The controversial article from The Daily Telegraph ...
Spain
is officially insolvent: get your money out while you still can
I'd not noticed this until
someone drew my attention to it, but the latest IMF Fiscal Monitor, published last
month, comes about as close to declaring Spain insolvent as you are ever likely
to see in official analysis of this sort. Of course, it doesn't actually say
this outright. The IMF is far too diplomatic for such language. But that's the
plain meaning of its latest forecasts, which at last have an air of realism
about them, rather than being the usual dose of wishful thinking.
Let's take the projected
budget deficit first. This is expected to decline quite steeply this year to
6.6 per cent of GDP, but that's mainly because the cost of bailing out the
banking sector fell substantially on last year's budget. On a like-for-like
basis, there has in fact been very little fall in the underlying deficit. And
nor on the present policy mix is there ever likely to be, for that's where the
deficit is projected to remain until the end of the IMF's forecasting horizon
in 2018.
Next year, the deficit is
expected to be 6.9 per cent, the year after 6.6 per cent, and so on with very
little further progress thereafter. Remember, all these projections are made on
the basis of everything we know about policy so far, so they take account of
the latest package of austerity measures announced by the Spanish Government.
The situation looks even worse
on a cyclically adjusted basis. What is sometimes called the "structural
deficit", or the bit of government borrowing that doesn't go away even
after the economy returns to growth (if indeed it ever does), actually deteriorates
from an expected 4.2 per cent of GDP this year to 5.7 per cent in 2018. By
2018, Spain has far and away the worst structural deficit of any advanced
economy, including other such well known fiscal basket cases as the UK and the
US.
So what happens when you carry
on borrowing at that sort of rate, year in, year out? Your overall indebtedness
rockets, of course, and that's what's going to happen to Spain, where general
government gross debt is forecast to rise from 84.1 per cent of GDP last year to
110.6 per cent in 2018. No other advanced economy has such a dramatically
worsening outlook. And the tragedy of it all is that Spain is actually making
relatively good progress in addressing the "primary balance", that's
the deficit before debt servicing costs.
What's projected to occur is
essentially what happens in all bankruptcies. Eventually you have to borrow
more just to pay the interest on your existing debt. The fiscal compact
requires eurozone countries to reduce their deficits to 3 per cent by the end
of this year, though Spain among others was recently granted an extension. But
on these numbers, there is no chance ever of achieving this target without
further austerity measures, which even if they were attempted would very likely
be self defeating. IN any case, it seems doubtful an economy where unemployment
is already above 25 per cent could take any more.
In the past, the IMF has been
guilty of being far too optimistic about Spain, both on the outlook for growth
and the public finances, so it's possible it is now committing the reverse
mistake of undue pessimism. Yet somehow I doubt it. Spain is chasing its tail
down into deflationary oblivion.
All this leads to the
conclusion that a big Spanish debt restructuring is inevitable. Spanish sovereign
bond yields have fallen sharply since announcement of the European Central
Bank's "outright monetary transactions" programme. The ECB has
promised to print money without limit to counter the speculators. But in the
end, no amount of liquidity can cover up for an underlying problem with
solvency.
Europe said that Greece was
the first and last such restructuring, but then there was Cyprus. Spain is
holding off further recapitalisation of its banks in anticipation of the
arrival of Europe's banking union, which it hopes will do the job instead. But
if the Cypriot precedent is anything to go by, a heavy price will be demanded
by way of recompense. Bank creditors will be widely bailed in. Confiscation of
deposits looks all too possible.
I don't advise getting your
money out lightly. Indeed, such advise is generally thought grossly
irresponsible, for it risks inducing a self reinforcing panic. Yet looking at
the IMF projections, it's the only rational thing to do.
Jeremy Warner, assistant
editor of The Daily Telegraph, is one of Britain's leading business and
economics commentators.