What Is The Endgame For Spain?
As we pointed out in the last monthly commentary, Spain’s problem is tied in with the problem of the entire European periphery. The boom years following the adoption of the euro provided 1) easy money via negative real interest rates, and 2) overvaluation of prices as measured by real effective exchange rates. Spain, and the rest of the European periphery, can solve their problems either through massive productivity gains, which is highly unlikely, or through a reduction in wages and prices in the order of 20-30%, which is what will happen slowly and painfully. You could call such a reduction of wages and prices an “internal devaluation”. Such an internal devaluation will imply large losses to domestic banks and to external creditors. In the case of Eastern European countries, the damage will be bad, but not very large. In the case of Spain, writing off mortgage debt will be massive. We estimate that Spanish real estate losses will be over €250 billion when all is said and done. Clearl
