Mariano Aldama of the Royal Bank of Scotland and responsible for capital market origination for financial institutions in Spain and Portugal, has given an interview to the business daily Cinco Días in which he admits that, despite the critical situation of Spain because of excessive financing costs, it is possible to restore market confidence. We offer an excerpt of the interview.
How long can the banking system resist without financing itself? The rejection in the markets can not last much longer but first there are pieces of the puzzle that need fixing.We must restore market confidence. The new government has to implement specific measures of austerity in regards to public spending and other structural reforms such as the reform of the financial market itself, the labour market reform and a tax reform to avoid being doomed to stagnation.
Is it possible to stimulate growth and meet the deficit requirements? Nobody has a magic wand but it is possible to reach a balance between austerity and stimulus measures that can increase public revenues. In the end, if European investors perceive that Spain is not a problem and they see that the deficit requirements are being met, the cost of issuance of Spanish sovereign debt bonds will decrease and investors will be less afraid to participate in auctions so market financing will be sustainable .
What can be done to restore credit? Should a ‘bad bank’ be created? It’s the mechanism that has been adopted by the Anglo-Saxon world and in Germany. It’s possible that it’ll be created although there are conflicting interests. The large banks do not want to mix with the weaker entities and prefer to solve the problem themselves but it’s true that it is the quickest way to reactivate credit and no matter what it takes, foreign investors are going to understand. Foreign investors either find that things work according to a system they are familiar with or they don’t quite trust what they see. Abroad nobody really understands what the FROB is trying to achieve because in the end the real estate assets still haven’t been repriced.
How long can this situation of excessive financing costs last? Three, six months at most. I think it is precisely the amount of time necessary to implement all these reforms. During this time debt costs are going to be high. For this reason, I believe that the transfer of power must be done as swiftly as possible because the more time we gain, the faster we will be able to implement measures. What Mariano Rajoy can’t do is introducing reforms in drips and drabs or waste time trying to sound the public opinion. He has had enough time, knowing that he was certain to win the elections, to work out clearly who is going to be on the economic team and what decisions need to be taken.