Monday, July 16, 2012

Grantham Mayo van Otterloo: "The Pain in Spain-- Is There Time for Hope and Change?"

I believe the IMF said no.
Here's GMO's take:
The intertwined problems of sovereign debt, European banking systems, and the euro itself will continue to be debated despite the measures that came out of June’s meetings in Europe. Yet it is the economic and financial situation in Spain that is driving policy now. The precedents being set because of Spain are in a sense more important han discussions about the euro, for decisions about the euro can be delayed, whereas the pain in Spain is acute and the time for decisions is now.

What are Spain’s key problems? First, there is too much debt, not just for the sovereign but also for banks, for numerous private companies, and for many homeowners. Second, the sovereign debt continues to rise due to budget deficits, in part because of measures needed to fix Spain’s banks and corporates, just when the world’s private sectors seem less interested in providing new funding. Third, and most importantly, measures to improve debt and deficits have brought on an economic contraction that some fear will turn into a free fall. Adjustment in Spain will continue to be severe. Yet I would reiterate the sentiments of last year’s paper on sovereign debt, classifying Spain as a country whose sovereign debt problem is daunting, but not quite insuperable.1 The bank problems also appear solvable, though the outcome will not be pleasant; an earlier paper had already identified the Spanish banking system as among the neediest in Europe.

So, what would it take for Spain to succeed, to keep daunting from becoming insuperable? The following sections will show that there has been some progress on the big problems that Spain faces, and that the sums under discussion are in the right ball park to get the situation under control – enough that the daunting may stay superable. The process will take years to prove itself, and in the interim Spain will endure more drama. In Churchillian terms, Spain is at best at the end of the beginning of solving its economic problems.

Fiscal policy on the edge in Spain

Spain seemed a success story for much of the 2000s. Deficits were small – the government even ran surpluses in 2006 and 2007 (see Exhibit 1) – and general government debt fell to a low of 36% of GDP in 2007 while the ratios for Italy and Greece danced around 100% from 2000 to 2008 (see Exhibit 2). Unfortunately, this seeming success largely reflected an economy fueled by a construction boom and ever-rising real estate prices. This left the economy seriously out of kilter when the real estate boom ended....MORE (10 page PDF)
IMF Says Japan And Spain Are Done, "Debt Ratio Will Never Stabilize"