jueves, 22 de septiembre de 2011


Spain, not Greece, may be biggest Eurozone threat (Financial Times)

Greek default is the high-profile threat to eurozone banks that hogs the headlines, and drives down the share prices of the region's banks. But, aside from the Greek banking system itself, Greece is not a major threat to European banking solvency.

Substantial ownership of Greek debt by French and German banks is a manageable portion of their books, and they are supported by countries with strong finances.  By contrast, Italy's very large banking system is heavily exposed to its government debt. Equally worrying are Ireland, Portugal and Spain where the debt excesses are in their private sectors - in each case largely bank financed. These excessive debts, the banks' chief assets, could soon prove to be worth well under 100 cents in the euro.

To get a fuller measure of the burden that may fall upon the state's resources, we need to add a country's household and net business debt to net government debt as these will have to be serviced in some fashion from that country's income. By this broader definition, Italy comes off relatively well, with total debt a little over 200 per cent of gross domestic product. Greece at nearly 230 per cent is less bad than Spain, as well as Britain and Japan. Way out on their own, however, are Portugal at over 300 per cent, and Ireland at 330 per cent. Diana Choyleva and I in our latest book* explain why this means the credit of Portugal and Ireland, and probably Spain, could well become more threatened than Italy - though not as badly as Greece, which has particularly acute government debt and deficit problems.

The dangers from too much private debt depend on whether the excess is in household debt - chiefly Ireland - or non-financial business - Portugal and Spain. In Ireland, household debt is twice after-tax incomes. This ratio is half as large again as America's 130 per cent during the subprime-crisis.

So why has this debt been ignored, while property development loans got crisis treatment via the National Asset Management Agency? The answer lies in the chief difference with US mortgage loans: Irish ones (like British ones which are also at a higher ratio to income than in the US) are floating rate. So Irish households are paying a typical 3? per cent on their mortgages as Irish banks have access to the European Central Bank's "window" at the repo rate.

In other words, the primary source of subsidy in this crisis for Ireland (and the southern-eurozone countries generally) is the ECB, not Germany, France, or the European financial stability facility, the eurozone's bail-out fund. Irish households with a taste for risk could consider increasing their mortgages and getting a 5 per cent turn by buying their own government's bonds at an 8? per cent yield, an unprecedented credit-pricing reversal.

But when the eurozone finally sorts out its financing of these over-indebted states - or they leave the euro - their banks will likely lose access to the ECB, causing rates to rise and large numbers of mortgages to go sour.

In Portugal, non-financial companies have debt that is 16 times their pre-interest profit. An interest rate of little over 6 per cent would wipe that profit out. In Spain the numbers are 12 times and 8 per cent, respectively. So its entire NFC sectors are junk - a designation that kicks in at a ratio of about 10 times. The somewhat less dire Spanish ratio is exactly where Japan was in 1995-96. Japan had no real GDP growth between 1996 and 2002 - an ominous precedent - and finally emerged into growth again after a massive bank-debt write-off in spring 2003. But Spain's current situation is in several respects far worse than Japan's back then. First, Japan had a currency, which devalued in real terms by 20 per cent over the six years to 2002, aiding adjustment. Spain is fixed in the euro.

Second, having a currency, Japan also had a monetary policy - the famous "ZIRP", zero-interest-rate-policy. Spain's monetary conditions are set by the ECB in Frankfurt, with recent tightening that could hardly be more unsuitable for Spain.

Third, Japan had an independent fiscal policy, and ran large budget deficits to offset private-sector debt repayment via financial surpluses. Spain is under orders from its eurozone "partners" to slash its deficits, "no matter how politically painful" to quote Wolfgang Schäuble, German finance minister, in Financial Times columns recently.

Fourth, Japan had (and has) flexible wages - downward in nominal terms as well as upward. In the six years from 1997, as recession hit, average nominal weekly wages fell by 1? per cent a year - and they have continued to fall (on average) since then, though more slowly. Spain, by contrast, has a consistent inflation record and in many cases index-linked wage increases. Lastly, Japan was handling its problems in a broadly expansionary world economy, which Spain regrettably cannot hope for.

The chances are high of a Spanish asset price slide and banking crisis, with stagnation (at best) or depression, if it sticks in the euro. For Portugal they are close to 100 per cent.

Charles Dumas is chairman & chief economist at Lombard Street Research

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