“The confidence and liquidity crisis has translated into serious solvency issues and the authorities must take measures accordingly.” This was the opinion expressed by Juan José Toribio at the special continuous education session titled “La crisis económica. En el ojo del huracán” ["The Economic Crisis: In the Eye of the Hurricane"], which brought together over 750 executives at the IESE campus in Madrid on October 9.
At the event, which was moderated by Prof. José Ramón Pin, fellow professors Juan José Toribio, José Luís Suárez and Javier Díaz Giménez responded to the most frequently asked questions about the current economic and financial situation.
According to Toribio, the monetary policies employed have not been altogether effective since the problem is not so much about injecting liquidity as it is a lack of confidence in the markets. Nevertheless, pointed out Díaz Giménez, “it is better to lower interest rates and keep injecting liquidity in an effort to revive the interbank market than to take more prudent measures.”
The event also addressed the issue of the fiscal measures being implemented by a number of national governments, such as the Paulson Plan and the partial, reversible nationalization of English banks. While the speakers argued that the former could turn out quite well, the latter is being met with some reticence.
“We are facing a solvency problem: without liquidity, loans cannot be made. Recapitalizing the banks is one solution, but it remains unclear whether the government will take a step back afterward,” suggested Toribio.
The effect of the crisis on emerging economies was also put under the microscope. “For a long time, a number of these economies have benefited from the high prices of commodities, given that their economies are largely dependent upon those materials. But when those prices drop, the emerging economies will also be weakened by the crisis,” noted Díaz Giménez. “This is a good time for emerging countries to make reforms in their economies,” he added. Meanwhile, Suárez said that China and other Asian countries will not be as hard-hit by the crisis.
The case of Spain
With respect to the Spanish economy: “the main problem is its dependence on external financing. This is the country with the world's second-highest current account deficit in relative terms, and that is our greatest weakness compared to other countries," pointed out Toribio.
The professor explained that Spain's trade deficit comes primarily from private deficit, where consumption and investment take precedence over savings. Nevertheless, the prospects of minimal GDP growth (0.2% according to the IMF) and the increased spending brought on by the crisis-relief measures suggest that it will also incur public deficit.
Toribio spoke positively about the measures taken by the Spanish government involving increased bank deposit guarantees and the creation of a 30-billion-euro fund that could be raised to 50 billion. Nonetheless, he pointed out that this liquidity is highly unlikely to reach private hands, given that the Spanish banking system needs it to finance the credit already issued.
Díaz Giménez foresees changes in the savings-bank sector. “Some of the banks may end up absorbing the assets and losses of others. Nevertheless, given the prevailing lack of confidence in the markets, the government will have to provide incentive for such transactions,” he said. Toribio added that, “the legal nature of the savings banks makes this kind of restructuring extremely complicated.”
The Future of the Real-Estate Industry
The Spanish real-estate industry was the day's true protagonist. The speakers all agreed that the shortage of financing has a particular effect on developers. Furthermore, the loans they have been given amount to 300 billion euros and, as Suárez explained, “although their default rates remain low (2%), they have climbed significantly since March of last year (0.9%).”
Suárez also made special mention of the indicator on housing sensitivity, which reflects the effort made by people when buying a home: presently, a family spends 47% of its gross income on the mortgage payment.
According to Suárez, this year there have been 57% fewer approvals on new housing in comparison with last year, and this number is expected to continue decreasing in the next year, which means we are seeing a massive drop in supply. As for demand, “sales of primary homes have decreased by 13% and second homes are down 46%. Up until the second quarter of 2008, the developers listed on the stock market saw their sales numbers plummet 67% in 2007, while the price of the homes previously sold had fallen 13%, including inflation. And there is still room for a larger drop in real terms,” added the real-estate expert. Nevertheless, Suárez clarified by saying that, “a decreased housing supply would speed up improvement in the real-estate industry.”
Consumption and Employment
Toribio pointed out that, “durable consumption has fallen off in Spain.” Meanwhile, we are also seeing a rise in the number of mass layoffs, and the consequent increase in unemployment, which Díaz Giménez estimates to be an additional 400,000 unemployed workers
Nonetheless, the experts did provide some optimism. Toribio made reference to the fact that, “not all sectors will suffer from this crisis. Nondurable consumption has not undergone excessive variations. Energy companies, telecoms and infrastructure builders will not be hit that hard. Nor will those with little dependence on credit, or exporters in emerging countries.” Díaz Giménez said that, “by staying positive, our decisions could influence the economic situation.”
Professors Toribio, Díaz Giménez and Suárez concluded by underlining the need to change the shortsightedness that investors, financiers and families have maintained in recent years, as well as market innovations that are capable of putting the system back in order.
