By Alfredo Aranda, in Madrid | The course of the euro seems to be clearly bearish, according to some analysts. However, in contrast with previous situations, the depreciation of the single currency is more the result of the actions of the ECB than due to traditional factors such as monetary or economic policies. According to Alberto Matellán, the liquidity injection carried out by both the Fed and the ECB are directly influencing the downward of the currency. If things continue like this, the euro could drop to $1.20, according to the Inverseguros expert.
What is your prediction for the growth of the Spanish GDP this coming year? We don’t have a public predicted figure, but the probability that growth will be negative is too high to feel comfortable. The short term indicators lead us to believe that it is very possible that there will be a negative growth for at least one or two quarters.
Some estimates say that an additional €32 billion in cuts still need to be made in Spain this year. Do you agree with this amount? The exact amount in cuts is not important. The public accounts face two issues: liquidity and solvency. The first seems to have been postponed thanks to the ECB measures and the recent positive placements, but it could reappear at any moment. For this reason it is necessary to fully take advantage of the available time to deal with the second. The fact is that to the extent that solvency improves, credibility will be transmitted to the market which in turn will allow for better liquidity. From this point of view, it becomes evident that the massive cut to public expenditure is necessary. It’s not a matter of arguing over the amount but rather of cutting back as much as possible but in a rational fashion; that is to say, increasing the rationality of the expenses that do remain.
That is, besides reducing the number of useless expenses, especially at the regional and local level, it is necessary to improve the efficiency of the production of public goods and services, with the intention of providing the same social services with fewer means and thus, bringing public efficiency closer to that of the private sector. On the other hand, part of the adjustment is to be done via tax increases. This is very dangerous since, as we have seen in other countries, this implies a contractionary pressure on the main components of the GDP and it supposes a burden on the main economic agents that already have to cope with another pressure: deleveraging. If applied in excess, increasing taxes can stunt growth which is the only feasible way to repay debts.
Will there be another QE in the US? The current data don’t justify one but there exists a significant risk that they worsen in the coming quarters. Recently, publications have been surprisingly positive with decreases in unemployment and a slight improvement in the industrial and housing sector activity have played down the expectations of a Fed intervention. Nevertheless, massive deleveraging continues to characterise macro tendencies, which could cause the process to turn in the opposite direction at any moment, even more so if affected by the European crisis. For this reason, even though at this moment a QE3 is not justifiable, it cannot be discarded in the near future.
What do you think will be the bottom value of the euro/dollar? During the last two years the main factor of the exchange of the euro/dollar has been the race of the central banks to degrade the currency in detriment of other traditional factors. This is why the euro increased in value during the Fed’s QEs while it decreased with the ECB’s ‘light monetisation’ measures. If the situation maintains itself, there won’t be any need for any further Fed actions but the ECB will have to act, which could cause the euro to go below the 1.20 mark. But in any case, the idea that the investor has to keep in mind is that the type of exchange euro/dollar depends, at the moment, on actions taken by central banks to increase their balance.