Euro vs local currencies

The auditor point of view - May 2012

amado Lorenzo

Information to young people
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Euro vs local currencies

My friend Luis Baralt asked my opinion on one of the articles published in the New York times, regarding the future of the euro. I will try to do it.

Dear Luis:

After the fact every body is 20/20.

“.……Basically the author claims that some economists figured out, when the euro was introduced to replace the previous ECU model, that the new currency would be fatally flawed.

The economists claim that Europe´s leaders didn´t much care what they thought and also predicted that the euro could tear Europe apart …. “

There is nothing new in this article. The economists have always been divided between those that were in favour of the euro and those against.

We have to realize that the Euro is in fact the German mark. The European central bank has always established low interest rates to control inflation. Unfortunately, now this only applies to Germany.

During one of my conferences, one student indicated that the “new European economy” is in fact what the III Reich dreamed during the early forties. At that time the German strategy assigned a role to each of the “regions” as they called the conquered countries.

The document suggested a role to Spain not very far to our current situation.

Since our acceptance as a full member of the EU in 1986, Spain has been dismantling most of our industrial capacity and our few D + I centres were transferred to Germany, France or even the UK. We can blame ex president Gonzalez for that. They were too willing to apply for a full membership without considering the hidden consequences of the agreements.

In 1996 the new government of the “Partido Popular” decided to join Germany, France and other countries in the euro zone.

IN MY OPINION THE PROBLEM WAS NOT OUR INITIAL PARTICIPATION IN THE EURO, BUT HOW WE DID

The “second financial category countries” like Greece, Spain, Italy, Portugal, Ireland and the “new ones” were forced to use financial engineering to “inflate” each country economy to create bubbles, sometimes different from country to country, in order to qualify for the euro zone.

In the case of Ireland they offered tax advantages to HT companies, in the case of Spain was the real estate bubble – reclassified land to build millions of apartments that were not sold, but inflated the gross national product, HIGHER salaries, higher contribution to the social security due to more immigrants, etc. –

However, we forgot our capacity to create a huge “corrupted bubble” that nobody dares now to deny. If you add to our corruption the very low capacity of our honest politicians to fight the situation YOU MAY REALIZED WHAT WE HAVE. A situation where the politicians do no even know what the “rules of ethic” are.

¿Can you imagine a situation where members of the royal family, the chairman of our supreme court, many of the presidents of our CCAA, judges and members of the parliament insist that the “common practice” of using credit card without any reporting is correct. The system established to provide our politicians a “MINIMUM SALARY” after they leave their positions have become an “ADDITIONAL SALARY” even if they become Board members of several companies with huge salaries or receive additional funds through foundations that provide them travelling expenses – sometimes for private business, secretaries and other source of fringe benefits.?

Our euro bubble was created during the time of my friends Rodrigo Rato, Luis de Guindos and also Cristobal Montoro. There is a rumour that this team advised Jose Maria Aznar against this technique, but JoseMari insisted, in order to meet the EU requirements to joint the Euro.

In the case of Greece was pure accounting engineering, created with the assistance of several banks (USA, Ge, Fr) and financial consultants.

During that period there was a low cost financing for the Spanish companies which allowed them to invest in Latin America – some companies bought USA affiliates - creating “not realized profits” in their balance sheets due to the difference between the Euro – dollar exchange rates at the time of the investments (1,60) and a few years later (around 1,30). Now, many of the companies that invested in Latin American would need to disinvest creating frictions with both the LA governments and their local partners.

The low cost financing and the availability of credit let the corrupted politicians of the Spanish CCAA´s to initiate projects like M40, M50, M??, more than 20 airports never used, PER programs to pay salaries to farmers in Andaluzia, toll highways underused, create hundreds of “municipal companies” that sometimes pay more fees to the members of the board of directors than the salaries of the employees.

Some of the CCAA have created “embassies” in foreign countries where brothers, children and friends get high salaries and expenses privileges without any benefits for their tax payers.

There was a huge duplication in the number of employees when the central authorities transferred to the CCAA the control on public services. In 1996 when the PP replaced the PSOE party, in 2004 when the PSOE replaced the PP, and now again, new administrations always promise to correct the situation. Each time the situation gets worst.

During the election period in Andaluzia, the PSOE thought they could loose it, therefore they approved over 230 million euros grants to companies close to them. ¿Don´t we have a system to revert that corruption or is the same to all the political parties and that is why they refuse to correct that practice?

You would be surprise at the number of ex ministers, majors and “consultants” to the presidents (Spain and CCAA) that becomes members of the Board of Directors of public companies, saving and loans banks, banks, utility companies, etc.

In a recent “working breakfast” of a high politician of the “Ministerio de Hacienda” she explained the controls they are implementing to avoy deviations on the budget of the CCAA. I asked them whether they were still using the system I helped to implement to control, on a day to day basis, any deviation. They did not even know what I was asking them.

I just read in the papers that the CCAA of Valencia and Madrid will increase their deficits. Can any body believe that they didn´t know it 60 days ago?

THE REASON when there is a change of government, many times the new appointed employees find that the previous ones have erase software and information from computers without any regard to efficiency.

WHICH ARE THE CURRENT SPANISH SOCIAL, ECONOMIC AND POLITICAL MODELS?

I asked post graduate students this question and their reply, in spite of the fact that most of them didn´t know the previous Spanish regime, that our current models are still based on the previous regime model.

They prefer to call what happened in 1978 “A change” and the period afterward and still now being present “a transition to a higher level of democracy” which is only 1,95 compare to the French 7,0 on an scale of 1-10.

CONCLUSION

The problem is not “why or how” but ¿What do we do now?
The majority of the Economists did not advised the governments against entering the Euro, but they did recommended the use of sound economics models instead of doing it with “accounting engineering” formulas.

An economist indicated in a conference at the “Fundacion Rafael del Pino” - Madrid - that although they advised in the years 2007, 2008 and 2009 president Rodriguez of the Spanish kingdom and also Mr Rajoy (PP) and leaders of other political parties of the situation and explained the best available solutions, neither of them appeared to understand the situation. We all now know the consequences.

In spite of the fact that our political leaders refused to correct the situation, specially at the CCAA where the major problems were, because that would have produced a reduction of their “fringe benefits”, the economist claimed to be “tranquilos”, because they explained that the situation would continue deteriorating and our european leaders, Merkel – Sarkozy, BO and IMF would them act.

What can we do now?

When a company can not pay there is no other solution that a declaration of a bankruptcy – chapter 11 or 7 – and a negotiation.

Because it is not only Spain but also Italy, the impact on those who carry our debts (German, French banks, Gulf countries funds, China, pension funds and small savers), the current “differential interest rates” system is no longer viable. Now those who finance us get higher interest rates and in the case of bankers they refinance with the Central European Bank or private accounts at lower rates with high profits. This system was created to provide the banks with additional profits as a compensation for the real estate losses. In Spain, the financial institutions losses on real estate are higher than their TOTAL EQUITY.

BUT THIS SITUATION IS NO LONGER VIABLE because the debts of the affected countries keeps going on with those “unrealised interest profits”. You can keep adding higher interest to the debts of Spain and other affected countries and they will no be able to reduce their debts.

THEREFORE there is no other solution that reduce the debts and start changing debt with properties. In Spain we can give our debtors a lot of properties as:

- The Thyssen museum collections (we paid an unknown amount close to 500 millions dollars) and could now sell it for 2000 or 3000 millions euros.
- We can sell them all the airports build with European funds
- We can rent the Alhambra and the Cordoba mesquite during 50 years to the Gulf countries if they also buy 300000 beach apartments
- We can sell them most of the foreign football players. This will increase the participation of our local players and will reduce the debts of the clubs allowing the banks to provide more credits to local entrepreneurs
- We can sell our participation in LA companies – telecommunications, banks, oil explorations, gas and electricity to reduce the private debts with our banks.

WHAT ABOUT THE DEBT AND THE DEFICITS?

The Merkel – Sarkozy formula might be no longer valid. During the visit of Mr Hollande to the USA it appears that Mr Obama might have agreed to look for a different formula that combines some growth and a practical solution to the debt. We have no other choice that wait until they discuss it with the other G8 members.

WHAT ABOUT THE EURO?

Unfortunately, we are already in and ! dammed if we stay and dammed if we get out!

Our problems comes from two main sources.

Our social, economic and political models do remains close to the previous government model. We need to correct the situation. First the election system. We should try to be able to elect our candidates and politicians … and we should be able to kicked them out if they do something wrong, without having to wait for the next elections.

We have to change our Unions system. The union leaders can not continue being included in our budget.

As I have said before, although I am catholic I think that we can not afford to have all the members of the church in our budget.

We all know, but the politicians refuse to kick their families and friends from the government, CCAA, counties, municipal companies, banks and saving and loans board of directors, TV etc. We will have to be able to force them to do it.

IF WE CORRECT THE CURRENT SITUATION we should be able to “live with the euro” until the European authorities decide to establish a centralize system that control deficits and corruption.

Tengo que agradecer a Amado los extensos párrafos que ha escrito acerca del tema de "Euro vs.local currencies" relacionándolos con mi pregunta al respecto del artículo de Eduardo Porter en el New York Times. La verdad es que ha desarrollado (y en inglés, que confieso no es mi fuerte, ¡!) un tema extensísimo y complejísimo mucho más allá de lo que yo hubiera esperado con la mejor voluntad del mundo.

En cuanto a la tesis de Porter, yo no le había dado mucho crédito, en lo que creo coincidimos. Eduardo Porter no es verdaderamente un economista serio. Se trata más bien de un "journalist" al estilo --que a mi me gusta llamar-- de la mejor tradición "novelística" de la noticia. Él, como muchos de esa escuela, se caracteriza por escribir bien y amenamente, pero ni con mucha base especializada ni con mucho respeto por la realidad. La función de ese tipo de "periodista" americano es épater más que otra cosa. En lo primero en lo que se les notan las orejas es que con frecuencia suelen generalizar, así como buscar soluciones dramáticas un poco a la ligera. Yo por supuesto ni soy economista ni tampoco me atrevería a redactar una tesis económica sobre el Euro. Pero me parece un poco cuando menos petulante hacer como Porter, y aventurar que la solución de los problemas económicos de Europa van por la vía del abandono del Euro. (Por cierto, de lo que digo arriba sobre cierto tipo de "periodistas" son buenas instancias figuras conocidas por los cubanos como Herbert Mathews del NYT y las muchas consabidas de CNN, CNBC y otros medios del main stream press americano.)

Pero llendo al grano, sin ser especialista, me atrevería a vaticinar que algún retroceso del Euro es inevitable, pero ni con mucho generalizado. Me parece que el abandono, o expulsión, o renuncia a la membrecía del "Club" --como se lo quiera llamar-- por algún o algunos países, no sería ni imposible ni siquiera indeseable. En primer lugar, creo que las candidaturas para ello no incluirían probablemente a España, y ni siquiera a Italia, aunque quizás a esta última antes que a la primera. Me estoy refiriendo por supuesto a Grecia. Como Amado dice, creo que muchos países no debieron ser incorporados a la unión monetaria, especialmente de entre los de la última decena/docena. Pero creo que por lo pronto lo de Grecia es ya inevitable. Esto no sería ni el fin de Grecia ni el fin del Euro.

Creo que tendremos que hacernos a la idea de que a la larga vamos a ir a lo de las dos velocidades. Y que no sería muy distinto de cómo se acostumbran los clubs de fútbol a veces a jugar en primera y otras en segunda, y quizás hasta en tercera. Y que cuando desciendan, y si lo quieren, que se esfuercen por remontar a la superior.

En cuanto a España, hay todavía mucha riqueza aquí, y mientras no se acabe el sol este país tiene recursos para aguantar esta crisis y muchas más. Lo que está haciendo el gobierno es apretarse el cinturón y probablente apretará bastante más, y con razón... No sólo no se lo debe criticar (aunque las críticas nunca faltarán en un proceso democrático) sino que se lo debe impulsar para que intensifique el proceso de austeridad: eliminación de diputaciones, del senado, de embajadas de autonomías (y ni hablar del proceso aún más difícil del desmantelamiento o reducción del fenómeno confederativo), de asesores y ayudantías, etc... Y ni hablar de la reducción de la corrupción... Todavía hay mucha tela por donde cortar.

Y, aparte de lo que antecede, el gobierno tiene tres grandes grandes factores a su favor para resolver esta crisis sin tener que descolgarse del Euro ni hacerse el jara-kiri optando por un rescate financiero externo: uno, tres años por delante; dos, una mayoría congresual absoluta; y tres, unas riquezas acumuladas a nivel privado y familiar que tradicionalmente contribuyen en parte sustancial a nivelar las escaseces sociales. Espero que estos breves apuntes contribuyan modestamente a complementar las tesis de Amado, mucho más desarrolladas que las mías.

Es muy difícil captar las realidades, pero "si no" existe una valoración ajustada, los problemas serán malos y peores. El objetivo de 27 países, a mi juicio, fue un error. No debieron pasar de 15/18 países. Un Stop OK.

España ocupó el No. 12 (1986), anticipándose por Grecia No. 10 (!) y Portugal No. 11. Quiénes quedaban? Los de Europa del Este: Polonia, Hungría y Checoslovaquia (ahora separados Chekia y Eslovaquia). Rumanía no estaba ni era necesaria. Los países pequeñitos no debieron integrarse, como Malta, por ejemplo.
Las realidades económicas NO se han cumplimentado, sino que han "creado problemas". Ahora vemos a España, que parecía estar mucho mejor, se ha ido al garete por un campo mal estructurado y desarrollado en sentido no ajustado.

Ahora vemos también que el Euro se va a situar en lo que yo calculaba que no debía estar a $1.31 o más aún. Desde hace tiempo he calculado que no debíamos estar por encima de $1.20 (se logró tocar este nivel y hasta bajarlo por poco tiempo), a pesar de los golpes que también el dólar ha venido sufriendo. Su deuda es enorme y ya veremos la decisión de capacidad monetaria. Es tan complicado el mundo monetario, con su oferta y demanda según mercados monetarios, que es fácil moverse en los movimientos del dólar. También ahora con el Euro que sufre las oscilaciones hacia abajo y a mi juicio, habrá tres niveles de sus miembros. La posición monetaria sufre sus movimientos.

SPAIN: Las auditorías se escondieron y/o se dejaron ignorar en muchos países y sectores especiales.

En el caso nuestro, puertas adentro la inspección del Banco de España ha ido fallando en los años de ZP a la par, teniendo al Presidente Ordóñez. Es probable que no hubiese profundizado su gestión y llegó a un nivel que no analizó ni tomó las decisiones necesarias para estas coyunturas.

El sector de la Banca española necesita más dinero. Las pérdidas de dicha banca flucturía entre 220,000 y 260,000 millones de euros, necesitando un capital extra de unos 50,000 millones. Esto fue informado por el Instituto Internacional de Finanzas. ¿Dónde están las pérdidas? Pues, en las Cajas ¡donde un número significativo requiere una ayuda gubernamental! Los expertos piensan y afirman que el grueso de estas pérdidas estaría concentrado en los balances de activos inmobiliarios de dichas Cajas. La asociación de banqueros
ha interpretado que las pérdidas estarían más cercanas al peor escenario.

Han aparecido los dos bancos bien conocidos: Santander y BBVA. Capitalización: 42,846 Euros M, Activos 1.251.525 EM y Beneficio Neto 5.351 EM. En el BBVA tenemos: Capitalización 25,424 EM - Activos 597,688 EM y Beneficio Neto: 3,004 EM. Después tenemos Bankia, Sabadell, Popular y Banesto. Bankia, según Mr. De Guindos,
necesitará 7,500 millones para sanearse. si bien alega De Guindos que esta cantidad no corresponde a ningún "agujero" extra y servirá para cubrir las nuevas exigencias al crédito inmobiliario.

Una frase aplicable para cerrar por ahora: "Dejemos las teorías a un lado y apliquemos la práctica real".

Me he casi limitado a la economía de España, pero hoy vale la pena destacar qué tipo de Evolución Económica se debe interpretar y realizar en el resto del año, como mínimo. ¡El Ejercicio 2013 lo necesitará a fondo!