Spain’s role in this possible calamity is more that of a sideshow than a frontline. Spain has a fighting chance for survival without serious economic disruption, but only if the world economy remains at the least benign. To get out of its difficulties, the Spanish government needs to be far more determined than the light approach taken by the Irish and Portuguese (which face far worse problems than Spain).
Last we heard, Ireland was still Europe's take-your-medicine poster boy.
To be clear, Spain has a better chance of avoiding sovereign and massive bank defaults compared to Greece,... In this regard, announcements in the last few weeks from Spain were helpful, for example when the government chose resolution authority over religious authority in taking legal control of a troubled savings bank (CajaSur) from the Catholic Church.
We think they are - at least to the degree that the widespread interpretation of this as a new sign of weakness was quite simply stupid - partly correct. The contrary argument would question why they didn't do it months ago when it first became obvious that the management of CajaSur was not not negotiating a merger in good faith.
The highly unpopular budget reforms announced by Prime Minister Zapatero further demonstrate some resolve – and the fact they just passed a legislative hurdle is encouraging.
The take in Spain was that the one vote majority showed the debility of the Zapatero government. But that he managed at all to get across a bill ordering civil service wage cuts and a general pension freeze is not without its merit.
But who is really safe in Europe? With France running an 8% GDP budget deficit (for 2010) and a debt/GDP ratio of 83.6%, should we be confident they are safe while Spain is not (with debt/GDP at 65%)? France’s thirty years of budget deficits do not bode well for anyone expecting an immediate strong fiscal response. In many ways Spain appears better placed to take tough actions than France.
It's nice to see someone with a bit more mediatic and (possibly) intellectual clout than this olive farmer state the obvious.
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3 Comments:
Hi,
I agree with you about Simon Johnson. Simon Johnson is a close minded, superficial fear monger. I am very glad the US government took a very different route addressing the financial crisis than the approach pushed by Johnson last year. That could have been a total disaster.
Spain's current 65% public debt to GDP is better than many countries. However, can you share some thoughts on Spain's private debt level? How significant is the concern for the total debt (public+private)?
As for the troubled banking sector, why do you feel the market has properly priced in that risk? I am very amazed that Spain's stock market is now back to level of early April of 2009. In other word, the market had a whole year to properly price Spain's risk. Today the market decided the price appreciation of last 14 months was wrong! Well, is it? Why?
I have been following your blog for a while. As a constructive feedback, I've not notice many negatives entries on the structural problems of Spain.
It still blows me away that anyone would suggest deflationary policies for countries that are suffering from overly high debt.
On an aside I read the other day that Portugal issued a bunch of bonds dominated in USD back in March.
They were really proud of themselves because they had saved a couple basis points over issuing the debt in Euros.
狂猪 - I used to deal with the inherent (or even genetic) silliness of economic life in this country on a regular basis. That was before the world went all histrionic on us and I decided that the structural problems faced by most commentators were more worthy of my attention.
I may soon return to a less reactive stance.
As for the banks, the strategy being followed is to kick the can down the road. This the same as banks everywhere. The difference is that I believe that the real estate collateral they hold on their books (not speaking of raw land here) is considerably safer than similar in the US, for example. I don't know if any given bank is appropriately priced or not, but I'm pretty sure that the house isn't going to come down.
Thanks
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