Deleveraging Is the Key

IESE Continuous Education Session


“The challenge facing the European and world economies is deleveraging,” IESE Professor and former Spanish Finance Secretary of State José Manuel Campa told a Continuous Education session titled “The Challenges for the Eurozone and the Spanish Economy this year.” The session was moderated by Prof. Antonio Argandoña.

The conditions necessary for deleveraging, Campa said, were growth, inflation, share sales, financial integration and public and private debt.

He also pointed to some of the institutional challenges that have to be resolved if we are to relieve tensions within Europe, such as unanimous decision making or measures towards greater financial integration such as the fund guaranteeing deposits and the mutualization of resolution mechanisms.

Prof. Juan J. Toribio then spoke about the specific Spanish situation. To begin with, he said, processes such as the consolidation of the euro are functioning better. He underlined the positive effects for Spain of the ECB’s changed attitude such as the repatriation of capital and the fall in the cost of sovereign debt.

Adjustments in the private sector are also positive, he said. “The public sector has gone from a surplus to a deficit while the private sector has gone from a deficit to a surplus.” Other positive developments include deleveraging, increased productivity, improved competitiveness and better exports and imports. He added that cleaning up the banking system and reducing installed capacity were moves in the right direction, although much remains to be done.

In spite of this, there are persistent problems such as negative growth, high unemployment, lack of available credit and high public debt. Having assessed the risks, the professor gave four reasons in favor of a bail-out: it was a condition for the ECB to buy bonds in the secondary market; it would reduce the cost of public debt with the effect of creating credit for the private sector and the conditions are already partly accepted.