Fernando Favata, CEO of SAMMY FREE, took part in issue number 17 of AGERS’ magazine, titled “Polycrisis”. In the article he gives us his view on the challenges companies have faced in recent years, emphasising the dizzying increase in public debt in just 15 years, an issue that no one seems to want to talk about… Following Nobel laureate Camilo José Cela, who told us “When debts are not paid because they cannot be paid, the best thing is not to talk about them and to shuffle the cards”, let us hope we don’t end up “shuffling”.
We leave you the article so you can read it at your leisure:
For some years now we have been facing unimaginable situations: just when we had overcome the harsh blow of the 2008 crisis, we have strung together a worldwide pandemic, galloping inflation, an armed conflict and, as the final touch, snap general elections that no one “anticipated”.
The pandemic forced us to take exceptional measures, global activity came to a halt, GDP collapsed, and the monetary authorities, together with governments, had to implement expansionary policies on liquidity and public spending to sustain the economy as far as possible.
What seemed to be a matter of a few months stretched into several years, and was complicated by bottlenecks in world trade, the war in Ukraine and runaway inflation, situations we had never experienced before.
This rollercoaster has made us open our eyes and realise that nothing is impossible and that the scenario changes overnight; and one of those scenarios we did not imagine is the unstoppable, unprecedented rise in rates by the European Central Bank, together with other central banks such as the FED.
A dizzying climb in rates means hard times for debt, to which we add the decrease in liquidity in the system: for the first time the M1 aggregate suffers the first fall in the entire historical series of the EU, and there are views that this aggregate is a leading indicator of economic activity. A warning to all: is a recession on the horizon? Germany is already showing signs of it.
We know that the ECB is not only implementing a rate hike to curb inflation, but has also begun to reduce its portfolio of public and corporate debt; in addition, the loans it provided to the banks will gradually be repaid, that is, even more liquidity will be removed.
How history changes! Not long ago we were charged fees for holding liquidity in our accounts. The central banks have aligned themselves with the firm purpose of putting a brake on inflation; what we do not know are the consequences this path may lead us to, because, although there is apparently no critical strain on credit or liquidity, the truth is that today it is more expensive to hold debt or to borrow, and today it is harder to grow. Is the impact of the rate hikes being underestimated? Weighing up “stop inflation / encourage growth”, the policy of halting inflation by curbing consumption wins out, despite the fact that current inflation is supply-side inflation, not demand-side.
And although private debt is under control for now, the question is: what about public debt?
From 2007 to 2022, public debt in Spain went from 35.80% of GDP to a far from negligible 113.20%, which amounts to a per capita debt of €31,556. Are we really aware of it? Does no one talk about public debt any more?
The European authorities are flagging it up: fiscal policy must be managed very well, the exceptional public spending measures adopted by governments to mitigate inflation must be eliminated, and the public deficit must be clearly reduced; the free-for-all is over.
Without an ECB to buy our debt, without a clear policy of reducing the public deficit and with rates rising, will we be able to attract the private capital needed to buy our public debt? We will keep an eye on the risk premium.
It is a fact that consumers’ disposable income has fallen: inflation and rising mortgages have eroded it, and the deposits accumulated during the pandemic have been notably reduced. The slump in consumption is a given, and with it the possibility of recession and, in turn, the difficulty of financing.
It is urgent that we are more aware than ever of how important it is to pursue a credible, responsible and solvent fiscal policy, because tensions are approaching; let us hope the government that is elected has a clear view of it. It becomes a key factor not to erode the confidence of investors and financial markets in order to maintain our credit rating as a country, a condition that not only affects the public accounts: the country’s rating can also affect companies’ ratings.
A high public debt makes a country more vulnerable to financial and economic crises; in the event of economic recessions or sudden changes in global financial conditions, countries with high levels of public debt may face difficulties in financing their debt and reach a crisis of confidence. Having no fiscal room for manoeuvre can hamper the ability to make the public investments needed to stimulate economic growth and reduce inequality in times of crisis.
It is therefore a serious matter that we should all take as our own: discussing how public debt can be reduced so as not to lose credibility and end up only “shuffling the cards”, as Nobel laureate Camilo José Cela defined impossible-to-pay debts: “When debts are not paid because they cannot be paid, the best thing is not to talk about them and to shuffle the cards”.
