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On the cover

Between junk bond and intervention

Global Economy, On the cover, Sin categoría,

(This article was published in Cotizalia on July 1st 2012)

The EU summit concluded with a surprise note. The strategy of Spain and Italy to corner their partners has been a masterstroke and it buys both countries time. Unfortunately, these agreements have had a very modest impact on the Spanish 10-year bonds, still at 6.25 percent, and the spread to the German Bund, which is around 475 basis points.

Why? Because it is still a patch. As someone in Twitter noted ” A decisive solution, using a fund that doesn’t exist to buy debt that won’t be repaid via a mechanism that hasn’t been agreed.” I’ll try to explain it as simply as possible going through the main comments from readers.

Why more uncertainty?

It doesn’t matter which entity we think will provide the funds, be it the European Central Bank, the European Financial Stability Facility or theEuropean Stability Mechanism. They will have to finance themselves in the secondary market, with capital from foreign investors, SWFs, etc. These investors see that the legal structures, mandates and limits of the European mechanisms are discussed, threatened and redesigned almost every month, generating tremendous uncertainty. Therefore, neither the EFSF nor the ESM, when approved, will enter the benchmarks used by funds to decide where to invest.

In short, threatening legal structures that underpin these mechanisms scares investors away, precisely when they are most needed. Would you invest in a fund in which each month the managers threaten to change the prospectus?

We have discussed in previous weeks the enormous difficulties faced by these mechanisms. The ECB’s balance sheet already exceeds 30% of the GDP of the Eurozone, compared with 20 percent of the US Federal Reserve or theBank of England. The European countries that contribute to these mechanisms and the ECB are extremely indebted. In addition, as time passes,there are less “net contributors” because the number of troubled countries grows. Portugal, Greece, Ireland, Spain … and Cyprus, which after four years in the EU, needs a bailout of €10 billion with a GDP of 18 billion.

France already has 89 percent public debt to GDP, Spain surprised negatively on Tuesday with a much higher deficit than expected, German default risk rose 30 percent in a month and meanwhile almost all eurozone economies are in recession or stagnation, while the vast majority of those countries are increasing their debt.

There is no money to continue this “ostrich strategy “of avoiding tackling the debt problems and kicking the can down the road in an EU that feels more isolated from the rest of the world each day.

Why bond spreads keep widening

The spread of the Spanish bond with the Bund is a reflection of the secondary market, ie the investor appetite adjusted by a certain risk. We can complain and make European entities intervene, but if markets don’t see reliable, verifiable and sustainable economic figures and an improvement in the ability to repay debt, investors will not buy bonds. That is why on Friday we saw fund flows of 3 to 1 better to sell.

Imagine a quoted company that is posting weakening results and a major shareholder buys 5 percent in a defensive move. The share price might stabilize for a few days, but then it continues to fall because institutional investors still do not trust the strategy and the profit generation ability of the company. We see the same effect on bond yields after the placebo effect of ECB purchases. Bond yields rise again, due to lack of confidence.

Grand public statements and good intentions are not enough. Until Spain publishes figures showing clear and sustainable improvement of credit qualitywe will not see bond yields fall.

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Are markets attacking us?

Investors are not buying Spanish debt. That is not attacking. It is not buying. We should analyze why an investor in bonds, which seeks the lowest risk and the longest duration, prefers to buy bonds at 0 percent yield, the Germans or Swiss, rather than bonds with 6 percent yield, the Spanish. They avoid high yield bonds because they worry more about whether the principal is ever going to be repaid. As Jim Rogers used to say “I am more interested in the return of my money than the return on my money”

With the level of uncertainty about Spain’s public finances, investors feel that 6 percent is not an attractive risk-reward. Spain has destroyed its credibility with changes in deficit figures, broken promises and hidden data for years, and now it has to bring back confidence with facts.

Bond investors do not distinguish between one political party or another, or one government or another. It is a sovereign matter. And if the state doesn’t meet its own targets, investors don’t risk their capital. Would you do it? Would you invest in the debt of a country where targets are not met or are made up? This is what Spain has to solve, now. slashing expenses.

Doesn’t Spain have less debt than Japan?

The spread of Spanish bonds is not high by coincidence or injustice. As a country, Spain always talks of its low debt to GDP, which is a misleading indicator, as GDP, for example, can be artificially inflated by borrowing to build useless things -phantom airports, ghost cities, etc.

What matters to investors is the deterioration of the public accounts, revenues falling and costs rising. Spain’s debt has doubled between 2008 and 2012 but the country has not done enough to stop the escalation of spending while tax revenues coming from the “housing bubble” disappeared. But the expenditures have remained untouched, most of all subsidies and bureaucracy. Spain had three major bubbles: Debt, Housing and State size. Of those three, State size is the one that has not been burst.

Imagine having a credit card for which one pays interest. If expenses double, but income stagnates, first one sees the interest rate rise, and if expenses don’t fall the credit card will be cancelled. And this does not mean that the issuer of the card is “attacking”, it just means that the card holder becomes an unreliable debtor.

Many will say that a country is not a credit card and that “we deserve” to be funded at lower costs. Fine, then, as a country, we should do what households and sensible companies do. Cut expenditures.

Intervention, let’s go

What happens when the credit card is cancelled? That one has to go to a lender of last resort that will solve the liquidity problem, but will demand cuts and high interests. Like those TV ads that say “reduce your monthly payments”, “we consolidate debts into one comfortable monthly payment”… at exorbitant interest rates and with severe penalties.

The problem of using the word “bailout” or “intervention” is that it has a positive connotation, almost humanitarian. I would recommend that when you hear the word, change it in your brain for “mortgage” and when you hear ECB think of “lender”. It shows a completely different meaning.

Some readers tell me they prefer an intervention than keeping our corrupt politicians. I do not know what to say. Changing politicians who have been elected to bring others who are not elected from Brussels? I am not sure, particularly when the latter have a track-record as poor as that of our own leaders.

Blame it on Germany for financing our real estate bubble

As a Finnish member of parliament said to me, “the fact that I have lent to a friend €1,000 and he has wasted the money in parties does not mean that I have to continue lending him or that he doesn’t still owe me my money”. Responsibility must be shared, but donations should not be expected.

But what if we are rated junk bond?

Rating agencies, I’ve said it many times, act always late and poorly. With Spain, investors have assessed its credit risk well below what rating agencies said since March 2011 at least. I always say that a rating agency is an entity that charges Paul McCartney to inform him that the Beatles split up.

First, Spain is not junk bond. But the risk of downgrades cannot be tackled by promising income that never comes, or by giving excuses for poor data, as any rated quoted company can tell. It is tackled by cutting costs and showing better numbers than estimated.

But if we cut spending, we lower GDP

Sure, let’s put more debt into the economy to build useless things until we have the GDP of China and let’s see how we do.

Of course cutting expenditures lowers GDP, but it also slashes the deterioration of our debt problem by a bigger percentage. Spain needs to cut political spending, duplicative administrations and unproductive debt that only generate impoverishment. We are talking of tens of billions per annum.

Print money?

It’s a unanimous cry. Let’s print money. The ECB must buy the debt of our wasted years and monetize it, creating inflation. Let’s do like the United States which “only” has a debt of $50,500 per citizen.

Print money in the EU, when the euro is only used in 25 percent of global transactions would generate high inflation. To begin with, we would have to see if our partners accept to drown the ECB in more debt. But I am surprised that people cry for inflation mentioning an “adequate” level of 5 percent-official, as real inflation would be 8 to 9 percent. I am shocked to hear people calling for their own impoverishment to allow the government to continue spending recklessly. If citizens think that raising VAT is a disgrace-and it is-inflation is the same, but “undercover” and cumulative.

Then there is no solution

Of course there is. Cut spending, duplicative administrations, subsidies and grants, be a serious country, open the doors to free market, and stop thinking that everything is arranged in the Eurozone web of cronyism, patronage and debt.

This week I wrote an article in the Wall Street Journal detailing the four points which, in my opinion, would help Spain to reduce bond yields. None of those points is to “solve a debt problem with more debt,” and the agreement of the EU is exactly that. It gives Spain and Italy time to accelerate and deepen reforms, but is nothing more than a loan.

Of course Spain will be helped and the country will emerge from this mess, but it will not be by going “back in time” like Huey Lewis & The News. It will be through cuts in spending and liberalizing the economy.

Austerity and Growth. Why It Works

Global Economy, On the cover, Sin categoría
(This article was published in El Confidencial and  Cotizalia on April 4/2012)

The great debate in modern macroeconomic analysis focuses on whether the processes of public spending cuts that are being carried out are consistent with fostering growth or whether spending cuts threaten economic development.

Many anti-austerity economists like Krugman, who calls for more spending but also massive wage cuts, or Stiglitz warn of austerity as a driver of deepening crisis.

I’d like to give a summary of the talk I gave a few months ago in Austin and Dallas called “Austerity Works” and why it is in Spain and Southern Europe where budget control is most needed.

The first thing worth to note is that Europe is not undertaking true austerity measures, but very modest cost savings. In fact, in most cases the cuts have only slowed down the speed of spending growth. As we explained here to reduce the “deficit” from 8.9% to 5 % is not austerity, it’s just fiscal prudence. It is not the same to aim for debt reduction than to reduce its increase.

The first argument often used by those who attack the austerity programs is to compare this process with what happened in the 30’s, that is, a worsening of the crisis. But these arguments tend to forget the differences between both periods.

* In the thirties there was a combination of austerity with protectionism , a lethal combination that our rulers should avoid. In a globalized world it is very difficult that we can see the wild U.S. protectionism of the 30s. Unfortunately, this is where Europe can err seriously, since political intervention and protectionism is growing, but not alarmingly.

* In the thirties interest rates were extremely high and the financial capacity of the systems was very limited. That is not the case today. The role of central banks and the globalization of the financial systems has changed this risk dramatically.

* In the thirties quantitative easing was not used as a tool to mitigate the risk of deflation and stagnation. But there is a huge problem to solve. The QE (quantitative easing) that the U.S. Fed makes floods the system with money directly, skipping the banks as an intermediary. In Europe, the monetary policies have been directed solely at banks, which hold on to the funds, buying sovereign debt, without extending credit to the real economy.

The current problem is that the increased liquidity provided by the ECB fails to reach businesses and families. As the chief executive of a large Spanish company said to me “credit crunch here is affecting the small and efficient businesses, not the inefficient overgeared large companies.”

The reasons why I believe that more spending is equivalent to a shot in the foot is as follows:

* Spending more did not work, repeating it is suicidal . Spain increased public spending by 67.2 billion euros between 2007 and 2011, 6.4% of GDP, to generate a GDP decline of 3.3% and a fall of industrial output of 12.7%, with an increase in unemployment to 24%. That increased spending also meant a cost of additional debt equivalent to 0.3% of GDP. Spain SA not only did not stop the crisis spending, but rather deepened it. The figures in Spain are devastating, but the U.S., UK and the Eurozone demonstrate the same principle, that increased spending has not produced a real positive impact on GDP.

I always speak about the debt saturation model. When an additional unit of debt does not generate additional GDP, but negative . We have saturated the dubious benefit of spending. A clear example of this aspect is the infamous Plan E of the Spanish government, 13 billion euros, only generated debt, job losses and lower GDP.

govt spend

As we have seen in the past years, “lack of austerity” is expensive, but indiscriminate spending is even worse. I always say that if Krugman was able to read the details of expenditure items in many European general budgets he would join the Austrian school in a minute. We are not just talking about tens of billions dumped in phantom cities, unused airports, useless infrastructure and outright subsidies and grants. The problem is that all these expenses are not supported by an equivalent income (no ROIC, Return on Invested Capital) thus leaving behind them not just a non-existent value, but an unpayable debt that must be covered with higher taxes destroying other activities and productive sectors.

Useless infrastructures and subsidies are not only wasteful, but the debt they leave behind is also crowding out and taxing the profitable and productive sectors. The subsidy and uneconomical public spend culture also becomes a private “investment deterrent” . No one dares to put a penny in an economy in which taxes generated by productive sectors will be used to cover liabilities of unproductive wasted capital.

Why does austerity work:

* It frees financial resources from unproductive to productive activities. Today, almost 70% of financial resources available are used to purchase public debt and finance government expenditure. It is the crowding out effect of a State that accounts for more than 50% of Europe’s economy. If the State stops monopolizing the majority of credit availability, and also stops spending on unproductive activities, private investment activity and high productivity activities return. It is no coincidence that the states that have cut public spending are the ones that create more jobs.

* It accelerates the transformation to a more productive economy. It is no coincidence that productivity falls with increasing public spending. Most public spending stimulus plans are directed to subsidies and to rescue declining industries (mining, automobile) and very low productivity activities (construction, civil engineering), and it monopolizes scarce financial resources which precludes private investment in high productivity areas. If countries rescue the inefficient by taking from the efficient one’s pocket, investors fly away from the country and moves to more attractive places.

* It helps create real jobs, not subsidized labour. When the State spends on pointless companies and investments with no return, it does not create employment, it subsidizes it by borrowing. And that cost comes from taxpayers until the State runs out of other people’s money and the pyramid collapses. Europe has seen the destruction of more than 80,000 small and medium enterprises annually while governments subsidize spending that also destroys public jobs in the medium term, when money runs out.

* The increase in interest expenses from more government debt hinders recovery and generates tax increases that discourage consumption and investment as well as repel capital. If Europe stopped issuing new debt to pay interests on old debt it would start to solve its problems.

It is relatively easy, austerity would help: Not only stop paying unnecessary subsidies and reduce billions of euros of cost of additional debt, but austerity attracts capital and reduces the loss of tax revenue by bringing new investors. And instead of removing 0.3% of GDP increasing debt, GDP would be up reducing the financial burden.

The well-intentioned recipes of Krugman and Stiglitz start from incorrect assumptions:

. That most European governments would spend taxpayers’ money more efficiently and wisely than private investors.

. Even worse, they assume that those European governments would base their investment criteria in a capitalist, return-driven, open-market, Anglo-Saxon way.

. And much, much worse, they assume that the investment decisions of most European governments are compatible with private investment, when often they aren’t.

Most of these “growth plans” have proven to crowd-out private investment, prevent competition, unfairly defend unproductive and declining sectors, and aim at safeguarding inefficient low productivity oligopolies. As such, in many cases European government spending has proven to be in most cases more damaging than helpful for economic recovery, and it widens the funding hole.

We need to escape the spiral of spending, of favors owed, protectionism and subsidies, we need to stop rescuing the unproductive and, through lower taxes and lower spending, foster investment private capital, innovation and growth.

Further read:

My article in The Wall Street Journal:
http://online.wsj.com/article/SB10001424052702304782404577488283442408896.html?mod=WSJEUROPE_hpp_sections_opinion

also here:

http://energyandmoney.blogspot.co.uk/2012/06/recipe-for-spanish-comeback.html#frameId=uWidget20a9e6e60130f5c6a6f0&height=131

The Myth Of European Austerity

What If Germany Turns Off The Funding Tap?

The European House Of Cards

http://energyandmoney.blogspot.co.uk/2012/06/euro-house-of-cards-and-greek-temporary.html

Real Austerity Does Work

http://pompeunomics.com/2012/07/09/real-austerity-does-work/

Recipe for a Spanish Comeback

Global Economy, On the cover, Sin categoría, Spain

(This article was published in The Wall Street Journal on June 26th, 2012 copyright WSJ)

The recent pullback in Spanish bond yields has been heralded locally as almost a victory. But if so, it’s probably a pyrrhic victory, as Spain’s 10-year sovereign bond yield still stands at 6.5%, and five-year credit default swaps remain at historic highs of 563 basis points. Meanwhile, the question in investors’ minds is the same: How will Spain repay its public debts, which have more than doubled since early 2008 to 72% of GDP as of the first quarter of 2012?
Before Spaniards elected the Rajoy government last year, the previous government had denied the crisis for years and failed to act swiftly upon it, leading foreign investors to avoid the country’s bonds. Spanish public debt owned by non-residents has fallen to 37.3% today from 54.5% in 2010. The real figure is even lower, as a significant portion of that 37.3% represents debt bought by the European Central Bank.
The slump in international demand has been mostly offset by bond buying by domestic institutions, including the Spanish social-security and public-pension funds, and mostly from Spanish banks. These Spanish banks now loading up on sovereign bonds are the same ones that have used €288 billion of the ECB’s discount-lending facility so far this year. This is a truly dangerous move, as the vicious circle of risk-contagion between bank balance sheets and sovereign risk affects every asset class. This has also created a credit crunch for the real economy, particularly unhelpful in a country in which small and medium-sized businesses generate 70% of value added and almost 80% of employment.

According to Spanish Finance Minister Luis de Guindos, investors are not taking Spain’s “growth potential” into account. There is truth in that assessment, but Spanish authorities seem resigned to the notion that they can do no more to actualize this “potential.” I believe there is a lot more they could do.Given its potential, Spain can do better, it can do more and it can do it now.

Spain has failed to restore investor confidence in its ability to repay its debts predominantly because the reforms pushed by the Rajoy government so far have focused mostly on revenues, namely tax increases, while the government’s bloated administration and massive subsidy culture remain in place. As such, the economy deteriorates and taxes go up, while debt continues to grow.
Spain seems stubbornly intent on restoring tax revenues that were the product of a giant real-estate bubble, and those will not return easily. Tax collections per capita increased almost 40% between 2003 and 2008 due to the housing bubble, driving a similar increase in government spending. Spain created a public sector perfectly suited for an economy that would grow 2% per year forever. It didn’t. Once the bubble burst, those revenues disappeared but the spending stayed. That funding gap, which took Spain to an 8.9% deficit in 2011 from a 2% surplus in 2007, can not be tackled through taxes, but only through cuts in spending.
When discussing possible cuts to Spanish public spending, one always hears that every reduction is only a drop in the ocean. True, but a million “drops” would add up quickly in a country with 17 regional administrations, thousands of loss-making public enterprises, tens of billions in subsidies, and a complex web of regional and national regulatory bodies.
The Spanish economy, centered on services, industry, tourism and construction, is strongly cyclical. As such, the burden of the state and the maximum debt it can sustain need to be smaller than its less cyclical peers. Spain could restore confidence and reduce its bond yields by achieving this through a four-step, zero-cost program focused on:
1. Structural public-administration reforms: Eliminating duplicative public administrations, chiefly in regional, island and county councils, could save up to €20 billion, according to Spain’s Circle of Entrepreneurs think-tank and the Conservative Party. Additionally, selling off Spain’s dozens of public television and radio networks, and ridding taxpayers of thousands of loss-making companies owned by regional governments, could save €10 billion.
2. Tax Reform: Increasing Spain’s standard value-added tax rate to 20% from 18%, while reducing the employer portion of social-security taxes by 3.5 percentage points, could boost GDP by between 1-1.3% without any decrease in government revenue, according to a recent study by domestic banks. Spain scores 69.1 out of 100 in the Heritage Foundation’s Index of Economic Freedom, significantly below its peers. It needs a long-term sustainable plan of tax incentives for new businesses, and a unified system of regulation instead of the current patchwork of rules, to allow small and medium-sized businesses to grow into large corporations.
3. Cut subsidies by half: Spain spends more than 2% of its GDP per year on corporate subsidies and grants (not including its aid to banks). So far these have only been lightly trimmed throughout the crisis. The subsidy culture keeps zombie businesses in place and puts up a barrier to the development of more productive enterprises. End it.
4. Attract capital: Spain’s private-equity funding of companies is below 0.1% of GDP, according to the national stock-exchange regulator. This is partly due to regulatory instability, along with its protectionist regulation of foreign capital, as any fund that has tried to open an office there knows. By opening its doors to foreign investment, Spain could erase the view that all major deals there must happen between friends and behind closed doors, thus improving its public image in financial markets.

Sovereign-bond investors are by definition the most risk-averse of the world’s financiers. Markets want clarity, sustainability and no surprises. Spain needs to prove to them that it can not only meet its current economic estimates, but beat them. The country has done it many times in the past, and it still possesses all that “potential” that Mr. de Guindos talked about. Spain can do better, it can do more and it can do it now.copyright The Wall Street Journal. Published with permission.

How to Save the Spanish Banking System

Global Economy, On the cover, Sin categoría, Spain
(This article was published in Cotizalia on June 23rd, 2012)

The big news of the week was the presentation of the independent assessment of capital needs of Spanish banks. It is interesting, but on Tuesday I was at a dinner with several managers and analysts of the financial sector, and all of them were spot on about the figure that would be published: A maximum of 60 billion euro.”A solvent banking system” read one of the local press headlines. The ones that have proven to be solvent are the usual suspects: Santander, BBVA, etc… And a positive surprise in Sabadell, which came off better than expected by the market. The savings banks have proven again to be the main problem, because a financial hole of tens billions is frightening.

What angers me is that this tremendously harmful process of “pretend and extend” the problem has led to cast doubt on the solvency of some banks that never should have been doubted. Not all the savings banks are a problem either. It should be noted that Caixabank, made the transition from savings bank to commercial bank and proved to be better-prepared within the national economic disaster.

It is worth to note that at least for the first time, the Government has sought to manage expectations. Hence, the chain of events: 1) The IMF says that the capital needs of banks are 40 billion euro. 2) The State requests a loan of 100 billion euro, and 3) independent consultants put capital needs between 15 and 62 billion, depending on macroeconomic conditions. All happy, instead of changing numbers every three months.

However, if we go into detail, this is another “stress test” I am afraid that leaves more questions than answers.

All prior stress tests have started from the premise that they were very conservative, but the market misses ​​a genuine exercise in “cleaning up the closet.” Let us not forget that all entities that have gone bankrupt – Dexia-, or have been intervened, passed the “stress tests” with flying colours. And do not forget that in 2006 one of the consultants, Oliver Wyman, said that Anglo Irish Bank was the best bank in the world . And it went bust.

Everyone can make mistakes, of course, but what is important to note is that these reports are neither aggressive nor conservative in their estimates. That is the premise from which we must start the analysis.

spanish banks I

The Positives:

Spain is the only country that has made ​​the exercise of bringing independent consultants. It is an important exercise in transparency.

. Now no one doubts that losses in the “adverse” scenario would reach about 250 billion euro, with recapitalization needs of 51-62 billion. And forget about the other scenarios. The independent reports themselves provide many clues and reasons to consider that the “base” scenario is the least relevant, starting with bank profits estimates, GDP growth and estimate of fall in home prices.

. If recapitalization needs remain in the medium scenario, the State would not use much of the 100 Billion loan granted by Europe, reducing the negative impact.

. Listed banks are saying they would not need to access the loan and provisions will be made ​​against their results. Let us see if I banks make the necessary capital increases, as Italian banks did.

. The Government itself, as part of the committee preparing the basis of the report, has allowed some macroeconomic estimates for the base and adverse scenarios that in many other countries would have not been allowed.

The criticisms:

– The consultants have not analysed corporate risk, liquidity, and sovereign risk. There is no review or analysis of the substantial portfolio of sovereign bonds, or the DTA (deferred tax assets), or industrial holdings losses, when latent losses are very important, estimated at 20 billion euros, according to Merrill Lynch. This is very important because in some cases more than 70% of the core capitalization ratio (CT1, Tier 1) is made of government bonds.

– The acceptable solvency ratios are calculated at very low levels: They use an acceptable ratio of core capital (CT1) of only 6% in the adverse scenario, while 9% is used in the base scenario. If the economy is going to deteriorate further, would financial institutions be allowed to reduce their capital ratio from 9 to 6%? This difference alone can enlarge the capital needs by 50 billion euros, according to BNP or Credit Suisse.

– The estimated “new profit generation ability” clearly seems benign for the banks, at approximately 64 billion of profits in the adverse scenario. It seems at least optimistic, since the entire sector generated 100

billion in the last three years. If the economy collapses it is very difficult to estimate this level of profits as “conservative.”

Spanish banks IIHow to save the system from another “stress test” in a year:

I have participated in the documentary, “Fraud.Why the great recession” , which outlines some of the essential measures to prevent further financial shocks from a liberal perspective. It is worth listening to some of these ideas and leave behind the old arguments of “that’s impossible” or “it has never been done” to find sustainable solutions.Using core capital ratios of 6% or 9% is simply putting patches. Banks cannot be so thinly capitalized and risk going bankrupt with any small change in the markets. Banks must be capitalized at least 25%, and ideally build a cash to deposits reserve ratio that gets as close as 100% as possible.

The risk spiral “sovereign debt-bank balance sheet” should be cut. They cannot keep gorging on Treasuries, because when bond yields rise it impacts the credit quality of the bank through the cumulative risk in the sovereign portfolio.

The spiral of corporate risk should be limited and provisioned at market prices. Industrial stakes, with millions in latent losses, should be reviewed and banks should get rid of those that are not profitable.

In the absence of wild credit to feed the bubble that created the Spanish network of industrial holdings, the cycle of “debt rises -> GDP falls -> stock market falls -> industrial stakes stocks fall -> quality of bank assets deteriorates -> bank stocks fall -> loans to the real economy fall -> debt rises -> GDP falls -> start again” is repeated over and over again.

Don’t bail out banks. The bail-in alternative we always mention is the logical one. Bailing out banks perpetuates the incentive to lend recklessly, to continue to take risk “suggested” by politicians and fail again. Use the EU loans to guarantee bank deposits and liquidate the insolvent ones or we will have another round of “bailouts” in a year.

Leave any intermediate solutions. There are no partial provisions for zombie loans. Provisioning “part” of Non Performing Loans does not cut the risk. It perpetuates it. And old school bankers know it.

Finally, conduct a continuing review of the loan portfolio by independent entities and increase international transactions.

If the entities base their risk analysis less on PowerPoint, and less on optimistic own research, banks will see the beginning of the solution and the return to a banking model that has made some of our institutions and managers global models. Do not forget that the solution is not so crazy, because we have it in the past.