Grains of Hope Amid Pain in Spain: A Far-Flung Hotelier Reports

BY Paul Solman  July 26, 2012 at 9:12 AM EST

Spanish austerity worker demonstration
Government employees demonstrate in the center of Madrid after conservative Prime Minister Mariano Rajoy announced the latest measures to lower Spain’s deficit: an $80 billion austerity package involving cuts in unemployment benefits. Photo by Dominique Faget/AFP/GettyImages.

Earlier this week we featured a dispatch from one of our far-flung correspondents, economist Ed Hugh, live from Barcelona. Tens of thousands of you have read our joint post, which was especially popular on reddit.

So I wrote to another of our Spanish correspondents for his view of what’s now hashtagged on Twitter as the #spanic: Raúl Velázquez, a hotel owner we met in Madrid two years ago. As you can see from our story, a key issue was the hotel’s debt burden, as a variable-rate mortgage meant great vulnerability to rising interest rates.

Making Sense

Of course, rising interest rates has been the crisis in Spain this week and especially short-term rates, a surefire sign of deteriorating trust in the system. (That’s why the authorities encouraged European banks to manipulate LIBOR during the Crash of ’08 to keep it low: to sustain the illusion that trust was not deteriorating, whereas in fact it was practically deliquescing.)

In Spain on Monday, interest rates shot beyond the supposedly fatal 7 percent rate at which they threaten to become a self-fulfilling spiral of doom. That led to Thursday morning’s announcement in London by head of the European Central Bank Mario Draghi: “the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough… To the extent that the size of the sovereign premia ["spread" or "interest rate cost over a risk-free rate"] hamper the functioning of the monetary policy transmission channels, they come within our mandate.”

And for the moment, Spain’s 10-year rate is down below 7 percent Thursday morning. As you’ll see below, this is just what Raúl has been waiting for.

Things are indeed heating up and Spain (and probably Italy) is at the brink of a financial rescue by the EU and probably the IMF.

Spreads [the difference between the Spanish and German rates] are unsustainable and finance is totally closed.

Same opinion as ever I think is shared by many Spaniards: nobody understands the extremely passive attitude of the European Central Bank, why it doesn’t react in the markets, why it doesn’t inject liquidity in the economy to generate trust and ease the tension we cannot understand.

At the end of June a new European financial assistance facility was made. It is affordable financing as the [market] spreads are crazy; maybe we can cut costs of financing in half. The country should definitely go for it, even if we are temporally governed from Brussels and Germany.

[What] is still not understandable: why the ECB doesn’t interact as it can be done much more quickly and better in the meantime; why in Europe we cannot have the same measures as in the UK or the U.S. that are working. So we look at U.S. as the example of a good monetary policy. We don´t understand why this is not happening by the ECB as it has happened in the Federal Reserve. It is a pity, and we are generating turmoil for the rest of the economies of the world, which is something we are very sad that is happening, but the solutions are not in our hands only.

Refinancing loans is difficult as the spreads are so high; almost everything we pay is interest. There is also very little inflation so it´s difficult to overcome the debt in a normal way [such as raising prices]. Still, the productive system is working and tourists increased 2.6 percent from the last year, so the industry is working. This year is going to have a very good level of British visitors as the euro is very low against the pound.

It is just a problem of debt (generalized in the country). Solving the problem of the country is just such an easy thing: [the ECB, IMF, etc.] buying debt to lower the cost and injecting liquidity in the banks while the budget balance adjustment is done, even if it means temporary inflation. We don’t understand why it doesn’t happen and why such a painful road is chosen, though it can be better in the long term but in the short one is very difficult.

And also we don´t understand at all why Germany and France are financing themselves so cheap, at even 1.4 percent at 10 years, and why we’re charging ourselves so much, and why we don´t cooperate to get down these spreads as we are supposed to be allies and be part of the same union.

Generally in the country there is a consensus that a balanced budget is necessary; we changed the constitution last year to settle this principle. It is very good that the new government, institutions public and private, companies and families, are internalizing this principle, but we still think that more liquid injections of the ECB are needed.

But no doubt hope is happening, industries are working, especially the tourism and exporting industries, and the country is learning a lot from the debt crisis, especially to have balanced budgets, and ‘don’t spend more than one can afford.’

This entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions