Daniel Lacalle

Spain, Insolvency and The Telegraph

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(This article was published in Spain in El Confidencial on May 18th 2013)

” Dissent is the highest form of patriotism”, Howard Zinn.
In the past week there has been an enormous uproar in Spain created by an opinion article published in The Daily Telegraph under the title “Spain is officially insolvent

Do we really believe that an article is so important that it could change anything if what it says is untrue?

The article, let’s be clear, says nothing new or that has not been written before in reports by Citigroup, Exane, JP Morgan or a handful of local analysts.

I live in London and work in the City and as a Spaniard it angers me often to see how my country constantly revises and changes economic data expecting no one will notice and praying we can hold our breath for another month. No, the lack of confidence of markets is not due to the foreign press, but to of our track-record.

About the Daily Telegraph I believe it’s worth mentioning that it is frequently extremely critic and agressive with the policies of the government of Mr David Cameron and others, with sharp comments almost daily. The newspaper has uncovered corruption cases in its first page that in Spain would be relegated to inside columns because the amounts stolen would be seen as ridiculously low. I’ve also seen headlines in other media such as “Subprime Britain” (in City AM), that show the level of free speech in the UK. However, as soon as the press touches Spain, oh no, we cannot allow that.

What we have to do is show our credibility with strong economic data . We don’t need to to demand blind loyalties and say that “they are doing worse” or “everyone else is changing data”, because it is not true to start with. Yet in Spain it is now a national sport to blame Merkel, Draghi, Bush, Obama or the UK press for our troubles, not ourselves.

So, on to the article, let me clarify some concepts without entering into hopeless patriotism. Spain is not yet insolvent , but if it continues to spend and avoids tackling its debt issues hoping that someone else solves its problems, it run the risk of becoming so.

Why Spain is NOT insolvent

Spain has 50% of its private debt concentrated in 28 companies and banks of the Ibex 35 Index. All listed, with diversified shareholder bases, and multinational activities. These companies spent huge amounts of money in assets with debt. But those assets can be sold. They are already divesting, at good prices too, and lowering their debt levels to 2006 averages. In addition, these same companies and banks are financing themselves at extremely low rates, even in the worst months of the crisis. Everyone of them could make capital increases if needed. Besides these concentrated cases, most of our companies maintain a comfortable financial situation.

  • It is true that the interest coverage ratio of Spanish listed companies and banks is very low , as the IMF pointed out, but that average is distorted by the fact that Spain’s stock index contains many utilities and construction companies, which traditionally have very tight ratios but also asset-backed non-recourse debt. These companies, of course going through unquestionable challenges, are also doing their homework.
  • The problem of banking in Spain is concentrated in the disaster that was the political model of the savings banks. It’s true that the cost of their bailout is huge, but it is also true that Spain has only used 40% of the funds granted by European Union for their aid, which is a strong cushion even if we considered that 20% of the 160 billion euro in zombie loans is unpayable. Spain’s big banks, on the other hand, maintain higher capital ratios than many French and German banks.
  • The bubble of political spending is a huge problem . It is recognized all over Europe. 493 billion euro of public spending and 110 billion deficit is unacceptable for a cyclical economy that is service-oriented and which has seen the burst of a bubble which accounted for 15% of GDP. The real estate and ghost infrastructure bubble. The central state until March 2013 has spent 43.3 billion, nearly twice its revenues. Right. But we all know that if the state recognizes an economy of “crisis” it could curtail 10 billion in subsidies and grants, 35 billion in “economic activities”-the black box of state spending- duplicate administrations, regional embassies, eliminating thousands of advisor jobs, etc.

The UK and the useless comparisons

The Spanish press has spent days saying that the UK is in worse shape than Spain and that is why they “attack us”. Enter the “blame the foreigner game”.

To remind the British people that the policy of printing, devaluing and inflating the economy is not working is useless. They discuss it every day (“Never mind the triple-dip recession, the double dip may have been an illusion too “).

To remind the British of the cost to taxpayers of the support to their banks (512 billion pounds according to the National Audit Office) is not necessary. The press repeat it day after day, and it was the BBC -a public network- who alerted of the Northern Rock and banking crisis. Can you imagine the Spanish State TV (TVE) alerting of the debacle of the savings banks five years ago when Spain was self-proclaimed the “best and better regulated financial system in the world”?

Needless to say that the policy of increasing debt, adding deficit and propelling the real estate bubble is also criticised heavily here in London. But it’s also worth differentiating deficits. The British deficit is partly explained by the weight of its financial sector and its solid financial account supports it. In any case, urgent cuts are needed. The Spanish deficit is current spending and no investment, and its deterioration is far superior in size and speed (from +5% surplus to -10% in two years and continuing down is simply atrocious).

The funny thing is that those Spanish politicians who repeat day after day that the country needs to print money like the UK are our leaders, masters of the blank chequebook and golden scissors to inaugurate ghost airports and useless bridges . However, they fail to mention any need to copy the dynamism, freedom of trade,and investment attractiveness of the UK.

What Spain refuses to copy from the UK is:
The lowest corporate tax of any western economy (21% from 2014), according to PWC. No taxes on dividends, large investments do not pay tax on capital gains and are given huge tax benefits to investment in R&D and UK companies. An environment that is not predatory against capital and allows SMEs to grow and reach the status of large company faster and more succesfully than in Spain.

The most important difference, that many tend to forget, is a robust and growing financial account balance of payments (see the graph of @ _perpe_ )

In the UK one can start a company in a week for the cost of a couple of Happy Meals . Being an autonomous entrepreneur is extremely cheap. Public administration suppliers are paid within 30 days.

  • A reduction in civil servant staff of 22% since 2005 .
  • Independent regulators, not controlled by parties and governments.
  • A really flexible labour law that allows an unemployment of just 2.5 million (7.9%), despite the recession and over a hundred thousand annual net immigration.
  • A country that attracts foreign investment -more than a trillion euro-, opening doors to M&A, trade and private funding.
  • Institutional credibility and credit responsibility. Everyone knows who to blame for the deficit. Debt is not shared between 17 regions with no responsibility for its consequences.

To say that the UK debt is worse quality than the Spanish bonds but trades at low rates solely because the country devalues ​​and monetizes, is simply lying . And it’s also a lie to say that monetizing debt would avoid budget cuts if Spain could do it. If inflation and printing is the magic solutions, the richest country in the world would be Venezuela or Argentina and the poorest would be Germany .

Without institutional credibility industrial strength, credit responsibility, legal certainty and a proper investment environment, all monetary interventions are futile.

Is the UK “against the European Union”? Or the other way around?

The whole controversy created by this article boils down to the eurozone crisis and how it is perceived from London.

Being in Europe is costing the UK 13.6 billion euros a year . From London, one sees the European Union as an accident in slow motion. In horror, but unable to stop looking. And the debate is logical ( read here ).

The constants summits to solve debt problems, inefficiency and bureaucracy with more debt, bureaucracy and intervention make the model unattractive to anyone looking from the UK perspective. It is not a “take it or leave it” issue. Paying for a club where they serve bad food, the staff is impertinent and rules change each month is not the solution .

Does the UK defend the City? Of course. And France defends its subsidized cinema and farmers and no one criticizes them. The City generates more tax revenues than Scotland for the country, of course the government has the right to defend it.

After almost ten years living in the UK, I have not met a single British EU supporter. But that’s not an attack on the countries or its citizens. It is a concern about the interventionist course the EU is taking. “More Europe” does not have to be a loss of sovereignty, less freedom, more planning and less democracy.

A Europe designed from the model of the State “in everything and for everything,” a “directed” economy similar to the French, where everything is decided by committee, attacks the culture of trade and freedom not only of the UK , but of Finland and Holland… And the tradition of Spain!.

Many in the UK, locals and foreigners, see the disaster that is building, and obviously do not want it for them or for the poor countries that fell into the trap. Margaret Thatcher said it in 1990, ” The single currency will be fatal to the poorer countries because it will devastate their inefficient economies “.

For me it is essential that the UK remains in the EU. To help it avoid becoming a “centralized planning Titanic”, and to make it what it always should have been, a union of sovereign states to facilitate commerce and growth, not design it in a committee. Openness and freedom.

PS: Many thanks to @ _perpe_ and PWC for its graphics

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