If you think the European Central Bank’s policies have “bought time”, you should ask yourself: time for what? Greece’s debt situation is as unsustainable as ever; so is Portugal’s; so is the European banking sector’s and so is Spain’s. Even if the ECB were to provide unlimited cheap finance for the rest of the decade, it would not be enough.Market Trumps Central Bank Arrogance
On my estimates, Spain’s house price adjustment is still less than halfway complete. In real terms, the US housing boom has been almost completely cancelled out. The graphs of historic bubbles, if expressed in real prices, have nice bell-shaped curves. This makes sense, since domestic property is an unproductive real asset. In Spain, as elsewhere, it would be reasonable to assume real prices will eventually fall to where they were in the mid-to-late 1990s.
The Spanish government has forced the savings banks to write down €50bn in their property portfolios this year. This will only be a small part of what will ultimately be needed if the housing market falls as I expect it will. Official estimates assume mild price falls and a quick rebound in the economy. Both assumptions are delusional. How can the Spanish economy rebound if the private and the public sectors are deleveraging at the same time, and are likely to do so for many years?
The deleveraging of the public sector will be vicious. The deficit was 8.5 per cent of GDP last year. This was a big overshoot, but the reason was not fiscal indiscipline. It was necessary to avoid a bigger slump. The recently-revised target is 5.3 per cent for this year and 3 per cent next year. So the total public sector adjustment needed under the European deficit rules is an incredible 5.5 per cent over two years – this, in the middle of a recession. If you look at the extent of total deleveraging that lies ahead, in both private and public sectors, the question is not whether the Spanish economy rebounds in 2012 or 2013, but whether it can rebound at all before the end of this decade.
Münchau is not really stating anything new. Many have been commenting on the plight of Spain for what seems like "forever" now. With every passing day it becomes increasingly difficult to say anything new, so we all struggle to say the same thing in new ways.
Does anyone even remember how little the writeoff would have been had Greece been kicked out of the eurozone two years ago? What was once a 40 billion euro problem became a 300 billion euro bureaucratic nightmare because the ECB and EMU insisted on "buying time".
ECB president Jean-Claude Trichet emphatically said "We say no to default". Well guess what Mr. Trichet? The market trumps central bank arrogance, that's what.
Trichet now looks like a complete fool. Hopefully he feels like one as well, but odds are he doesn't. Fools never see themselves for the fools they are.
ECB Buys Time For Bigger Disaster
The ECB under a new president, Mario Draghi, has circled the wagons to contain Spain and Portugal. The markets are (for the time being), cheering the success of "Super Mario" in doing just that.
I must point out that for a time, Trichet appeared successful in containing Greece. However, time is fleeting.
History will show that the ECB did not buy time for anything but a bigger disaster, just as happened with Greece.
Mike "Mish" Shedlock
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