Monday, November 25, 2013

The View from Madrid

My friend Fernando del Pino writes "Independent views on Spain, Europe and the big picture of politics and money," possibly the most coherent and perceptive dissection of the European carcass today. The fictional misrepresentations by the political and bureaucratic powers in Europe are extinguishing the peoples' trust. This is true on both sides of the Atlantic. In his November 13, 2013, essay, The Government Experiences a Financial Mirage, the corruption of finance and words in Spain reveals a degenerate incumbency sliding down the drain pipe with similar enthusiasm to hangover institutions in the United States. To read more of his essays, his website is FJS

The Government Experiences a Financial Mirage

Our government seems to be up in the crow's nest shouting land ahoy each time it sees, pretends to see or just imagines some grey mass on the horizon. Three years ago, the then ever-smiling-president Zapatero, mistaking the back of a whale for terra firma, shouted green shoots just moments before the whale submerged and the surface of this ocean of crisis turned flat again. Today, those currently in power think they see something and joyfully wave their arms about again.

 It is remarkable that so much attention is still paid to a president or finance minister, belonging to any political color or country, making comments on the prospects of the economy. They lack any superior prediction or analysis capabilities whatsoever, as shown by their dismal forecasting track record. If they truly had a crystal ball they would not have wasted their entire professional life going between the party HQ and the ministry but would have founded a hedge fund a long time ago, would have made a lot of money and would now be able to read the FT without an online translator. No: politicians simply sell their product, which is always aimed at getting elected or reelected by the people (or by the leader). This fact notwithstanding, the media remain blind to the overwhelming empirical evidence and keep on giving them an unfathomable amount of credibility. In Spain, this phenomenon of mystifying political power is particularly noteworthy, and extends beyond politics to the financial and big business ruling class, which is famous for never being independent or critical of the government. As an example, the Chairman of one of our largest banks predicted back in 2007 that the Spanish economy would keep "growing at high rates" in the future; in 2008 he said that the crisis would be over "soon", and today he states that we are living a "fantastic" moment. This part of the ruling class also sells its product, be it a bond issue, the price of its shares or a more favorable regulatory environment. Therefore, we should neither be impressed nor take these statements too seriously; instead, we should put them into context with some healthy skepticism and a grain of salt.

 Having said this, it seems that the situation in Spain is normalizing itself in the sense that the unemployment rate is stabilizing - alas at a very high level. This seems logical, because our 26% unemployment rate was already among the highest in the world. However, there is a purely financial phenomenon that is distorting the perception of what the true situation might be, and we may be taking for a solid comeback what remains a timid stabilization.

 In the summer of 2012, the markets, having been conveniently demonized by the politicians and the media, were "attacking" Spain and other periphery countries. Both the bond and equity markets were falling, effectively closing the door to the refinancing of our galloping debt. Those to blame for it all, we were told back then, were the damned speculators, that savage, heartless species that did not trust the numbers and the promises of politicians. How insolent! At that moment the European Central Bank came to the rescue and pledged to print as much as necessary in order to buy those assets that were unwanted by everyone - for good reason. Apparently tired of attacking after such long a siege, the speculators who despised our debt and that of other periphery countries suddenly changed. In the blink of an eye the were no longer damned, but blessed; actually they were no longer speculators (which in old Europe is an insult, nearly a crime), but serious investors. Exactly the same day the President of the ECB made his famous "whatever it takes" statement, the newborn investors started buying bonds and equities with both hands with the anxiety so typical of bullish hysterias, pushed by the money created out of thin air by central banks and backed by their fantastic promises. Since then, the prices of all assets of periphery countries have sharply and simultaneously increased: the Spanish equity index has jumped some 60%, and the Portuguese, Italian and Greek markets have followed suit increasing 45%, 55% and 100%, respectively. Also, the bond markets have turned bullish again bringing down interest rates and spreads. From that very day, the cost of 10 year bonds issued by the Spanish government has come down from 7.5% to 4%. Again, something similar has happened to the other countries: the Portuguese cost of debt has gone from 11% to less than 6%, the Italian from 6.5% to 4% and the Greek from 27% to 8%. As soon as the former speculators have started to do what politicians wanted them to do (lending a hand in their re-election), the fierce criticism has given way to a warm welcome and lots of praise. In Spain, this truce has drowned the government in a wave of self-complacency, to the extent that it no longer feels the need to pretend with more of its famous mini reforms. Surfing this wave of good luck, our government has shamelessly taken credit for the bull market as if it were a Spanish phenomenon wholly attributable to its own actions. But of course! What else would you expect from the incorrigible world of politics?

 We might be mistaking a financial bubble (yet another one) for a solid economic recovery. Because, what has really changed in these last twelve months? I do not see the ingredients for a healthy, sustainable recovery. In the very first place, have we reduced our overall indebtedness? Has the financial sector turned robust or is it functioning normally again? Do we suddenly possess a favorable framework that promotes entrepreneurship and wealth and employment creation? Do we have lower taxes? Has the vast ocean of despotic legislation and regulation been reduced? Are we abruptly a country famous for its rule of law? Have we confronted the vast problem of the size of the public sector or the regional monster administrations? Thus, are we about to grow as if by magic? Have our problems disappeared in a puff of smoke?

 The liquidity created out of thin air by central banks of the whole world is generating new bubbles everywhere. However, in nearly all countries, little or nothing of this vast experiment is improving the real economy. In fact, a growing number of alarmed voices on both sides of the Atlantic are questioning such a monetary policy that bears no fruit while exponentially increasing the fragility of the system.

 We still have tough times ahead and, wickedly, the crisis will last longer because of the burst of the latest bubble created by the damned central bankers.

 Near the end of the 18th century-Dickens wrote in Tale of Two Cities - France "rolled with exceeding smoothness downhill, making paper money and spending it". The British writer was describing the huge economic crisis which preceded (may I say caused) the bloody French Revolution of 1789, a crisis that was disguised for a while with the usual monetary trick. Plus ça change, plus c'est la même chose. Two centuries have passed, and not only France, but Spain, Europe and most of the West are rolling with exceeding smoothness downhill, printing money and spending it. For a while, nothing seems to happen, and the treatment looks efficient and harmless. But then, inevitably, all hell breaks loose.
Fernando del Pino Calvo-Sotelo