 |
|
Researcher at the Basque Competitiveness Institute (Instituto Vasco de Competitividad) / Lecturer in Economics at the University of Deusto |
|
Given all this, who would have said that by the end
of 2008 people would be living in mortal fear of what was to become,
according to some, the worst crisis in living memory? How
did we get to this point? The crisis has three
main causative factors: the property sector
(especially housing), the financial sector, and
energy and raw materials.
Energy and raw materials were affected
from the outset, when GDP and employment
were still strong. Indeed, when the economy
is doing well in developed countries, there is a
greater need for energy and raw materials. Moreover,
in addition to this demand arising as a
result of economic growth in developed countries,
there was an extra demand produced by
the extraordinary economic growth of large
countries such as China and India, putting a yet greater strain on
the supply of energy and raw materials. Our planet was unable to
keep up with the rampant growth in demand from these countries
(even less so, when the creation of renewable energies led to a growing
demand for various products which are fundamental to agriculture)
and prices soon began to rocket. Nevertheless, the contradictions
implicit in this model of growth remained hidden when
the crisis hit the economy, reducing the demand for energy and raw
materials and causing the prices of oil, scrap metal, etc. to fall once
more. In other words, one of the three causes of the crisis – the rise
in the price of energy and raw materials - has been camouflaged
by the crisis itself. But this has not solved the problem, because in
the long term the most difficult thing is to address this contradiction.
For this to happen, we need radical changes in patterns of production
and consumption. And this is, of course, a much thornier
issue than the reconstruction of capitalism, which so many people
are talking about these days.
Of the two other crises we have mentioned, the housing crisis
was chronologically the first. It has taken place in almost all the
developed countries – except for Japan and Germany,
where it had already happened. From the
mid-90s till halfway through our present decade,
the number of new houses grew by 40% in countries
like the USA and France, and house prices
shot up by 100%. This housing boom owed its origins
in some degree to the interest rate resulting
from monetary policy. But if there is one place
where it could be said that this boom went over
the top, that place is Spain. 650,000 new homes a year were
built – 90% more than in the previous decade – and prices rose
by 150%, more than in other countries.
A great number of toxic assets were spread
throughout the accounts of the financial institutions
in many countries. Nobody knew
exactly how “trapped” they were in these
transactions, and did not therefore know
how much they could be entrusted with loans.
This loss of confidence led banks to refuse
capital loans to each other, and the financial
markets were blocked up. Facing
problems with solvency and liquidity, many
financial companies went bankrupt.
Since the onset of the crisis, the measures
taken by the monetary authorities –that is, the central banks–
have followed the procedures recommended for this kind of situation.
At the same time, governments have taken a number of measures
in response to the financial crisis. For banks in serious
difficulty, bailout schemes have been put into effect. In
some countries, steps have been taken to strengthen
capital (generally by increasing the state’s stake
in the capital of the financial institutions).
This financial crisis has had
certain features which are
particular to Spain,
owing to the characteristics
of the
banking syst
e m s .
Firstly, in contrast to the American banks, the main function of the
banks was not to contract loans in order to pass them on to other
entities (a practice known as “create, then spread”) but for
the Spanish banks to concern themselves principally with traditional
businesses (take money as deposit and give it as credit).
As for liabilities, in contrast to their American counterparts
Spanish banks did not obtain enough money in the short term in
the financial markets for their business dealings. However, most
of their income came from deposits. The Spanish banks did not
have enough with the deposits obtained through their own savings
to finance their investments, and they had to turn to financial
markets further afield in order to finance themselves.
The crisis brought about by sub-prime mortgages in the international
financial markets, then,
had repercussions on the Spanish
banks not because they had
invested in toxic assets, but because
they depended upon those
markets and saw their lines of
supply suddenly truncated.
In this financial crisis, the
solvency, liquidity and profitability
shown by the financial institutions
and savings banks of
Spain and the Basque Country in
comparison with other countries
is due to the particular characteristics
of their assets and liabilities,
as mentioned above.
Lastly, as far as profitability is concerned, the delays in debt
replayments and a drop in applications for credit resulting from
the crisis will have a negative effect on the profitability of the
financial institutions and savings banks. This negative effect
will be more keenly felt in institutions which in previous years
committed themselves to large-scale expansion -because recently
opened branches will take more time to become profitable
- and in those involved in the property sector, whether directly
or through property developers. On the other hand, we
must bear in mind that in recent years approximately 40% of
the profits of the financial institutions and savings banks, instead
of coming from financial brokering, have come from capital
investments in companies. Given the current state of the
stock market, it is estimated that it will be impossible to maintain
this situation. In short, the crisis is certain to bring a decline
in the profitability of the financial institutions.
Owing to the collapse of the construction sector, the economies
which most depended on its growth will be those will suffer the
worst consequences.
The financial institutions and savings banks are becoming increasingly
wary of extending credit because of the lack of liquidity
brought about by the crisis. The businesses worst affected
by this situation have been those involved in the production of
consumer durables (as their customers frequently seek loans in
order to pay for such products).
In these two aspects of the economy, the situation in South
Basque country is a little better than in Spain. Firstly, the housing
sector carries less weight in the global economy in the BAC
(9%) than in Spain (12%). In Nafarroa Garaia, however, the construction
sector is almost as important as in Spain (11%). Secondly,
the local savings banks (overtly in the BAC, less so in Nafarroa
Garaia) have fewer problems with liquidity than the Spanish
ones, and therefore have imposed fewer restrictions on loans.
Moreover, Basque companies are less heavily in debt than Spanish
ones, and in this respect they are in a better position to
withstand the credit crunch.
According to the latest macroeconomic data, the BAC, and
to a lesser degree Nafarroa Garaia, are faring better in these critical
times. In the third trimester of 2008, for example, the inter-
annual growth of the GDP was 1.9% and 1.8% in the BAC and
Nafarroa Garaia respectively, whereas in Spain it reached only
0.7%. As for unemployment rates, the BAC and Nafarroa Garaia
were better placed (6.3% and 7.1% respectively in the third trimester
of 2008) than Spain (11.3%).
Many experts think that we are experiencing the worst crisis
since the Great Depression of 1929. In my view, as far as
growth in GDP is concerned, it may well be that the current crisis
resembles previous ones to some extent. But with regard to
unemployment and social welfare, we will keep ourselves at a
good distance from the difficult situation witnessed at that time.
Let us compare the current crisis, largely bound up with the
financial sector, with that other great financial crisis which sho-
Economic recession
24
Let us compare
the current crisis,
largely bound up
with the financial
sector, with that
other great
financial crisis
which shook the
world – the Great
Depression
General Joint of Shareholders of BBVA. Argazki Press
ok the world – the Great Depression. As Sala-i-Martín has shown,
the differences are considerable. In the first place, in the 1929
crisis people’s deposits were not insured, and therefore when
the banks went bust many people lost their entire savings, which
has not happened in the present crisis. Secondly, as there was a
Gold Standard at the time, the central banks did not supply the
system with the liquidity it needed. In contrast, in today’s crisis
the central banks have attempted to provide the liquidity required
by the system. Thirdly, in 1929 deflation caused prices to
decrease and incomes to fall, and people found themselves unable
to pay off their debts. This time round inflation persists, albeit
to a reduced degree. Fourthly, during the Great Depression
governments resorted to protectionist measures which impeded
international trade and worsened the crisis. Now, mindful
of what happened then, nobody has proposed any such measure.
Fifthly, when the 1929 crisis struck, there was very little profitability
outside the financial sector, whereas the current crisis
came at a time when the profitability of non-financial companies
was at its peak. Finally, in 1929 average earnings were
much lower than they are now, and there were fewer means of
social support for the unlucky ones. For this reason, although incomes
have been reduced by the current crisis it will have a less
dramatic impact on the population at large.
Moreover, as I have indicated above, Basque companies are
meeting this crisis in reasonably good shape, with their installations
fairly well modernised, without an excessively large
workforce, with their liabilities in sufficiently healthy condition,
with a knowledge of how to function internationally, and with
well-entrenched quality control systems.
In 1993, the state faced the crisis of the time with a large
deficit in public spending and in considerable debt. This time,
in contrast, there is a surplus and compared to other countries
it is in relatively little debt. The governments of the autonomous
regions are also in a good state of financial health. This improves
the chances of implementing compensatory policies in response
to this crisis.
Finally, when things began to get worse during the crisis of
the 90s, the unemployment rate was much higher at the outset
– according to Eustat, in 1990 it stood at 16% in the BAC. At its
worst (in 1993 and 1994) it reached 25%. Now, however, unemployment
rates are much lower. According to the INE they are
6.3% in the BAC (even lower according to Eustat – 3.5%) and 7.1%
in Nafarroa Garaia. What is more, this time round it does not look
as if the unemployment rate is going to increase so much. In fact
what happened then was that the unemployment rate rose because
of job loss and the introduction of new jobseekers into the
labour market. There were various reasons for this. There were
then more young people reaching working age than those reaching
retirement; secondly, many more women were looking for
jobs at a time when there were still very few openings for women;
and thirdly, many workers in the primary sector were laid
off and had to seek work in other sectors. Today, however, although
the effects of these three factors on the labour market
continue to be felt, they have considerably less impact. There
are now more people reaching retirement age than working age;
women are now much more integrated into the labour market,
and there will therefore be fewer extra women looking for jobs
in the future; and there are now few jobs in the primary sector,
and therefore few people will be laid off.
So, bad times are on the way - there will undoubtedly be a
sharp rise in the unemployment rate - but we do not expect to
see it reach the levels it reached during the mid-80s or -90s.
Author´s note: I would like to thank Itziar Navarro and Xabier De la Maza
for their suggestions for the correction and improvement of the first draft
of this article. However, any errors it may still contain are entirely my responsibility.
|
|
In the Pdf together with the analysis of Mikel Navarro includes a brief report that gives us a perspective on the subject.
Note: This text is a version abbreviated of the original text that is written in basque and is available in the following direction: Economic Recession by Mikel Navarro. |