Stage One of the Spanish Bailout Begins
-Edward Hugh (Don’t Shoot The Messenger)
This weekend it has been hard not to think about the first Spain bailout, and what it implies about the future of the Euro. I guess we will never know whether Mariano Rajoy uttered those two words immortalised in song by Aretha Franklin as he cruised down the Chicago River that Saturday afternoon, but one thing is now clear, Angela Merkel has finally accepted Spain into the German embrace. Whether it will be a tender and loving one remains to be seen.
I say first bailout intentionally, since it is clear that this is the beginning and not the end of a long process, a process which will now inexorably lead to either the creation of a United States of the Euro Area, or to failure and disentegration of the Euro. There will be no middle path.
Unfortunately Europe’s leaders are still thinking short term, and practicing one step at a time-ism. Essentially there are three key stakeholders in the present situation – the EU in Brussels, the German government in Berlin, and the Spanish administration in Madrid. All three have probably walked away feeling satisfied they have gotten something out of this deal. The EU leadership in Brussels has long wanted to draw Spain in. After months of issues about number quality relating to both public finance and the financial system, they will now feel they have a firmer grip on the situation. They will also be perfectly well aware that Spain’s financing needs go well beyond the 100 billion euros which has been agreed to as the current ceiling. So Madrid will be back for more, and step by step the conditionality can be ramped up.
Berlin also has reason to feel satisfied, since they probably feared a much larger number. I think German leaders have long sought to avoid the implications the Spanish problem entailed for them, but finally they too have been brought into the real world. As far as the external onlooker goes, this is a defining moment, since it is the moment beyond which you could definitely say it will cost Berlin more to get itself out than it will to stay in. Germany is now answering President Obama’s question, and positioning itself to stand behind the Euro. We can only hope they will be up to the task.
Meanwhile, in Madrid, things are not in fact as humiliating as they might at first seem. The greatest preoccupation felt by Spain’s leaders is not to be seen to be giving money to banks, money which at the same time they are taking away from hospitals and schools. In this sense the EU rescue formula is definitely a lesser evil, since even if indirectly – as the loan is repaid – the money will have to come from the Spanish budget, this will not be fully understood by the Spanish electorate. So really, Spanish politicians have had a hot potato taken from their hands.
Naturally, the details will be become clearer as time passes. At this point I would simply say three things. Firstly this money is not a problem fixer. It is a stopgap to enable Spain’s bank to maintain capital levels as losses are crystalised over the next two years. In this sense the money addresses one of the symptoms of the problem, but not the root of the problem itself. What we can now certainly say is that Spain’s banks will be well capitalised through to the end of 2013.
But credit isn’t flowing to the private sector in Spain, and these funds will do little to change that situation. So this is the second point I would make, to get credit moving again a necessary (but not sufficient) condition will be deleveraging the banks, and achieving this deleveraging most certainly means taking some of the problematic property assets off the balance sheets, to be deposited in a Nama style bad bank, for example. Doing this will need finance, so furbishing that finance may well be the next stage in the bailout.
Then, thirdly, we have the sovereign funding issues. As is well known foreign investors have been exiting their Spanish debt holdings, and there is no reason to imagine this posture will change. Spain’s banks have been filling the gap by using LTRO liquidity to buy government debt, but there has to be a limit to this process, otherwise the banks will be as bust with the bonds as they are with the property. So financing Spain’s bond redemption needs between now and 2015 will be the third bailout stage.
As I said, removing property related assets from the balance sheets is a necessary but not a sufficient condition for getting credit flowing. The other condition is having solvent demand, which means getting the economy moving again, and this means addressing the competitiveness issue. If the economy isn’t turned around then property prices will continue to fall, and the banks will continue to have losses, which means at the start of 2014 we will need another round of capitalisation to cover for the losses to be anticipated in 2014/2015, and so on. There has been much talk of internal devaluation to address the known competitiveness issues, but in Spain’s case nothing has been done. Maybe this is the next reform Brussels should be discussing with Madrid. If they really do want to save the Euro, and not have Spain go back to the Peseta to devalue, then one day or another this internal devaluation will have to happen.
Is the Spanish Bail-Out a Turning Point?
-Efraim Chalamish (Efraim Chalamish’s Economic Development and Security Blog)
Central banks are usually slow to react. When the sovereign world discussed last year reserve currencies and the impact of the Euro crisis, central banks did not rush to replace the Euro with the Chinese and other currencies.
Talking to many emerging markets’ central bankers recently it was clear to me that they are waiting for the private sector to show the way.
Most banks did reduce their Euro reserves. We should wait and see if the temporary feeling of relief will revive the discussion and lead to different results.
How to Make Corporations Green
-Ed Dolan (Ed Dolan’s Econ Blog)
Ahead of this month’s Rio+20 global environmental conference, Tuesday’s FT ran a story on capitalist conservationists. Writer Pilita Clark headlines a $100 million wind farm that Google is building in Oregon, Unilever’s efforts to design concentrated detergents, and Wal-Mart’s push to get suppliers to send it greener goods.
Clark notes that green corporations come in two varieties. There are the “evangelicals” like Unilever, Philips, and Marks and Spencer, for whom sustainability is a belief system. Then there are the “sustainability capitalists,” like GE or Siemans, who see the green movement primarily as a profit opportunity. Both are fine, but she points out that the pool of green corporations is still small, making up no more than 1 percent of companies with $1 billion or more revenues.
The challenge is how to expand the movement toward corporate sustainability. James Cameron of the London-based Change Capital investment group observes that corporations are not designed to pursue environmental objectives. “It’s an uncomfortable fit,” he says. “These businesses are still designed to make profits and distribute them to shareholders.”
Clark says corporations need a nudge, citing the proposal by New York City Mayor Michael Bloomberg to ban large-sized sugary drinks as an example, but that is a piecemeal approach, unlikely to have a big impact.
There is a much better kind of nudge that would start a real boardroom stampede toward sustainability. That would be green tax reform that would couple a system of broad-based environmental taxes, starting with a tax on the carbon content of all forms of energy, with a reduction, perhaps even elimination, of the corporate profits tax. Immediately, we would get not just more wind farms, but careful energy audits of every warehouse and office building, real pressure on suppliers, and a pricing edge in the consumer market for the companies that were first to deliver sustainable products.
The IMF on the Turkish Economy
-Emre Deliveli (The Kapalı Çarşı: Emre Deliveli’s blog on the Turkish economy)
The IMF was recently in Turkey for a short pre-Article IV visit. They released a short post-visit statement afterwards:
“The Turkish economy has been resilient to heightened stress in the Euro area and a weak recovery in most advanced economies and, although reduced, vulnerabilities remain. The tightening of macroeconomic policies since the second half of 2011 was appropriate and has contributed to slowing domestic demand. Encouragingly, the economy is decelerating toward a soft landing, thus helping redress the imbalances built over the last two years. It will be important to maintain current budget targets for 2012 and tight monetary policy to guard against external shocks and to strengthen existing policy buffers. However, global economic developments pose downside risks. Should these risks materialize, the public sector’s strong balance sheet gives the authorities room for countercyclical policies.”
I usually more or less agree with the Fund on the Turkish economy, but I have a couple of objections to this paragraph. First, I am not sure if we can definitely say vulnerabilities have been reduced. It is true that the current account has been falling, but we have yet to see if this adjustment is permanent. Besides, there is more to external vulnerabilities than just the current account.
The same goes for the “soft landing”: Not only are we getting mixed signals from the most recent indicators, I am not sure the slowdown could be attributed to “tightening macroeconomic policies”: I would argue it owes as much to the uncertainty created by the unorthodox monetary policy as well as the global environment. Besides, while the Bank did tighten monetary policy significantly after October, fiscal policy has remained pro-cyclical.
In fact, this last point (as well as most of the others) were made in the Fund’s latest Article IV published in January. I really don’t think so much has changed since then to warrant such a drastic shift in the IMF’s thinking, so maybe they couldn’t squeeze all the details into one paragraph.