“The ECB liquidity has been more stabilising than the bailout funds”

By Tania Suárez, in Madrid | Alberto Matellán, director of Strategy and Macroeconomics at Inverseguros SVB, considers that the effect of the ECB liquidity auctions will fade away and that, in the end, fundamentals will have a bigger influence.

In order to stabilise the euro zone situation, is it a reasonable option the simultaneous use of the rescue funds? The bailout funds are a mechanism for ‘buying time’; so, from that viewpoint, increasing its power is positive. However, we have seen that the provision of euro liquidity by the ECB has been more stabilising than the rescue funds. In the end, the rescue funds are slower and less operative. The underlying problem is that buying time only works if that time is used to carry out reforms for the improvement of the EU foundations. But that hasn’t been done yet.

Why are there people betting on a breakup of the euro? Because, at its root, the Economic and Monetary Union is badly crafted due to two main factors. Firstly, the countries that comprise the EMU have very different economic structures, and this makes them vulnerable to asymmetric clashes. Secondly, and much more important, these countries share a monetary policy but not a fiscal policy. Thus, it’s not possible to correctly manage the continental economy as a whole.

How much time has bought the ECB’s Long-Term Refinancing Operations (LTRO) so that the member countries can do the individual adjustments? Is it enough? Possibly, between one year and one year and a half. This is the period when the accumulated maturity of Italian and Spanish banks starts to exceed the quantity of the LTROs. Whether it’s enough or not, it depends on how that time is managed. In other words, it depends on whether financial reforms that allow the banks to go back to the markets are implemented. Anyway, if it’s not enough, nothing stands in the way of  new provisions of liquidity.

How long will it take to see credit flowing again in Europe? In some parts of Europe credit flows are already growing, because there is an increasing divergence in the monetary fundamentals of the core and the peripheral countries. In any case, I consider it’s wrong talking about ‘recovering’ the flow of credit. For many years there has been growth on the basis of credit, and this has led to the crisis. Debt means bringing money from the future, so in the near future we won’t have it and we’ll have to generate it by ourselves. Now, that future has come. It’s more important to grow by means of productivity and without turning to leverage, because that would make the balances much more vulnerable. Anyway, the demand of credit in the peripheral countries is insufficiently solvent while suppliers’ balances are weak, so for now we can’t think about recovery of the credit flows to normal conditions.

The liquidity auctions have helped Spanish bond sales but, is it reasonable that this trend will continue? The effect of the liquidity auctions will fade away over the time, so that, little by little, the fundamentals must get stronger. This way, although the general state of the economy may not improve much, the current reforms should contribute to favourable bond sales in the next months. But the perception on the market regarding Europe has turned negative again, that is true.

What do you think about the poor performance of the Spanish equity market in the last months? It has been negatively affected by two closely connected factors. The first one is the sovereign risk, which is affecting not only the risk premium but all assets, too. Anything with the ‘Spain’ label is perceived with suspicion. The second factor is that the equity market depends on the prospects of growth, whereas the fixed income security depends on the default risk. Currently, the measures to reduce the default risk favour the debt and are weighing down growth prospects. Combining this with the effect of a massive deleverage process, investors work with the hypothesis of many more years of low or negative growth. That’s why the lack of apparent future profit is dragging down stock prices.