Finance&Economics: Spain will have to swallow its pride

Spain will have to swallow its pride

By The Financial Times

©Ferguson

In the beginning, the eurozone crisis featured two core problems: large imbalances of trade and competitiveness, and a daunting debt mountain. Two years on, the challenge has shifted: there have been striking advances in competitiveness but the debt is as formidable as ever. This metamorphosis suggests two lessons. First, the morality tale version of the crisis, which blames profligate Mediterraneans, has ceased to be relevant. Second, it is time to modify the argument that the countries of the periphery are doomed because they lack flexible national currencies. Their really crippling disadvantage is that they lack flexible national central banks.

Consider Spain’s predicament. For 10 years after the launch of the euro, its workers bid up wages: labour costs jumped 55 per cent compared with a rise of 22 per cent in Germany. Outsized wage gains were not offset by gains in productivity, which lagged behind Germany’s by a whisker. The upshot was that uncompetitive Spain ran a vast current account deficit, peaking in 2007 and 2008 at about 10 per cent of gross domestic product – a gap that dwarfed the infamous external deficit run by the US.

When the crisis began in 2010, the question was whether Spain could correct that deficit, given an inflexible exchange rate. Of course, flexibility would have helped. But in 2011 and early 2012, Spain’s wages fell relative to Germany’s and its productivity gains were larger; the supposedly indulgent Spanish private sector has achieved a fall in unit labour costs versus Germany of 8.7 per cent. Thanks to renewed competitiveness, Spain’s exports rose 7.6 per cent last year and will rise another 2.1 per cent this year, despite recession in Spain’s export markets. Add in the cyclical effect of falling imports and the country’s external deficit has fallen remarkably, from 10 per cent of GDP to this year’s forecast 2.4 per cent.

Now consider what has happened to Spain’s debt challenge. As they bid up wages too much, Spaniards also borrowed excessively: between 2000 and 2010, debt held by Spain’s non-financial companies and households doubled to a whopping 214 per cent of GDP. When the credit bubble burst, tax revenue fell and lenders required bailouts, pushing government debt up. Together, public and private debt posed a question analogous to the one raised by the current account: could Spain adjust?

Here, unfortunately, the answer is less positive. Since 2010, private debt to GDP has come down only slightly, to 204 per cent. Gross government debt has meanwhile exploded, from 61 per cent of GDP in 2010 to 90 per cent in 2012, according to the International Monetary Fund. Putting a brave face on things, the IMF projected last year that Spain’s government debt to GDP ratio would be 76 per cent in 2016. When it redid its projection recently, its 2016 forecast had leapt to 97 per cent.

Why is Spain failing to cut debt? It is not for lack of grit. The big reversal has taken place in the public sector, yet the savings effort there has been respectable: the IMF estimates that Spain’s cyclically adjusted budget deficit has come down from 9.7 per cent in 2009 to 4.6 per cent this year. The private sector is saving 10.7 per cent of disposable income, less than thrifty Germans but considerably more than Britons or Americans. Spain is discovering that belt-tightening can be futile in the absence of aggressive action from the central bank.

Consider the contrast with the US and Britain, countries that also experienced credit bubbles. There, national central banks embarked on quantitative easing, pushing down interest rates even as they pushed up growth and inflation. This transformed the arithmetic of debt reduction. With nominal interest rates below nominal growth rates, the debt stock grows more slowly than output, driving down the ratio of debt to GDP. Of course, fresh borrowing can still pull the ratio upwards. But quantitative easing creates a kind of moving carpet, allowing the passenger to walk backwards and yet advance.

Spain is also on a moving carpet, but it is travelling the wrong way, fast. Nominal growth is negative and the government’s 10-year borrowing rate in October was 5.7 per cent, with private rates higher. This differential is ruinous. Even if Spain ceased borrowing, debt would grow faster than output, exacerbating doubts about Spain’s solvency and pushing interest rates further up.

To be fair to the European Central Bank, it has tried to be helpful. Spain urgently needs to swallow its pride and accept external monitoring of its economy, freeing the ECB to lower borrowing costs by purchasing short-term Spanish bonds. But even if the ECB activates its promised outright monetary transactions, Spain’s interest rates will still be above the growth rate. The stated goal of these transactions is to eliminate the penalty Spain pays because of fears of exit from the euro. It is not full-blown quantitative easing on the US or British model.

Perhaps the ECB will be more aggressive than it has indicated. Or perhaps a strong US recovery will pull the world out of recession, allowing Spain to escape its debt via export-led growth. But the positive surprise would have to be huge to change Spain’s dynamics, which suggests the country is likely to need debt restructuring in the end. If that is right, Europe should act urgently. One in four Spanish workers is jobless. A bolder set of leaders would tackle Spain’s debt now.

Current Affairs: Wave of Evictions Leads to Homeless Crisis in Spain

Wave of Evictions Leads to Homeless Crisis in Spain

By The New York Times

SEVILLE, Spain — The first night after Francisco Rodríguez Flores, 71, and his wife, Ana López Corral, 67, were evicted from their small apartment here after falling behind on their mortgage, they slept in the entrance hall of their building. Their daughters, both unemployed and living with them, slept in a neighbor’s van.

“It was the worst thing ever,” Mrs. López said recently, studying her hands. “You can’t image what it felt like to be there in that hall. It’s a story you can’t really tell because it is not the same as living it.”

Things are somewhat better now. The Rodríguezes are among the 36 families who have taken over a luxury apartment block here that had been vacant for three years. There is no electricity. The water was recently cut off, and there is the fear that the authorities will evict them once again. But, Mrs. López says, they are not living on the street — at least not yet.

The number of Spanish families facing eviction continues to mount at a dizzying pace — hundreds a day, housing advocates say. The problem has become so acute that Prime Minister Mariano Rajoy has promised to announce emergency measures on Monday, though what they may be remains unclear.

While some are able to move in with family members, a growing number, like the Rodríguezes, have no such option. Their relatives are in no better shape than they are, and Spain has virtually no emergency shelter system for families.

For some, the pressure has been too much to bear. In recent weeks, a 53-year-old man in Granada hanged himself just hours before he was to be evicted, and a 53-year-old woman in Bilbao jumped to her death as court officials arrived at her door.

Yet at the same time, the country is dotted with empty housing of all kinds, perhaps as many as two million units, by some estimates. Experts say more and more of the evicted — who face a lifetime of debt and a system of blacklisting that makes it virtually impossible for them to rent — are increasingly taking over vacant properties or moving back into their old homes after they have been seized.

Sometimes neighbors report such activities. But often, experts say, they do not. It is a temporary and often anxious existence. But many see no alternative.

The Rodríguezes fell behind in their payments trying to help their daughters, who both lost their jobs and have three children between them. Their daughters had come to live with them after being evicted themselves. “I could not let my children and my grandchildren starve,” said Mrs. López, who used to work as a cleaner in a home for the elderly.

No one tracks the number of squatters. But Rafael Martín Sanz, the president of a real estate management company, says squatting has become so common that some real estate companies are reluctant to put signs on the outsides of buildings indicating that an apartment is available.

“The joke is that half the people touring apartments that are on the market are actually just picking out which apartment they want to squat in,” he said.

Most of the evictions take place quietly, with embarrassed families dropping the keys off at the banks. But in some working-class neighborhoods, there are weekly clashes with the police and bank officials, as housing advocates and volunteers try to resist the evictions.

In Madrid’s Carabanchel neighborhood, a crowd protesting outside a basement apartment recently shouted “shame on you” to a cluster of bank and court officials who had come to evict Edward Hernández and his family. But Mr. Hernández’s lawyer, Rafael Mayoral, sized up the picture and predicted he would be able to negotiate a postponement. The crowd of supporters, he said, outnumbered the police officers.

Mr. Hernández, 38, who worked in construction, bought the apartment for $320,000 in 2006, but he lost his job three years later, he said. He thought he had negotiated with his bank to pay less for a while. But one day, he said, he got a letter saying that his apartment had been auctioned.

Mr. Hernández and his wife have their eye on an empty apartment they intend to occupy. Failing that, the couple will have to split up, he said. His wife would go back to live with her mother, who is behind in her own mortgage payments and already housing her other adult children. Mr. Hernández would live with his brother, who lives with his young family in a studio apartment.

By the end of the morning, bank and court officials had agreed to postpone Mr. Hernández’s eviction for six weeks. He still faces a debt of more than $330,000, more than he paid for the apartment. In Spain, mortgage holders are personally liable for the full amount of their mortgages. Then penalty interest charges and tens of thousands of dollars in court fees are added at foreclosure. Bankruptcy is no answer, either — mortgage debt is excluded.

Trying to stem the flow of homeless, the Spanish government has asked the banks to adhere to a code of conduct that protects, to some degree, the very poorest Spaniards, and many of the banks have signed on. But advocates say that the code offers relief to such a narrow slice of homeowners — those who have no working adults in their household and who paid less than $260,000 for their homes — that it is unlikely to have much effect.

Elena Cortés, the councilor for public works and housing for Andalusia, the region that includes Seville, said that during the boom years the government rarely built any low-income housing. On top of that, the country has never had much rental property. Now, as families are evicted they have nowhere to turn. In a written statement, Spain’s banking association, the A.E.B., said banks were looking to avoid evictions whenever they could through negotiation.

The Rodríguezes began living in the luxury block, Corrala Utopía, in May with only a few belongings, a move that was organized by members of the 15-M movement, the name given to people who became organized after the countrywide protests that began on May 15 last year. One member of the group, Juanjo García Marín, said the property was chosen because it was mired in legal proceedings that might give the families more time to stay there.

Neighbors have given them furniture, and donations of food arrive most days. On a recent evening, Mrs. López was using a generator to keep her lights on and her refrigerator running. Others in the building also have generators, but some cannot afford the gasoline to keep them running.

After dinner, Mrs. López’s 13-year-old grandson arrived, announcing that he needed a place to do his homework. His mother’s apartment upstairs had no lights.

Current Affairs: Obama second term: What it means for the world

Obama second term: What it means for the world

BBC

Now that President Obama has won re-election, what will a second term mean for US relations with other countries?

MIDDLE EAST

In his victory speech President Obama told Americans that 10 years of war were ending. But turbulence in the Middle East means that military action, perhaps even new wars, will push back on to his agenda.

The Syrian war is leaking into neighbouring countries. Second term Obama is likely to authorise more support of the Syrian rebels, short of direct US military intervention.

An even bigger decision awaits on Iran. If  by next summer the US and its key allies still believe that Iran is developing a nuclear weapon, despite talks and sanctions, President Obama will have to decide whether or not to attack Iran's nuclear sites, or to give Israel a green light to go to war.

America has to build new relations with Arab countries that have elected Islamist political leaders, and to respond if the Arab uprisings continue to spread to its allies in the Gulf. Another crisis between Israel and the Palestinians is overdue. When it comes, Obama will be tempted to revive the push for peace he abandoned in his first term.

Behind every decision will be the knowledge that, despite its huge military power, America's political leverage in the Middle East is in decline. Compliant, reliable, authoritarian allies have been deposed. And a new generation that sees America as an adversary, not a friend, is being empowered.

EUROPE

Europe will be waking up this morning with a general sigh of relief. Opinion polls have always shown President Obama to be more popular than Governor Romney across the continent - but for most governments, too, continuity in Washington is better than a changing of the guard. The US Treasury Secretary Tim Geithner - as well as the President himself - has been closely involved in discussions on the eurozone. The EU is so embroiled in its internal debates on the eurozone crisis that it doesn't want any external distractions.

The EU has also been working closely with the Obama administration on a variety of foreign policy issues - Iran in particular. Even if some of the key personnel change in a second Obama term, the President's victory means there will be no dramatic change of course for European capitals to deal with.

CHINA

President Obama's victory comes just a day before the start of China's once-in-a-decade leadership change, so for China's leaders the focus for now is firmly at home - and not across the Pacific.

But during the US presidential campaign, both candidates were highly critical of China, taking Beijing to task over what they saw as the country's unfair trade practices. Some of the sting from those accusations could well linger long after election day. Relations between the two countries have been strained in recent years - particularly over economic issues.

Beijing is also deeply worried about President Obama's strategic "pivot" back to Asia. Some officials believe that Washington is trying to contain the rise of China. It will be these issues that will dominate arguably the most important diplomatic relationship in the world.

AFGHANISTAN

Much in Afghanistan is viewed now through the prism of the ending of the US-led combat mission here. A change in Commander-in Chief was unlikely to make much of a difference to American policy - there was little difference between the candidates, aside from Mitt Romney's claim that he would listen more to generals on the ground.

The question facing President Obama is how quickly do the remaining troops come home, and how many are left here after 2014. Military commanders would like a more gradual withdrawal, and a force of 10,000 plus to remain. But the White House, with a renewed mandate, is likely to press for an accelerated exit, with fewer American soldiers and marines remaining to assist Afghan forces, after 2014.

IRAN

Many in Iran were concerned that a Republican win would mean war, and believe a Barack Obama victory makes life safer for the people, because the US will move quickly to set up a new round of talks over Iran's nuclear ambitions.

However, some Iranian political activists believe that Barack Obama's victory will give rise to more pressures on Iran. "Barack Obama enjoys considerable popularity in the international community, which Romney really lacks, and it will help him reinforce the coalition against Iran and build up more pressure on the country," said Naser Hadian, a political professor at Tehran University.

Which would be more acceptable for Iran: Mr Romney and his Israeli allies imposing a cessation of uranium enrichment or a President Obama who might give Iran peaceful nuclear rights? From that viewpoint, Iranians are very happy to see Barack Obama once again in the White House.

PAKISTAN

Pakistan's military, which controls the country's national security policy, has traditionally felt more comfortable with Republican governments in the US. Democratic leaders, on the other hand, have tended to be rather cold towards it, due to its position civil liberties, democracy and nuclear weapons.

During President Obama's first term, US-Pakistan relations appeared to have hit rock bottom. The US continued to express concern over Pakistan's alleged support for militant groups. Pakistan remained angry over drone strikes on its territory, the killing of Osama bin Laden in a covert US operation on Pakistani soil, and Nato attacks on some Pakistani border posts.

But Mr Obama's victory means the US' proposed "end game" in Afghanistan is likely to pick up steam, and from a Pakistani perspective, take on a clearer shape. Pakistan has been complaining that American strategy in Afghanistan is vague, and that its own potential role as an important player in the Afghan peace is being ignored.

Analysts here predict that the Obama victory is likely to increase pressure on the Pakistani establishment to facilitate US goals in Afghanistan.

MEXICO AND LATIN AMERICA

There was almost an audible sigh of relief in Mexico that it was the incumbent president who was re-elected. There is still a widely held perception in Mexico, and across the region, that the Republicans do not represent or understand the interests of Latinos in the US nor, by extension, of their families south of the border. Yet more undocumented immigrants have been deported under President Obama than under any other president since the 1950s.

Still, many in Latin America hope that a second Obama administration will strike up a better relationship with the US's regional neighbours. It is felt by many that, whether over political relations with Venezuela, the trade embargo on Cuba or the violent drug war in Mexico, Mr Obama has not really delivered on his promises on Latin America.

In many ways, though, the vote which will most affect Mexico was not the race for the White House, but the question of the legalisation of marijuana in Washington state and Colorado. Many analysts expect the decision to pass the measure to make a major dent into the massive profits of the country's powerful drug cartels. Marijuana is their main cash crop, worth an estimated 6 billion dollars a year through illegal trafficking.

AFRICA

President Barack Obama made only one, cursory trip to sub-Saharan Africa during his first term. So how much will change in Mr Obama's second term? That question was, perhaps understandably, barely mentioned in an election campaign that focused on pressing domestic issues and the Arab uprisings.

Behind the scenes, American diplomacy will no doubt continue to be furiously in demand. The start of the second term is likely to be preoccupied with more of the same: international efforts to remove Al-Qaeda-linked rebels from the north of Mali - by force or negotiation or both - and efforts to ensure that Zimbabwe and Kenya avoid repeating the violence that wrecked their last elections.

So far, there is no sign of a grand "Obama Doctrine" for Africa - and perhaps that's a good thing, given the diversity and complexity of the continent. Mr Obama has left it to others to warn about the dangers posed by an insatiable China, but his second term may give him an opportunity to move away from the distorting "war on terror" preoccupations of Mali and Somalia, and focus on the broader issues - trade in particular - that he raised three years ago in Ghana.

RUSSIA

Russia has received the news of President Obama's re-election with cautious optimism. Moscow feels it knows President Obama: it has worked with him the last four years. And, after all, he is the man who famously launched the re-set in US-Russian relations.

But this will be no "buddy-buddy" relationship. President Obama may have hit it off with the previous Russian leader, Dmitry Medvedev (they once went to a burger bar together), but relations with Mr Putin are proving more challenging. There is concern in Washington at the current human rights situation in Russia; at the same time, there is suspicion in the Kremlin that the US is funding and supporting President Putin's opponents.

Add to all of this Moscow's concern at US plans for a missile defence shield in Europe, Nato's potential further enlargement to the east and major differences over the conflict in Syria, and it is clear the mutual distrust is growing. Time for a re-set of the re-set?