Spanish Prime Minister Mariano Rajoy, his Economy Minister Luis de Guindos, and Finance Minister Cristóbal Montoro, have all been asked to respond to Nobel laureate Paul Krugman’s recent comments regarding what he called eurodämmerung: the end of the single currency.
Unsurprisingly, they all repeated their commitment to the single currency, saying that Spain would not require a bailout, and that the spending cuts would continue. But like guilty men giving away what is really on their minds, all three went further, insisting that Spain would remain in the eurozone, and that a corralito was a “technical impossibility.” Corralito is a dreaded word in Spain, associated with the chaos that ensued in Argentina a decade ago when the government, facing much the same scenario as Spain does now, imposed a series of measures aimed at preventing capital flight – including a deposits freeze – while devaluing the currency to a more realistic, sustainable exchange rate.
The last year has seen a rapidly spreading understanding in this country that things are not just very bad, but getting worse, and will continue to do so for a great many years to come. It’s hard to keep up with the figures on home repossessions, or the number of households with no income. Five years ago the middle classes were talking about how much the value of their home had risen; now it’s how a close friend or relative has lost their job and has no chance of ever finding another, or has a grown-up son or daughter with no prospect of finding work and leaving home.
There is a growing sense of fear and desperation and a growing sympathy toward the plight of the Greeks, based on the belief that “we are next” and that there is nothing we can do about it. And the sense of powerlessness and frustration is rooted in an awareness that events are moving at a speed beyond the government’s control, and that the real decisions are being made in Berlin and Brussels.
Those events and those decisions overwhelmingly concern the future of the eurozone. In the last two years we have watched as Brussels and Berlin have failed to save Greece from the Vikings of the international markets, who have raped and pillaged the country at will. The markets now know that the European Central Bank, the European Commission, and the IMF either don’t know what they are doing, or don’t care what happens to Greece.
In the last couple of weeks the media and our leaders have shifted inexorably from “Greece will not go down,” to “Greece exit looks increasingly likely” to “Here are the scenarios for a Greek exit.” The media have even come up with a term for it: “Grexit”.
‘Grexit’…so why not ‘Spaxit’?
Might we soon be talking about Spaxit? Let’s hope so. The Spanish economy’s total government debt is projected to be 79.8 percent of GDP in 2012 — that is, €800 billion. The debt last year was a mere €680 billion — but that was still 21 percent higher than in 2010. At this rate, and without factoring in the contraction of GDP, in 2013 Spanish government debt could well rise to 90 percent of GDP.
We shouldn’t forget that private debt is an additional 75 percent of GDP, while the banks have a capital shortfall estimated at €78 billion.
Spain has to pay back €149 billion to bond holders in 2012. To do that it will issue a total of €186 billion worth of bonds. Recent bond auctions have, to say the least, been disappointing, and borrowing rates just keep going up. In 2011, interest payments totaled €28.8 billion — up from €22.1 billion the year before, thanks to rising bond yields.
In short, to use the home economics analogies that this government is so fond of: Spain has borrowed too much money on short repayment terms, but can’t earn enough to pay it back, and so its debts just keep mounting, and so do the costs of borrowing. It’s like being in hock to a neighbourhood loan shark.
The conversation we must hope that Mariano Rajoy and Luis de Guindos are having is something along the lines of: “Are we actually going to be willing participants in another Greek tragedy?”
Rajoy has already shown that he will stand up for Spain: he and De Guindos in March demanded Brussels relax the austerity targets for this struggling nation. They eventually succeeded in getting Spain’s budget targets for 2012 relaxed from 4.4 percent of GDP to 5.3 percent (after aiming for an even more lax 5.8 percent) Spanish officials told Brussels that their original target would be “suicidal”; Rajoy said it was a “sovereign decision, made by Spain,” his victory serving as a warning flare to markets, and delighting Spaniards.
He knows that Spain is heading inevitably towards the need for a bailout the EU cannot afford; that will mean bowing down to the conditions of the IMF, the European Commission, and the ECB. It will mean taking it Greek style.
Before that happens, Mariano Rajoy has to pick up the phone to tell Merkel that he’s had enough.
Angela, I’m not into this anymore…
Who knows, dismantling the euro may already have been discussed by our euroleaders. But there will be no final decision on Greece until the elections on June 17, when, as is expected, voters there make it clear again that they are not having any more austerity imposed on them from Brussels, and would rather face the consequences of returning to the drachma.
If Greece leaves and Spain limps along for the rest of the year, while we see that actually, the Greek economy improves, with demand for goods and services increasing now that people can afford to pay for them, and with spending cuts being implemented by the upwards of 50-percent devaluation of the drachma, along with a return of capital now that the markets knew what they were dealing with… then Rajoy and De Guindos might well summon the required courage themselves. Because with Greece out of the frame, they also know that Spain becomes the new delinquent on the block.
As long as Spain uses the euro, it can’t benefit from an inexpensive currency. The euro’s value reflects the strength of healthier eurozone economies like Germany.
How might Rajoy enact Spaxit? The first thing is that it would have to be done with the blessing of the ECB, the EC, and the IMF. In all probability, it would involve other euro peripheral countries, leaving a hard core led by Germany and France. In any event, key to avoiding an Argentinean style corralito would then be speed and secrecy. To avoid a run on the banks, nobody would be able to know beforehand. But the banking system would need to be in better shape than it currently is. Might the government’s recent redoubled efforts to speed up the recapitalization of the banks be a pointer? Similarly, the creation of a “bad bank” to hold toxic assets would certainly help the banking system withstand Spaxit.
Once Operation Spaxit was underway, De Guindos would order all banks in Spain — both foreign and domestic — to convert all their customers’ accounts and all their cash from euros to “nuevas pesetas”. The Bank of Spain would then swap the private banks’ euros for new pesetas on a one-to-one basis. Thanks to our banking infrastructure, the entire currency exchange operation could be done over a bank holiday weekend. It wouldn’t even be necessary to close the ATMs.
Immediately after the banks had surrendered their euros to the Bank of Spain and received their new pesetas, there would probably be a 30-percent devaluation, followed by a short-term restriction on withdrawals to something like 500 new pesetas a week, again, to prevent a bank run.
But that wouldn’t mean that businesses and individuals wouldn’t be able to move money around. For instance, someone buying a house would be able to transfer funds as long as the seller’s bank was Spanish.
Once the internal domestic situation had stabilized, something that might take up to a year, and which would be shown once a stable exchange rate had been established between the new peseta and the euro, restrictions on movement of capital would be lifted.
At that point, the Spanish economy would take off like a rocket: the weaker new peseta would make Spanish exports cheaper and more competitive and would help the economy start growing again, creating jobs. Demand for consumer goods and services at affordable prices would rise. Companies outside Spain might be attracted by the cheaper labour and real estate, encouraging them to move manufacturing plants here. Tourism would also get a boost: Spain would suddenly become much cheaper for foreigners.
And with all those euros on its balance sheet, the Bank of Spain would have the ability to nationalise any insolvent bank, pay off its losses, then turn around and sell the now-healthy bank on the open markets.
It would also be able to use the money to help pensioners and the unemployed, who would be the hardest hit in the early, difficult months.
True, bond holders would take a short back and sides, but once the markets saw that the country had stabilized and that its long-term future was more predictable, borrowing costs would eventually come down. Look at Iceland: They defaulted in 2008 — yet within three years, they were able to successfully auction a bond issuance on the international markets.
What’s more, Spain would not need to borrow initially: the forcible conversion to the new peseta and subsequent devaluation would mean that the government’s liabilities would be discounted by the percentage amount of the devaluation.
As for all those half-finished and unsold homes on the costas that Spanish banks are saddled with, there would probably be an influx of foreign money to snap them up at bargain basement prices.
The art of the “technically impossible”…
Spain’s prime minister has shown that while he may not be this country’s most charismatic politician, he is a stayer, keeps a cool head, and most importantly, has absolutely no qualms about doing things that he has insisted just a few months before that he would never, in a million years, do, and then leaving it to his ever-smiling deputy prime minister to explain the latest about-face.
Rajoy is still in time to save Spain from the same fate as Greece, and set a much-needed example of leadership in Europe. But things are moving fast: if he does not act, he will find himself overtaken by events, like so many of his predecessors at home and abroad in recent years. He needs to pull off the impossible, or is that the “technically impossible”?
What is revealing about the term “technically impossible” is its meaninglessness: it’s like saying that something is almost impossible; qualify impossible and you make it possible… something can appear to be impossible, and then turn out to have been possible… we’re perilously close to Donald Rumsfeld’s things we know we don’t know here.
The point is that while a corralito may be “technically impossible,” any number of measures by a different name to get Spain out of the euro certainly are possible, and we must hope that they are currently under discussion with a view to implementation sometime in the coming months.
Spain is a different situation to Greece. The problems here arose from property development and bank lending. The government has an EU bailout now for the Spanish banks to absorb their properties into SAREB the Spanish “bad bank”. This should free up the banks and begin as a first step to fix the property market. There’s a long way to go though. Economic growth is the key thing we need.