World economy: 3 risks that hardly anyone talks about

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IE Focus | By Ignacio de la Torre, Professor at IE Business School

The threat of a new recession in the US, the drop in the price of raw materials, and decisions taken by the ECB, might just bring about a turnaround in the world economy.

The traveler Javier Reverte once commented how when he set out on a trip to places he did not know he made a mental provision for scams, so that when a taxi driver overcharged him he didn’t get angry, given that he had already factored the “surcharge” into his provision. Now that we are over the hurdle of the recent European summit, in which for the first time political leaders adopted that old market practice of affording a false sense of happiness by means of pre-martyrdom (i.e. by lowering expectations and then subsequently announcing measures that are not quite that bad), it’s time to shed some light on other sources of basic risk for the world economy, so that we can set up our own mental provisions.  Given that I have always criticized market players for only seeing black swans in the economy, in spite of the fact that the majority of swans are white, I am going to talk about three risks – one negative, one ambivalent, and one positive, because they are the type of risks that will allow us to think that things are not really quite so bad if they do actually happen.

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Roubini’s magic figures

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IE Focus || By Javier Vega, Professor at IE Business School

A famous New York University professor has predicted that the Spanish finance system saga will end in tears and that Spain will be out of the Eurozone within two years. What is the reasoning behind such a prediction?

Professor Nouriel Roubini of New York University, famed as one of the soothsayers who foresaw the US real estate crisis, landed a few days ago at the offices of Financial Times with the prediction that Spanish Banks were going to need between one hundred and two hundred and fifty billion to meet the requirements of the competent authority – based in Switzerland, naturally – of 9% of the capital. Moreover he declared that Spain could leave the Euro in one or two years.

“I once had a broken watch that gave me the correct time twice a day”, said the popular Mr  Roubini. Journalists from accredited media informed, on the same Friday, that the number of potentially toxic real estate assets now stood at one hundred and forty billion, not counting those of Bankia and BFA, which are already covered by the state, and that provisions in place to support them stood at fifty billion. This means that if all the Spanish real estate assets were worth nothing, some ninety billion would have to be deducted from banking profits.  Banks and saving banks should have recurring annual profits of some 20 billion Euros, and not all real estate assets are going to be worth absolutely nothing, unless there is something they are not telling us and the 9% isn’t mandatory. This means that in two or three years the Spanish banking system would be as clean as a whistle. Then, as long as you and your fortune tellers don’t also think that the 10% of the remaining loans (1.2 trillion) are going to become bad debts, just exactly where is Roubini Global Economics Consulting getting that magic figure from? Basically we don’t know, but it is certainly serving its purpose, which is to put the frighteners on us.

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