How Not to Solve a Problem

The original article is no longer available without going through some very suspect registration process but on Monday El Mundo published a piece stating that the government was planning to offer a tax amnesty to individuals willing to use their secret stashes of cash money to invest in Spanish government debt.

The last time this type of rumour surfaced, in October of 2008, we remarked on how the powers that be had read, and heeded, our yet earlier suggestion in this regard. Still missing, though, is the necessary involvement of the ECB. Removing the 500 euro note (of which there are 50 billion euros worth in circulation in Spain alone) from the list of what is considered legal tender, giving holders of such a period in which to turn them in for bills of an acceptable domination, combined with the amnesty would easily cover Spain's refinancing needs for the year - even in the event that no one else in the world would dare touch a Spanish bond issue.

Not that this idea is likely to go anywhere - the Spanish political class probably holds the largest stash of 'black money' - but fabulously predictable is the opposition PP's reaction to this (later denied by the government) report. They officially hate what is a beautifully workable solution to two untenable situations presumably because it is "unfair" to those who do faithfully pay their taxes. Next they'll be claiming that the 20% retention tax on the interest payments from those bonds would further deplete the nation's coffers.

As to the advisability of the PP's playing electoral politics two years prior to the next general elections in the face of generalized doubts as to the solvency of the Spanish state and viability of its economy, it is worth taking into account exactly how slowly capital markets are capable of reacting to the de facto resolution of a situation. In the early 1990's, doubts began to surface with reference to the fiscal deficits run by the Canadian federal and provincial governments. Rather than expressing themselves through interest rates, investors went directly for the Canadian dollar. The chart at the top of the page shows the fall of the 'loonie', in US dollar terms, from 1991 to 2002. The vertical line in the middle more or less pins the date by which the deficits behind the decline had been eliminated. Yet to come was a further 17% negative revaluation of the currency - more than it had dropped up to that date - over nearly five full years.

This all does nothing to cure us of our suspicion that ideologically entrenched interest groups - of all stripes - in Spain would consider it a deal well made were absolute victory over the enemy to come at the cost of returning the country to the stone age.

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