“For Spain is either a bad bank or an outright intervention”

By Tania Suárez, in Madrid | Gabriel Montalto is general manager in Spain at Hanseatic Brokerhouse. In a conversation with The Corner, he pointed out that the European Central Bank should finish with the liquidity injections as soon as possible. Montalto also remarked that is doubtful that Germany decides to change its policy of austerity.

Do you think the euro zone is already in recession? According to the data we are receiving these last months, that’s right, there is already a recession in some countries from the euro zone. What needs a serious consideration is whether this would bring about a contagious effect in better-placed countries, such as the UK, France or Germany where, of course, the risk is really high. That’s why the EU, and also countries like Spain, will have to act immediately and in an effective way to avoid a lengthening and/or contagious effect to other countries in the euro zone.

Could the slowdown in the economic growth in the euro zone change the German push for austerity and choose other options? Germany has been known by this kind of measures for many years now. Austerity is used as prevention policy and, in fact, has been quite positive and has proved to be the correct path. Choosing other options is something we could consider in the medium term, but only if Germany takes that step. In the current situation, it is doubtful that the government of Angela Merkel changes its economic policy in the short term. I personally think she will keep it unchanged in the short term.

International investment flows have moved to emerging countries. Is this a risky venture? Could this actually be a new bubble? Increasing investment capital flows in the emerging countries (both Asian and South American) have existed for more that six years now, so that’s not something new. As time goes by, and taking into account the so-called economic cycles, we could say that those who weren’t in the beginning of the process have more possibilities to fall into a bubble. In the first years, those investments are profitable and quite secure. But they are like a rubber band: it cannot expand any more and it finally gives way, originating a bubble. So, the risk of a bubble is latent, not for the short term but for the medium or long term.

Back to Europe, in the current circumstances, would it be reasonable a new Long-Term Refinancing Operation (LTRO) by the European Central Bank (ECB)? It is highly likely because there isn’t any other option. The imbalance in the euro zone has indeed been boosted with this LTRO for more than three years, so it is like a self-inflicted torture for the ECB. We can’t forget that the ECB works together with Berlin, so we should carefully observe the economic policies that Germany proposes in the following months.

I personally think that the ECB should stop the liquidity injections as soon as possible, because they only somehow help the banking system in countries as Spain. However, the LTROs don’t have a direct impact in growth in the domestic economy, despite this being the target.

Goldman Sachs estimates that it would take €21 billion to clean Spanish banks’ toxic assets if only the government would create a ‘bad bank’, but Madrid rejects the plan. Is that a mistake? Are real estate companies a feasible alternative? My view is that the real figure is most possibly higher, but in any case, in Germany they think this ‘bad bank’ is the only solution because it would then enforce transparency within the Spanish banking industry, which is a must. In the US, the creation of a ‘bad bank’ was successful enough, so why is it taking so long in Spain to realise it would be a good option? Otherwise, Brussels or Berlin will come up with a similar move, or something even worse. The less cooperative the Spanish government is, the higher are the chances that Spain ends up intervened in 2012 or 2013.

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