Spain’s woes are not down to debt

Posted: October 6, 2012 in Currencies, Europe
Tags: , , , , , , , , , , , , ,

Never forget that before 2008 the Spanish government was held up as a beacon of fiscal responsibility. Of the world’s richest developed economies, its public debt as a percentage of GDP was the lowest. Its banks were held in pretty high esteem too, and when Northern Rock and then RBS and HBOS hit the buffers, the media said we could learn from Spain, and how its banks managed to maintain prudent management of their balance sheet, while at the same time providing mortgages with a very high loan to asset values.

It just goes to show that in hindsight it is easy for people to say: “Of course the problems were obvious all along,” but it is also possible that their backwards vision is a touch rose tinted.

And when others say: “You can’t fix a crisis caused by too much debt by borrowing more,” they miss the point where Spain is concerned.

The real problem for Spain is that during the boom years, the one size fits all approach to monetary policy in the euro area meant that its interest rates were too low, and unencumbered capital flows meant money from Germany and other richer nations flooded into the country.

Actually, if you are experiencing déjà vu, there is a good reason for it. The names were different, and so were some of the circumstances, but the Asian crisis of 1997 was largely caused by similar factors. It was not Malaysia and other so called tiger Asian economies who messed up during the 1990s; it was those who flooded the countries with money. Yet when the bubble burst and the IMF was called in to help, and Alan Greenspan waded into the fray, the priority was to ensure creditors got their money back. They imposed sharp austerity on the countries to which they provided backing. The result was that an economic nightmare was foisted on Malaysia and other countries in the region. A year later, the IMF dealt with the Russian crisis in a similar way. The long term implications of that has been mistrust of the Western economic policies, leading to deterioration in relations between Russia and the West, and the emergence of China’s policy of protecting the yuan.

When the priority is to protect creditors over debtors when the problem was as much down to the errors of the lenders, you end up with a distorted world.

The management at Barcelona might say: “Why don’t you run your football team like we do, and pick all the world’s best footballers, then you too would be unbeatable. “Alas they would be wrong. Some teams must be beatable. And when creditors dictate terms and say: “Be more like us,” we risk creating a world that can only ever know permanent depression.

Before we get to the fix, let’s take a look at Catalonia, and the snag with single currencies.

Also see the following related articles:

Is there hope for the euro? Catalonia’s rift with Spain
Spain’s woes are not down to debt
Catalonia’s strife; currency’s knife
Political shenanigans in Europe
The fix to the euro crisis

©2012 Investment and Business News.

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