“In Spain, an effective bailout must be focused on spending”

By Tania Suárez, in Madrid | Víctor Rodríguez is an economist at CMC Markets Spain. In an interview for The Corner, he said that Mario Draghi’s role is not so decisive in the debt crisis, although we could see important measures being applied by the European Central Bank. Regarding a possible bailout for Spain, Rodríguez considers that “if the country asks openly for it, the most likely reaction will be steep falls.”

Question.- In September it will be presented a proposal for the creation of a European banking union, which will presumably enter into force in January 2013. Do you think such proposal is feasable? Would all the countries from the euro zone accept it?

Answer.- There is no doubt that every major move aimed at trying to improve the current situation will have an important impact. Nonetheless, the questions we should ask ourselves are these: when will these policies be really implemented? Which are their real effects? Which are their side effects?

The key is the design of the European Stability Mechanism (ESM); it should allow the reception of funding from the European Central Bank (ECB). If this occurs and if the ESM receives the banking licence, the result will be very similar to the QE measures in the US: a liquidity injection that would cause in the short term strong rises in the European markets.

It is likely that all the countries in the euro zone will accept the monetary and fiscal policies together with the political decisions, even though Germany and Holland have said the contrary.

Q.- Which repercussions would have a banking union at European level?

A.- We are currently facing strong banking instability, but all the actions are focused on building up confidence in the banking system and on a capital injection in the economy. However, there are many speculations about this process, and also about the possible failure of this process. Be that as it may, we will see instability in the first weeks of September in the main European banks, until we have a firm and final decision.

Looking to the other side of the Atlantic, any measure to recover the confidence is positive; even though American banks are hitting hard times as well.

Q.- There have been many voices asking for a higher involvement of the European Central Bank in the debt crisis. Do you think governor Mario Draghi will finally give in? If so, when and under which conditions?

A.- Mario Draghi’s role is not so decisive for a higher involvement of the ECB in the debt crisis. It is the countries the ones putting pressure not to make decisions against their own interests and capitals. Since Draghi is in his new job, he has made many important decisions that were necessary and hadn’t been made before; so it would not be surprising if he took important measures. It is important, though, that investors and operators know that every time Draghi speaks, we see a strong volatility afterwards.

Q.- From your point of view, when will Spain ask for a complete bailout, and how will the markets react?

A.- Spain is taking belated measures. We cannot clearly see if Spain is going to be rescued or if has already been. International investors’ confidence in the Spanish market is extremely low, as we can see in the latest sessions, with a really high volatility.

If Spain asks openly for a complete bailout, the most likely reaction will be steep falls. However, the Stock Market National Commission (CNMV by its Spanish initials) has forbidden short positions, and thus the Ibex 35 hasn’t gone down to the level of 5,000 points or even lower.

Q.- If Spain asks for the bailout, will it be necessary to undertake new cuts and adjustments?

A.- If Spain asks for the bailout, the country will have to undertake new adjustments and more restrictive measures imposed by the ECB because it would lend us the money. But also there would be new measures imposed by the strongest countries of the European Union. These measures would probably be focused on raising money via taxes, whether direct or indirect.

From my point of view, if they really want an effective and productive bailout, they must focus on spending: a wild reduction of public spending and a reform of the Spanish Constitution would be the key.

Q.- Minister De Guindos has announced recently that the government will finally create the so-called “bad bank” for the Spanish banking system. Do you think this is the right decision? Will it make the international markets to trust more the Spanish banking system?

A.- In every cattle there is always a “black sheep”… if you want to implement new measures to “clean” the Spanish banking system before cleaning your own house, it’s easier to create a new house and remove the debris, if you know what I mean… Nowadays, the credibility of the banks is under suspicion. I don’t think that just by taking some measures they will raise credibility. It is another story that investors or speculators do want to invest in it

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