S&P rains on Spain's parade; Lagarde marches in both directions
I don’t think that it was a matter of it ever having been safe to go back into the water but at least one didn’t feel too threatened while sitting on the beach. Then, like a killer whale, Standard & Poor’s leapt out of the surf and snapped two notches off Spanish sovereign credit rating, leaving it at BBB- with a negative outlook, thus shooting holes into any pretence that the eurozone sovereign debt situation might be improving.
Going back to the day when St.Mario spoke to the faithful and promised to do “whatever it takes”, followed by the subsequent revelation of the OMT, there has been fear that the political class would take its foot off the gas. Mariano Rajoy’s steadfast refusal to take the formal bail-out is a case in point. He has learnt from the Greeks and is playing a game of extreme brinkmanship – not out of malevolence, I hasten to add, but because that is what he is paid to do by his citizens and voters. Let’s face it: the central banks step up to offer the politicians a bit of leeway and then we are all thoroughly surprised when the take it.
I have found that many analysts were shocked by the frank words used by the IMF in Tokyo when warning that all the good work of the past few years could go to hell in a handcart if the political classes in the three major economic blocks take their feet off the gas.
Achim Duebel of Finpolconsult wrote to me: “IMF GFSR: far too confrontational and silent on the train to longer term structural adjustment, then we might finally begin to make more progress.” His point was that the IMF was castigating the authorities for what hasn’t been done without offering adequate praise for the progress already made. He does clearly have a point. Long-term structural adjustments take just that, a long time, to implement and in his opinion it is counterproductive to continue beating people up simply because the process has not yet been completed.
Sadly, it is the only language which the political class appears to understand. When I was an idealistic undergraduate, I came upon a piece of graffiti which decorated one of the walls of my Alma Mater which read: “Make your MP work – don’t re-elect him”. That option only occasions itself every four or five years, depending on where you live or every two years in the case of the House of Representatives if you happen to live and vote in the US. In the interim period, citizens have no other voice than that which they carry into the streets. However, as the Italian sociologist Gaetano Mosca discovered not all that long after Karl Marx had developed his concepts of Communism, elites are replaced by counter-elites which swiftly adopt the flaws of the elite which they have dislodged.
Lagarde the hawk, or is it dove?
As an independent body, the IMF has both the right and the duty to persistently question both the speed and the direction in which progress is being made. Part of that duty is to highlight the fact that it is not the role of the monetary authorities to effect the turnaround. They can create breathing space and no more. The heavy lifting has to be done by those who dropped the clanger in the first place.
Alas, should the IMF be doing all it can to rebuild confidence or is it right in questioning whether the structural changes which need to be made before the rebuild can begin in earnest have been completed? That, evidently, is a matter of opinion. With a French Managing Director and with a French Chief Economist, one would expect the answer to be clear but it is not. Christine Lagarde is flip-flopping around while playing hawk and dove in equal measure.
The Spanish downgrade resolves nothing, least of all shoring up the value of sovereign debt ratings, but it reminds us that all the OMTs and all the ESMs in the world cannot easily bridge the underlying structural problems which are troubling the eurozone laggards.
Pandora’s social welfare box has been opened and it was found to principally contain un-fundable commitments.