Luis Arenzana

The Peter Principle

"Unlike it is the case in most developed economies Spaniards cannot count on civil society institutions to make up for the shortcomings of their politicians"

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The Peter Principle
Foto: Luca Piergiovanni| EFE
Luis Arenzana

Luis Arenzana

Llevo 31 años subido al andamio de la industria financiera, los últimos 25 gestionando patrimonios. He vivido en Nueva York y en Londres, donde he tenido la gran suerte de conocer y trabajar con algunos de los mejores inversores de nuestro tiempo. A ellos y a mis socios les estaré siempre agradecido por la formación que he recibido.

0“How did you go bankrupt?” Bill asked.

“Two ways,” Mike said. “Gradually and then suddenly.”

Ernest Hemingway, “The Sun Also Rises”

The Financial Crisis and the Pandemic evidence that the competency of government officials the world over runs a large gamut. Sadly, Spain ranks very close to the bottom of these aptitude rankings and regrettably, unlike it is the case in most developed economies Spaniards cannot count on civil society institutions to make up for the shortcomings of their politicians. Since 2008, the ratio of total Public Sector debt to GDP has nearly doubled from 64% to 123%, and counting. Credit to the non-financial sector i.e. the combined debts of households, corporates, and the public sector remains nearly unchanged at 300% of GDP, still very close to the top of the charts. The latest bright idea coming out of Sanchez’s Hydra government may prove to be its last salvo before he calls a snap election.

The Communists in the government coalition have drawn a line in the sand.  They will not support the 2022 Budget law unless their housing law bill passes, or so they say. The new bill introduced last week is a marvel among modern financial weapons of mass destruction. It undermines wantonly the value of the largest source of collateral in this over indebted and slow growing economy. It also discriminates ad hominin against the same real estate investment companies and funds that have been buying tens of billions of euros of toxic real estate assets from insolvent savings and loans and domestic banks for nearly a decade. Initially, the communists intended to discriminate between large and small property owners, somebody from the State’s legal counsel must have pointed out the vagueness of that concept in legal terms and they now plan to discriminate between private individuals and corporate landlords instead. The new bill also aims at restricting creditors’ ability to perfect securities interest on a foreclosed property. It is remarkable that these sworn enemies of Franco’s regime so often adopt similar interventionist policies. Property laws that undermined landlords’ rights are one of the reasons Spain’s credit and capital markets were under developed under Franco and the country remained poor in relative terms when compared to the EU’s large economies. 

The bill also intends to penalize property owners who hold empty dwellings with a surcharge of up to 150% in property taxes. The drafters of this bill seem to ignore that a large number of dwellings in rural Spain are owned by absentee landlords who moved to Spain’s large cities decades ago and use their homes in their ancestral village sporadically. Ironically, many of these working class families probably voted for the current government. For a party who supports development programs for “Empty Spain” these people seem to have a very poor grasp of the facts around this issue. This bill also sets a national government umbrella, which will give legal protection to all kinds of shenanigans that regional governments are bound to concoct. This will contribute further to the dismemberment of the Spanish State. 

If these politicians really wanted affordable housing, all they need to do is reform the zoning laws to increase the supply of developable land from public sector and private land banks. This well-tested strategy works as well in practice as it does in theory.  It is simple, efficient, market driven and bereft of potential for corruption if properly developed.  It is shocking that whenever Spanish politicians discuss the plight of those left out of the property ladder, this simple option is not part of the discussion.  Thus in addition to the energy crisis that sees electricity spot prices hit new records every day, we will soon have a housing crisis.  

Of course, these people are with the same government that sent utility stock prices tumbling with the hare brained and possibly illegal clawbacks with which they wanted to fix a problem they had created in the first place by following blindly a decarbonisation policy, which unintended consequences they failed to grasp. They fail to grasp pretty much everything it would appear.  Yet thanks to an astute combination of lack of scruples, which allows Sanchez to form alliances with, among other sub-optimal options, apologists for terrorists who not very long ago were assassinating his fellow party members, and sheer will to remain in office, these people are the legitimate government of Spain. 

Financial markets seem to have entered a new paradigm where nobody is responsible for anything and no harm can ever come from even the most terrible decisions or circumstances.  No better example comes to mind than the latest dash for trash that has taken hold of macro investors.  Eurozone bank stocks are once again the punt du jour. It is a well-known fact that financial investors have short-term memories. Jim Grant observed long ago “scientific knowledge is cumulative while financial knowledge is cyclical”.  Some observers are downfounded, as this is not the first time that a wall of cash piles on this capital destroying industry since the euro area Sovereign and Banking crises of the early 2010s.  Even as returns on the capital raised by these banks since 2013 are shockingly poor, investors have thrown caution to the wind and are back in.  Should anybody have concerns about the alleged arbitrary nature Chinese regulators, perhaps they should remember their recent experiences in the euro zone. 

The bespoke EU Bank Resolution directive, which came out just in time to create havoc on an already difficult situation, was applied exactly once in the case of banco Popular because the Spanish authorities chose not provide this bank access to the ELA funding facility. Italy has circumvented state aid rules with the blessings of the EU Commission. Greek banks still have NPL ratios above 25% ten years on, and so on… At the end of the day, all that matters to investors today is that these banks are reporting improving earnings, as they have been able to transfer most of their bad loans to Government schemes, because this time around it is OK for the taxpayer to pick up the check. Thus in the case of Spain, €140 billion of mostly dud loans have been transferred to a government sponsored lender. Similarly, you should not express any concerns about the ballooning Sovereign debt.  It is so 2010s! 

It would appear that any problem could now be solved with a printing press. Fretting about surging inflation is also not something one does in polite company either. If you allow for the possibility that the losses on the aforementioned €140 billion in sour loans could add another 7 to 10% to the debt to GDP ratio. If in addition, you observe from recent downward revisions to GDP growth that economic recovery in Spain is not quite as robust as was advertised. Then, soon we may be worrying about the contagion of a sovereign debt crisis to the banking system and vice versa.  Let us hope that this is not the case because very few people are positioned for bad news.  Certainly, a crisis of that magnitude is not something for which Sanchez’s cabinet is ready.  

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