“The European Central Bank could cope with another Greek debt haircut”

By Tania Suárez, in Madrid | Alberto Matellán is director of strategy and macroeconomics at Inverseguros SVB. In a conversation with The Corner, he said that even if Spain doesn’t formally request a bailout, “it will be necessary some kind of intervention.” However, he points out that the possible Spailout would be met via different instruments, and that there is a high probability that a bailout for Italy comes in at about the same time.

Question.- Will Spain finally ask for a complete bailout? If so, when do you think it will do so?

Answer.- It depends on what is meant by ‘asking for a bailout.’ It isn’t possible a process similar to that of Greece, Portugal or Ireland, and in fact, no such possibility is contemplated. The notion of bailout here in Spain is completely different, and it’s based on the idea of the European Stability Mechanism (ESM) or the European Central Bank buying Spanish debt in the primary or in the secondary market, so they contribute to the financing of our public sector. For this to happen, though, the government must request the bailout. That is what we understand by ‘asking for the bailout,’ a process that will bring about very hard conditions. It is also necessary to take into account that Italy is in a very similar situation.

Regarding the request, it’s likely to occur in a few months, although it is entirely a political question because, with or without a request, it will be necessary some kind of intervention. As a matter of fact, the last monthly report by the European Central Bank has placed Spain within the group of rescued countries in the European Union.

Q.- Which conditions could the European Central Bank (ECB) set if finally Spain requests the bailout?

A.- The conditions will include two lines of action, dependent upon one another: a reduction of the deficit, and an improvement of competitiveness. Although the ECB can introduce many obligations, these two are the most important.

Measures in the labour market are likely to bear a significant brunt. The emphasis will be on increasing competitiveness at the expense of salaries. The problem is that what Spain really needs is devaluation and, as it cannot do it in a direct way, the only option to achieve something similar is via labour cost. Besides, it is likely that they insist on further dismissals of public employees (not necessarily civil servants, but contractual staff and staff recruited for public companies).

Also, Brussels could insist about the inefficiency of the Spanish administration. Many European voices are asking for a reduction or the complete elimination of regional governments. This is precisely one of the issues with which Europe is more concerned: the Spanish regions are like a bottomless pit, and they don’t carry out the necessary significant adjustments.

Finally, they will insist on a stronger adjustment of the deficit. The taxes have already been risen a lot, but fiscal pressure can be toughened even more –not only the income tax (IRPF by its Spanish initials), but also the VAT and the corporate income tax. However, this is by far the less effective measure, and Europe knows that. That’s why Europe could ask for more measures focused on privatisations and the cutting on spending.

Q.- If Spain finally requests the bailout, will the markets perceive it as a positive step or will they keep on chastising the country?

A.- Well, it is usual to compare the situation with that of other countries such as Portugal, Greece or Ireland, where the market bleeding went on after their bailouts. However, the Spanish rescue will be carried out in a different way: through the purchase of debt, and accompanied by a message of forcefulness by the ECB. Furthermore, it is likely that the Spanish bailout will be very closely followed by a bailout for Italy. For these reasons, it seems difficult to think that the markets will keep on chastising neither Spain nor Italy.

This will ultimately depend on the European political reaction. If European authorities really show a path towards unity, investors will calm down. As we can see, it is in truth a problem of Europe as a whole, not only of Spain.

Q.- Are all the measures that have been implemented so far in Spain enough?

A.- The cutting on spending has been merely symbolic. The public sector keeps spending twice what it earns, and that is what needs to be changed. Deficit adjustment has been made via taxes, but the government hasn’t taken into account that that is counterproductive because it weighs down the economic activity. So, every new measure should seek an impact on spending and not on earnings.

Q.- Do you think that the ECB will finally take part in this situation? If so, when and how will it intervene?

A.- It is very likely that the ECB will intervene, and it will do so via a purchase of debt in the markets. In the future, the ECB will have more tools to work, such as a banking license for the bailout fund that will let it to leverage, or the capacity of banking supervision.

Q.- The International Monetary Fund has asked for country members to reduce the debt burden of Greece. Could this lead to new haircuts? Is this option affordable for countries such as Spain and Italy?

A.- The problem is that Greece is unable to balance its accounts. There have been many factors that have worked together and that have made it impossible to effectively govern the country both economically and socially. That’s the reason why it is very likely that Greece will need, once again, a haircut over its debt. It is not a question of whether it is affordable or not, it is something that must be done because there seems to be no alternative.

Anyway, the ECB has sufficient muscle to cope with another haircut on Greece. The ECB bought Greek debt at a price that gives it margin to bear a strong amount of reduction in the current price without suffering from losses in its accounting books. For the country members, it doesn’t really is an important amount; however it could bring in a high political impact.