MADRID | If there is something we all can agree on is that there is too much debt worldwide. We can also agree on the fact that it is the developed countries that are suffer this high level of debt, after more than ten years of excesses. This is the opinion of Jose Luis Martínez Campuzano, chief strategist at Citi inSpain, who has expressed his views for Consenso del Mercado.
“When we talk about the European public debt as a whole, the situation is better than that of countries like Japan or the United States. Of course, the fundamental question is whether we can speak of European debt (or deficit) at all as one single item at a European level. Perhaps we will have an answer to this question sooner than later; indeed, European politicians should be the ones to respond. The European debt crisis is above all a crisis of confidence. And distrust has increased due to a politically inadequate response to the shortcomings of the Euro. It is true that many countries in the region should take steps to adjust their public finances in the medium term, but the adjustment strategy becomes unsustainable when faced with a continuous deterioration of the financing conditions, which require further fiscal adjustments, and erodes the chances of economic recovery.
“But there are countries where we do have enough history to evaluate the seriousness of the moment. In the US, total current debt levels are only similar to those of the first half of last century. Its decline meant enormous sacrifices at that time, including depression and later a world war. Naturally, the current situation is different. Our authorities know the past and can avoid making the same mistakes. They are already doing so, starting with the central banks. Also, something is moving at a political level, although we all wish there were less talk and more decisions…
“The growing weight of emerging economies, their enviable financial position, should represent a sort of guarantee that the deleveraging process in the developed countries will not have an unaffordable economic impact in the medium term. But still, the negative impact will be obvious.
“The Dutch finance minister recently said that public debt will never again be a risk-free asset for banks in the future. These are very dangerous words in a market such as the current one, dominated by a crisis of confidence. So far, this year the European banking industry has achieved a recapitalisation by close to €850bn, in many cases through reserves. For many entities, profitability is a superfluous goal when it is necessary to survive in a world where the deterioration of their assets now joins the deterioration of public assets, and when funding conditions are fewer and more expensive. Does it really seem strange to talk about debt adjustment in a context of growing credit restriction? Two disturbing data: the net issuance of bonds by the global financial sector has been negative in the first half of the year, by more than €150bn; the net issuance of corporate bonds has been nil.
But then, the global financial markets are narrowing as a result of confusion and even panic among investors, too.”