Thursday, February 14, 2013

Mariano's Best Mates

To describe Angela Merkel and Mario Draghi as friends would probably be an exaggeration, but Mariano Rajoy can, right now, do with having any friend he can call on. And Rajoy's new best friends are saying things are much better. Like a drunk slowly sliding to the floor of the bar, he's grabbing hold of Merkel and Draghi and drawling "you're my best mates, I really love you", before finally collapsing in a comatose heap.

You couldn't really blame Mariano were he to drink himself into oblivion. Just when he thought that people might be forgetting about the Bárcenas papers, up pop other minor revelations - that Bárcenas was still on the Partido Popular's payroll until a couple of months ago and that graphologists have confirmed that the infamous ledgers were indeed written by Bárcenas (which of course Bárcenas has been denying) and not at one go, as has been suggested by PP prominenti. Ledgergate has required that friends rally round, and so Merkel and Draghi are propping him up by the bar.

Both Merkel and Draghi would have been alarmed by the fact that Spain's borrowing costs started to edge up again because of the nervousness induced by Ledgergate. It was the time for every good man, female Chancellor and president of the European Central Bank to come to the aid of the Partido Popular party, especially Draghi. It was he, after all, who promised unlimited bond buying.

Small wonder then that Draghi should have come before the Spanish Congress and offered some encouragement that there were signs of improvement and that Mariano and his merry men were doing the right things to get Spain out of its slight pickle. He probably hadn't intended for it to slip out, but it did, that he also told Congress that he was aware that adjustments were "still not producing visible improvements in the everyday lives of people". Had he not been aware, Draghi could have dragged himself off to Cas Catala in Calvia and spoken to a pensioner couple who were facing eviction for getting behind on their payments. It would have been too late, though, as the couple would have already committed suicide by the time he got there.

The ECB's intervention has certainly helped the situation, if you can call paying 5% plus on your bonds a healthy state of affairs. It is healthier than it was, but is it just a case of buying time? Economy minister Luis de Guindos can now say with a degree of confidence, all things being relative, that a bailout won't be needed and, moreover, say it without everyone rolling around in fits of laughter, which they were when he was insisting there wasn't a need for a bailout some months ago.

So yes, there are certain signs of improvement where the financial economy is concerned; hence the reason for de Guindos ruling out a bailout.  But there aren't signs in the real economy. De Guindos's belief that there will be some positive growth at the end of the year is not one that is widely shared, and even if there were to be, how would it be sustained? Could it be sustained? It is most unlikely. The government is pinning its hopes on export-led growth, enabled by internal devaluation through a lowering of labour costs. There are analysts, and Morgan Stanley bank has one, Joachim Fels, who do think that exports could permit sustained return to growth. An opposing view is that too little has been done to increase Spain's export competitiveness, while it is difficult to see how the domestic market can avoid being anything other than depressed for some considerable time. There just isn't any credit or liquidity to stimulate the real economy. In fact, the capitalisation pressures on the banks could become greater if the private sector remains inert. It's the chicken and the egg; banks can't lend and they don't receive capital either, except from the European Union.

The consequence is one of continuing stasis. The government has hinted that incentives will be offered to banks to lend to smaller businesses, but it has not explained what these might be, while there is no guarantee that they would have any real effect, a conclusion drawn from the recent Spain Summit held by "The Economist".

Despite the better news on the financial economy, the situation remains desperately bleak, and it may be that the government, and everyone else, has to wise up to the fact that it will remain bleak. For years. There is a belief that, as though by some act of God, economies always recover. Well, maybe they don't. And they certainly don't if nothing is done to make them recover.

Any comments to please.

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