The spree of easy and cheap money is over. The failure of Silicon Valley Bank (SVB) is an example of how liquidity can disappear quickly and in a context of rising rates with weak economic growth. In the blink of an eye, global financial policy has changed.
Until now it was the central banks that encouraged governments to borrow to avoid stagnant growth. But with the war in Ukraine the situation has turned 180 degrees. The rise in raw materials from Russia has brought inflation to double digits, causing a sharp increase in the price of money that is causing very serious problems for companies and the most indebted countries.
An example is what has happened with the SVB, which has run out of liquidity to return the money to its clients, causing an international financial crisis. It probably won’t be the same as in 2008, when the entire payment system collapsed, but what has happened these days in European banks with Credit Suisse at the helm has once again caused panic among investors.
For a country as indebted as Spain, with more than 1.5 trillion in debt, this paradigm shift has caught us on the wrong foot. Since Pedro Sánchez arrived at Moncloa in June 2018, the Spanish public debt has gone from 1.2 trillion euros to more than 1.5 trillion. These 300,000 million euros that it has borrowed from the ECB to inject into the Spanish economy have been the main cause of the inflationary tensions that have occurred. After all, inflation is a monetary phenomenon. Nothing happened then because there was easy and cheap money in the markets. But things have changed. With the rise in interest rates, debt service payments have become one of the main spending items in budgets. In other words, if the rise in the price of money continues to rise, we are going to pay more in the debt item than in financing healthcare.
Brussels, so tolerant until now with the Spanish Government, before the turn that events are taking has stepped on the brakes. The states have to control the public deficit again. It will be the topic discussed on March 23, when the reformed version of the stability pact is discussed. From 2024 the fiscal rule will be recovered. That is, the control strategy will be resumed. For the leftist sectors it is as much as going back to the “austericide” of which they accused the government of Mariano Rajoy due to its policy of budgetary rigor.
In other words, the government that comes out of the polls in December will have a much worse time than the left-wing coalition government, which has enjoyed leeway when it comes to spending.
The fact that the ECB does not absorb the debt issued by Spain will inevitably trigger the much-feared country risk premium, which damages business financing so much. In this environment and taking into account the net debt we have, we will inevitably have to raise taxes and cut expenses.
The department headed by Nadia Calviño admits that the net debt is high, but adds that it is not excessive because it only represents 113% of our GDP. But the reality is different. With the change in the financial framework, the strong tax collection will be reduced, inflation will drop and GDP growth will also be lower.
The good news is that Brussels will not be able to push too hard because we have reached this point with their complicity, as evidenced by their consent to the pension reform.
