Spain Real Time Data Charts

Edward Hugh is only able to update this blog from time to time, but he does run a lively Twitter account with plenty of Spain related comment. He also maintains a collection of constantly updated Spain charts with short updates on a Storify dedicated page Spain's Economic Recovery - Glass Half Full or Glass Half Empty?

Saturday, December 12, 2009

The Velocity Of Modern Financial Crises

Jean-Claude Trichet, European Central Bank president, noted when speaking in Cambridge last Thurdsay that the speed at which financial disruption can spread had “accelerated tremendously over the past few decades”. While debt crises in the 1980s occurred over years, the effects of the Lehman collapse “spread around the world in the course of half-days”.

As Ralph Atkins pointed out, the Greek government is but the latest to learn that in the modern world you can be catapulted from relative obscurity to global prominence in a matter of hours. Everyone can be famous for five minutes, as Andy Warhol said, but this kind of fame most of us could well live without.

Faced with the assessment by Ratings Agency Standard and Poor's that Spain's economic and financial situation was deteriorating, the Spanish Prime Minister Jose Luis Rodriguez Zapatero simply limited himself to an outright rejection of such negative economic forecasts, declaring the naysayers to be wrong in the light of the -to him - self-evident fact that Spain was just about, at this very moment, to emerge from the recession which has now bedevilled it for so many months. Indeed he even went as far as to say they were wrong, since he he could find no reason why Standard & Poor's should downgrade Spain's long-term sovereign debt rating, "From our perspective there are no reasons for it, firstly because of the strength of the country (and) because the public accounts are solvent," he told the Onda Cero radio station. Standard and Poor's in fact argued that "The downgrade ... reflects our expectations that public finances will suffer in tandem with the expected decline in Spain's growth prospects", a viewpoint with which few external observers would disagree.

Indeed, Spain's representative on the ECB governing council Jose Manuel Gonzalez-Paramo told the Spanish press agency EFE, in an interview widely quoted in Spanish media, that he, himself, found the S&P opinion hard to disagree with: "The ECB is not taking issue with whether Standard & Poor's should cut Spain's rating, but the report that accompanies this warning is hard to deny....I'm convinced that Spanish authorities share this analysis and will do whatever is needed to avoid S&P's negative outlook resulting in a change in rating," he said.

Had Mr Zapatero found it within his repertoire to be able to express similar sentiments I am sure he would have done more to convince the world at large that he is aware of the problem, and is willing to take the necessary action. As it is, he simply leaves the impression that what just happened in Greece will eventually and inevitably happen in Spain, with all the suddenness and lightning-strike velocity M Trichet was warning about. What we seem to be facing is what Gabriel Garcia Marquez once called the Chronicle of a Death Foretold.

So what do the rest of us do, simply sit back and watch that "accident waiting to happen" actually happen? Angela Merkel may have other thoughts, since speaking in Bonn last Thursday she indicated that she, at least, was of the opinion pressure could be brought to bear on the national parliaments of countries with looming budgetary difficulties.

"If, for example, there are problems with the Stability and Growth Pact in one country and it can only be solved by having social reforms carried out in this country, then of course the question arises, what influence does Europe have on national parliaments to see to it that Europe is not stopped.....This is going to be a very difficult task because of course national parliaments certainly don't wish to be told what to do. We must be aware of such problems in the next few years."

Well, if such pressure can be brought it most certainly now should be. And not over the next few years, but rather, if M Trichet is to be believed, during the coming weeks and months. Lightning may well not strike twice in the same place, but it most certainly can strike twice.

A New Version of the Weak Euro Meme

Well, having been so lavishing in my praise of Ralph Atkins in recent posts, perhaps it is time for the administration of a gentle "rapapolvo" (otherwise, you know Ralph, people might start to talk), and just to hand he offers me the ideal opportunity to "discrepar". A little instability is, it appears, a dangerous thing, but not, it seems entirely and unequivocally dangerous:

True, Greece’s plight has weakened the euro, which has ended this week back down at levels last seen in early November. A weaker euro, however, will help boost eurozone growth - and thus come as a relief to eurozone policymakers. A little instability is not necessarily all bad.

Now, with all the other pressing topics I currently have on my plate I would normally have quietly passed this one by, had it not been for the fact that earlier in the week, over at the Economist, they came up with a similar "saving grace" for a partial Greek default.

How badly the euro’s standing would be hurt by a default would depend on the state of public finances elsewhere: if America were struggling too, the dollar might not seem an attractive bolthole. If the current struggles with a strong euro are any guide, euro members might even half welcome a tarnished currency.

I can think of a thousand and one different ways in which the euro might lose some of its current strong value, I can even imagine a goodly number of those which might be decidedly positive, but what I can't for the life of me accept is that one of them would be the sort of economic, financial and political chaos which we may now be about to see in Greece.


christopher.a.clarke said...

Hi Edward,

Yes, any weakening of the Euro arising out of fears over the solvency of a member nation cannot possibly be a cause for celebration. In any case, if the Euro is devalued 20% against the Dollar because of the likes of Greece, and the oil price goes up 30% as many are forecasting for next year, we'd get a pretty frightening scenario for inflation and interest rates.

If A. Merkel is worried about Greece, what might she be thinking about the 4 times bigger Spanish economy? Also her friend Nicolas, who already thinks that Zapatero "peut-etre n'est pas trés intelligent" or something similar, surely won't be holding back for too much longer. Make no mistake, these two will dictate ECB policy; always have done and always will.

The seemingly inevitable final bail-out for Spain will surely come under strict conditions. That's when the fun will start. Meanwhile, Zapatero continues to deny what is staring him in the face. Does he really believe what he says? Does he not read what ex-minister Jordi Sevilla is now belatedly writing in El Mundo?

My conclusion is sadly the following: Zapatero and his clones believe they can only retain political power by buying votes through hand-outs and subsidies. Any fundamental reforms would put some of this support at risk so don't do anything and let the economy go to pot. The idea of winning an election based on any kind of performance appraisal has already disappeared completely.

Hynek Filip said...

Christopher, if the Euro devalues because of Greece, and if somebody notices that it was a gross mistake to let Greece join, then it will be a cause for celebration.

In fact, I do not really think that Greece can survive as a Eurozone member. It never should have gotten in and the effort to keep it in will soon prove futile.

Although it will most probably hurt, we might finally realise that the Euro is not for everyone, and that countries may leave as well as join.

lagarto juancho said...

Hi Edward,

Once again, excellent stuff.
Looking at the EURUSD evolution during these last days, one could argue that your insights are being closely monitored by the market. Victor Mallet and FT surely have a broad base of readers...:)

Another issue you could take on for future posts (if you haven't done so yet) is the role of "Spanish non-sovereign public debts"; I am referring to that of ayuntamientos and autonomias. I am afraid their volume is huge (they have mastered the variations of off-balance-sheet liabilities, while ignoring the non-recurrent nature of most of their income). And I am also afraid that the Spanish government will not allow these institutions to have their credit ratings deteriorate significanly (or at least not the biggest ones) because this would weaken its current optimistic message. The backing (via financing of guarantees) needed for this could very well increase the velocity of the Spanish crisis, and eventually trigger the intervention/pressure/guideline setting from the ECB/Germany/France.

I have thought of this because of the rating downgrades reported a few hours ago by Moody's (Cataluña,Castilla LaMancha and Comunidad Valenciana), so I am ready to admit I am being opportunistic.