy corto plazo porque el interés que se debe abonar es muy bajo. Puede ser también que España esté recurriendo a ese perfil de deuda ante las dificultades para obtener financiación a largo plazo en los mercados, inundados por las emisiones de todos los países que buscan enjugar los generalizados déficit provocados por la necesidad de intervenciones públicas en la economía para salvar los muebles en la recesión.

La cuenta de Garicano es la siguiente: de los 475.000 millones de deuda acumulada a finales de 2009 por el Estado, en torno a 125.000 millones vencen en 2010 y «deben ser reemplazados por nueva deuda». Cubrir el déficit previsto para este año obligará, como mínimo, a conseguir otros 100.000 millones, según las mismas estimaciones. Así que España puede tener unas «necesidades netas» de 225.000 millones este año. «Esto es mucho, se mire como se mire, en un ambiente en el que muchos países compiten por financiación».

¿Cuál es el riesgo entonces? El perfil de la deuda, con un 70% de vencimientos a corto plazo, «puede crear un problema serio», responde Garicano. Y avisa: «Si de repente el mercado no te quiere prestar, te encuentras, de un día para otro, en una situación básicamente de falta liquidez total».

l La banca. Advierte Garicano también de que cuando se airean las favorables cifras españolas de deuda pública en relación al PIB no se tiene en cuenta el coste que puede suponer sanear el sector financiero. El autor parte de considerar que hoy es un argumento «inadecuado» seguir sosteniendo que la banca española está en mucho mejor posición que la de otros países. Luis Garicano viene a coincidir con aquellos otros expertos y directivos que esperan dificultades severas en el sector debido a los impagos del negocio inmobiliario que aún están por venir. La deuda viva de los promotores con bancos y cajas asciende a 325.000 millones de euros. Los fuertes impagos que se esperan en ese capítulo, unidos a los que se presumen para el resto de los créditos, llevan a Luis Garicano a pensar que algunas entidades, las que no estén bien capitalizadas para responder, «van a tener problemas muy serios».

Y el saneamiento de ese problema financiero potencial salpicará al contribuyente y a la deuda pública. Presumiblemente, las dificultades de bancos y cajas y el proceso de reestructuración del sector obligarán al Estado, principalmente a través del llamado fondo de reestructuración ordenada bancaria (FROB), a inyectar enormes cantidades que Garicano aproxima, como hipótesis, a los 150.000 millones de euros.

El problema vuelve a la casilla del endeudamiento: «Esto aumentaría la deuda y las necesidades de financiación en otro 15% del PIB (...)». En ese escenario, reflexiona Luis Garicano, es razonable pensar que, a finales de 2010, la deuda pública española sea equivalente a entre el 80% y el 90% del PIB. Por encima del 66% que el Gobierno prevé para este año en el programa de estabilidad recién remitido a Bruselas.

l El crecimiento. Un nivel de deuda como el comentado «se convierte en muy preocupante» si, como subraya el profesor español de la London School, no llega «el famoso nuevo modelo económico», si España se sumerge en una década de paro tan intenso o más que ahora y con crecimiento cero. «El problema real desde el punto de vista de los inversores extranjeros es que no ven voluntad de cambio; el Gobierno ha tardado demasiado en enfrentarse a la verdadera dimensión de los problemas, los sindicatos están dispuestos a morir con las botas puestas y prefieren dejar que el Estado de bienestar retroceda veinte años antes que renunciar a nada y el Partido Popular en esto de las reformas a veces parece más el Frente Popular que un partido liberal», critica Luis Garicano. Y enfatiza: «Los dos partidos principales deben ponerse, cuanto antes, a educar a los ciudadanos sobre los costes y sobre la magnitud del problema».

l La transparencia. Garicano, con la perspectiva que da observar los acontecimientos y los mercados desde fuera de España, llega a decir: «Nadie en el extranjero se cree nada de nada». Nadie se cree, esgrime, que se hayan producido verdaderamente los ajustes que impone el final de la burbuja inmobiliaria. «Con más de 1,5 millones de viviendas vacías, los precios han caído sólo un 13%. Esto al inversor extranjero (...) le parece que tiene que ser fraudulento». «Nadie, pero nadie, se cree los números de las cajas», añade Luis Garicano.

Tercer pecado de transparencia: «Nadie se cree los números del Gobierno». El economista, que en 2007 recibió en Asturias el premio «Fundación Banco Herrero», resta crédito a las proyecciones comunicadas por el Gobierno a la UE, le parece optimista en exceso esperar que España pueda crecer el 2,9% en 2012. «No es serio», afirma también, que el peor escenario previsto para ese mismo año por el equipo de la ministra Elena Salgado sea un crecimiento del PIB del 2,4%. «Si esto se une a las declaraciones y retiradas de anuncios sobre pensiones y otras materias, podemos imaginar la falta de credibilidad de estos números».

Luis Garicano termina su análisis así: «Es hora de que el Gobierno, los sindicatos y los partidos de todo espectro se empiecen a tomar el problema en serio: la hora de las reformas es ahora».

Hanging In The Balance - The Future of The Eurozone

The future of the Eurozone seems to be decidedly hanging in the balance following the recent meeting of EU leaders in Brussels where it was stated that the EU stood ready to help Greece confront its financial crisis but failed to spell out exactly what form such help was going to take. As a result the common currency continued its downward path and investors fretted about the absence of any clear commitment to a bailout package, asking themselves whether the Greek government would be able to handle the very difficult process of change that is being demanded of them single-handed. It still isn't clear whether the EU decision is a strategy to force the Greek government to seek aid from the IMF, or whether Europe's leaders really believe a simple declaration of support will be sufficient.

This communicational deficit has now become a real handicap as all it does is pile ever more confusion on confusion. As Nobel Economist Paul Krugman continually points out, the problems being experience on Europe's periphery in countries like Greece and Spain are not simply fiscal ones, they are about structural imbalances and lack of competitiveness, and raise questions which go to the heart of the functioning of the common currency.

In Spain's case the position is even clearer than in the Greek one: before the housing bubble burst there simply was no evident fiscal problem - indeed the country was running a fiscal surplus. Spain's current fiscal problems have only arisen due to the attempt to solve a competitiveness problem using fiscal stimulus as a means.

The Eurozone's future seems to be hanging in the balance since economists, analysts and financial markets alike take the view that current wave of policy initiatives emmanating from the centre constitute a continuing process of too little, too late. Countries like Greece and Spain would seem to have little alternative to carrying out a substantial process of deflation (internal devaluation), and doubts about the effectiveness of the currently proposed remedial action are only further fuelled by the attempts of some of the parties involved to deny that this is necessary or desireable.

Evidently such outcomes were not anticipated when the monetary union was set up, but that is no reason to now deny their reality. Equally, it was hoped that monetary management could be carried out on the basis of a hybrid institutional structure (the ECB plus national fiscal policy, with "light" monitoring from the centre via the Stability and Growth Pact), and that no bailouts or closer political integration would be needed. Again, it is now evident that this methodology simply doesn't work, but there is no road back. The biggest challenge now facing the EU is thus one of its own making - Europe's leaders need to be bold and resolute enough to convince markets that they understand and will do what is needed. That is to say they will implement the evident institutional changes necessary to put the process of monetary union on a firmer and more sustainable institutional footing.

As custodian of the shared currency, the European Central Bank has operated more by stealth than by dictat in the present crisis, quietly opening lifelines to all the most seriously affected countries by effectively buying their government bonds through specially created credit windows. This softly-softly approach worked for a time, keeping much of Europe's periphery in a state of fragile equilibrium, where countries who found their economies folding in on themselves had no real incentive to takle their problems by the roots, but were able to survive from one day to the next via an intravenous feed of ECB credit. They were able to do so until a few weeks ago, that is, when it finally became apparent that ECB President Jean-Claude Trichet, and his German anchormen over at the Bundesbank had gotten tired of simply funding procrastination, and needed to see some signs of real progress. Ironically it might have been the rapid recovery in the French economy, and the growing pressure from France for an exit strategy from the emergency crisis measures, that finally set things off.

And now, no matter how many times Monsieur Trichet calls the idea of Eurozone break-up absurd, market participants remain unconvinced. So what steps does Europe really need to take to save the current version of the Eurozone 1.0 from collapse, or steady disintegration?

In our forthcoming report we will.

i) argue that, the EU leadership should recognize that, despite all the associated difficulties, the IMF has unique expertise in designing programs that can pull countries back from the brink of financial collapse. As such a partnership with the IMF in the transition to Eurozone 2.0 makes a lot of sense. The latest indications are that the IMF could well be brought in to offer "technical assistance plus" to monitor the conditionality of national level agreed programs with a brief of reporting back to the EU on the degree of progress made. This IMF-EU tandem makes a lot of sense under current circumstances. The way forward from here is not written in tablets of stone, and improvisation should be seen as a positive feature, and not a sign of weakness.

ii) outline in detail and evaluate the measures EU finance ministers will agree to in order to oversee the implementation of the "new generation" Stability Programmes.

iii) review the way that ECB funding has operated to avoid the development of classic balance of payments crises in the respective member states, drawing attention to both the strengths and weaknesses inherent in this approach, and argue the the Eurogroup now needs to create its own multilateral funding system to redistribute fiscal risk and ensure that adequate finance is available to each nation as it adheres to the jointly agreed conditional programs.

iv) examine what is involved in the processes of internal devaluation which are likely to be introduced in those member states with severe competitiveness problems, and explore the mechanisms though which these can operate.

v) finally, explore what might happen should the unthinkable - Eurozone disintegration - come to pass, and look at the implications for the global financial system of this worst case scenario.

Wednesday, February 10, 2010