Matteo Cominetta is just starting his new job and, as such, has been touring the countries whose economies he has to monitor. This is what brings him to Madrid. Cominetta is moderately optimistic about the European recovery. But he also doesn't underestimate the serious risks that threaten to stymie a return to growth and sets very clear timeframes for what has to be done.
Question. Is the recovery here to stay?
Answer. For sure. There has been a broad improvement in the activity indicators that had to surface after two or three years in recession in the countries of southern Europe. I believe we are at the start of a sustained recovery but with structural problems that still need to be resolved, which means that we are not facing a normal recovery.
Q. Such as?
A. Above all, problems with the supply of credit will weigh on the situation. Up until now, demand for credit has been weak because the pace of activity has also been weak. But if there is a recovery in activity, this will spark greater demand for credit and that's where we'll see if the banks are in a position to respond. Unfortunately, I doubt they will be.
Portugal needs another program whatever happens in the next six months"
A. The European financial sector, not just the Spanish or Portuguese one, is facing serious challenges. Some of these derive from new regulations, such as the fact that the capital banks need to set aside as provisions when they grant a loan to a household or a company is much greater, and that clearly means that the costs of that loan will be higher for the customer. There is also the problem of loan defaults, a problem facing all of the countries in southern Europe because it is linked to the recession. That means once again that banks need to use a greater percentage of their earnings to provision for defaults, which in turn means less capital available for lending. In addition, banks are still highly dependent on the liquidity offered by the European Central Bank (ECB) and cannot depend on this funding to finance the granting of loans because of a problem of maturities. If, on top of all of this, you add a situation of high leverage, this will require much stronger and more coordinated intervention at the European level than we have seen so far. Only in this way will banks be in a position to fund the recovery with all the credit that is needed. Currently, new loans to non-financial companies cost no less than 10 percent according to the Eonia [the effective average interbank one-day rate] and because of this, a sustained recovery is not possible.
Q. When is investment expected to take over the baton from exports?
A. If by the end of this year or the first quarter of 2014, there is no pick-up in investment, that means we won't see a very strong recovery.
Q. What impact could a weak recovery have on the bailout programs?
A. I believe that in the case of Portugal another program needs to be put in place, and that is not dependent on what happens over the coming six months. The program for Portugal suffered from all of the problems with International Monetary Fund's programs for Europe: they were too optimistic about the pace of the economy. That has been the case for Greece, Portugal, Ireland and Cyprus. Portugal did everything that was asked of it and even more as the IMF itself has acknowledged. But the euro zone doesn't fit with the typical IMF plan, which normally consists of a strong austerity plan, a devaluation of the currency, a very expansive monetary policy and a restructuring of debt. In Europe, only the austerity part has been applied to everyone, which means that the adjustment hits both domestic demand and the export sector. That is why the optimism of these programs is not justified. Portugal will have to rely exclusively on the markets for its funding in June 2014 and I think that is going to be very difficult. Undoubtedly in the fall, the IMF and the European authorities will unveil an extension of the program.
Spain will do well; it is well-placed to export and has a dynamic economy"
Q. Should we expect any other surprises in the coming months?
A. Not according to my central scenario. But I do believe the ECB will have to do more and it is possible it might approve another round of liquidity injection. It could also opt for a cut in interest rates, or fix a rate for the shortest maturities — one or two years — and announce another three-year refunding operation. It's not by chance that (ECB President) Mario Draghi has spoken openly about the Eonia and has been trying to influence the market by using forward guidance, which of course is a soft approach. This means that they are controlling short-term interest rates and don't want them to shoot up. That is why we believe there will be a further injection of liquidity.
A. At the end of this year or the beginning of 2014. What the ECB wants to see is if there is growth and a recovery and if they are going to be sustainable. Once it has unveiled its forecasts for growth and inflation for 2015 toward November, then we will see. Because if they announce a forecast for inflation for 2015 of 1.2 or 1.3 percent, as I predict, they will have to act because that means they are deviating from the ECB's target of 2 percent.
Q. Can the euro zone keep putting off a banking union?
A. If we don't want to see the continuation of this scenario of the absence of credit, of problems of deleveraging, and banks that basically depend on the ECB for funding, something will have to be done and that inevitably means the restructuring of the banking system. One of the key elements of this is a review of the quality of assets to be undertaken at the end of this year by the ECB. Only then will foreign investors feel confident about the situation of the European banks because nobody knows exactly what they have on their balance sheets. For that to be the case, the ECB has to carry out a serious, deep and strict review of assets. At the same time, it is very important that the next stress tests for the banks to be unveiled by the European Banking Authority (EBA) at the start of 2014 are done well, not like the first two, which were a joke. Another area of action is the implementation of an active monetary policy of excess and constant liquidity on the part of the ECB and the establishment of a true single bank resolution mechanism. This would completely change the funding scenario of the banks and as a result the euro-zone economy.
Q. Is the recovery a done thing for Spain as well?
A. I believe so. My estimates for 2014 point to the first general fall in unemployment. If you ask which of the countries of southern Europe will be best placed in five years' time, I believe it will be Spain. It has a competitive economic structure, is well-placed to export and has a dynamic economy. What is happening at the moment is the result of poor macroeconomic management during the bubble years; that means the problems are acute but not structural.