Wednesday, September 11, 2013

Is Spain Systemically Important?

I spent my professional career in credit (1978-2007). I must have seen thousands of credits of every description, from Drexel to Mexico to Russia to Enron to Lehman to Greece. Over time, one develops instinctual, or gut, feel. Among the indices of a good credit are: good financial  disclosure; a useful website; a helpful CFO who builds trust and never lies; a CEO who understands credit (rare, outside of Wall Street). In non-anglophone countries: fluency in English and an English-language annual report, which are highly predictive: at least you are both on the same planet. Obviously, there are good credits that don’t meet this criteria (e.g., Norinchukin) and bad credits that do (certain large Swiss banks). But generally, transparency is a useful data point for creditworthiness.

Readers know that I tend to focus on the financial situation of the PIIGs and their financial systems as the source of the next global convulsion. To do this, I must rely on public data, as I am not a client of the NSA. For a highly-developed country such as the US, this not a challenge. The US is a cornucopia of public financial data, right down to the Fed’s weekly balance sheet and the Treasury’s monthly revenue and disbursements. An analyst of the US government and financial system is not handicapped by a lack of data. To a great extent this is also true of the rest of the anglosphere: English-speaking countries are serious about disclosure. After that, you fall off the Continental Shelf.

The ROW (or rest of world) views economic and financial data as national security secrets or, alternatively, window dressing (the national honor depends on it). There are three problems with ROW data: availability, usefulness, timeliness and reliability. There is a very distinct hierarchy in this regard, and to a great extent, I believe that it is credit related.

Let’s take the PIIGS. I know for a fact that Draghi is very concerned about the financial data emanating from the PIIGS. How do I know? Because he said so. The PIIGS generally rank low on the transparency scale (aside from anglophone Eire, which is a serious country). Greece has prosecuted state statisticians for telling the truth; no joke. Greek statistics fall into the category of Soviet data. They have zero information content, like those of Uzbekistan or North Korea. We can live with that because we know that Greece is a failed state, whose most recent president was a member of the Communist Party. (You have to love facts.)

We probably don’t need to care too much about the quality of Portuguese statistics; Portugal is not a “systemically important country”. When they go under, no one will notice. But Spain is a completely different story. Spain is systemically important, so the quality, availability, timeliness and reliability of its statistics are relevant to global financial stability, whether we like it or not.

I think that Spain is a systemically important  credit. I think we all agree about this, although I would challenge any of you to put a number on that datum. What is the size of Spain’s total (general) government debt and that of its banks? Good luck finding that data on an official website. I always begin with FRED, compiled by the St. Louis Fed, which is an enormous boon to economists everywhere. FRED is the Vatican of economic data, and those who toil there are heros.

Go to FRED and look up Spain. Try to find the size of government debt and of the liabilities of the Spanish banking system. Then go to the Banco de Espana, the ECB and Eurostat. Then appreciate my frustration. Spain is the biggest bad credit in the world, and its statistics are state secrets. In desperation, I turn to Moody’s, which has proprietary data and estimates available only to subscribers (somebody has to pay for this). It won’t open: the story of my life.

The Banco de Espana website offers me data on the liabilities of Spanish banks--right up to September 2008. What a curious date! The number then was 4.5T, if I read it right. The European Banking Federation gives the current number of 3.6T. So we know we are in the ballpark. My recollection  is that general Spanish government debt (center plus regions) is around 1T, which would give us a credit between 4-6T, which is systemically important: ten times the size of Lehman.  Is Mariano Rajoy the next Dick Fuld?

It is only a matter of time until this ~5T edifice is downgraded to junk by the rating agencies. Will that force European banks to mark Spanish debt to market, or to assign impairment reserves? Will that affect ECB collateral standards? Will that affect global concentration limits for Spain and its banks? Yes, yes and yes, unless Mickey Mouse is able to seize control of the global financial system.

We have been here before. Remember those fabulous credits called “Latin America”? Well, now we have shifted to “Latin Europe”. The difference is that the global financial system was able to absorb the Latin defaults between 1982 and 1992. It is not clear that there is sufficient profitability in the European banking system to write-off Spain. Especially in Spain.

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