Is A 15%-Plus Devaluation Coming For Spain And Greece?

Tyler Durden's picture

Countries that have the luxury of their own exchange rate are able to eliminate any loss in competitiveness through an exchange rate depreciation, but (as is broadly recognized by now) UBS reminds that in a single currency area the only route available is an adjustment in relative wages.

In order to restore competitiveness, the periphery will have to endure a period of below-average inflation equal to the disequilibrium that an exchange rate adjustment would have delivered. While the fantasy of an orderly Greek exit is gradually being dispelled - as the market recognizes the almost instantaneous bank runs that would be exaggerated from current deposit withdrawals in Spain, Portugal, and Ireland - the euro's survival with any status quo is simply impossible - begging the question of 'so how do they get to the other side?'

The answer, instead of instantaneous devaluation (exit) - akin to tearing the (admittedly big) band-aid off, the devaluation will be undertaken over time to restore competitiveness, the periphery will have to endure a period of below-average inflation equal to the disequilibrium that an exchange rate adjustment would have delivered. This equilibrium 'devaluation' is impossible to know with certainty, but UBS estimates it is over 20% for Greece and 15% for Spain.

Via UBS:

Competitiveness pressures and inflation convergence


Long-run inflation trends in the eurozone will be driven by competitive pressures. Countries that have the luxury of their own exchange rate are able to eliminate any loss in competitiveness through an exchange rate depreciation, but in a single currency area the only route available is an adjustment in relative wages.


In order to restore competitiveness, the periphery will have to endure a period of below-average inflation equal to the disequilibrium that an exchange rate adjustment would have delivered.


Indeed, this is exactly the approach we adopt to estimate the long-run inflation prospects in a single currency zone – we quantify the size of the exchange rate disequilibrium and assume that the disequilibrium is eliminated gradually over a period of time.


Estimating the exchange rate (inflation) disequilibrium


The equilibrium exchange rate is impossible to know with certainty, but conceptually one can think of it as the rate consistent with a country maintaining its internal and external balance. The internal balance can be thought of as full employment and the external balance can be proxied by the current account balance. Taken together, the exchange rate is at equilibrium if unemployment is close to its equilibrium level and the current account is in balance.




We estimate the size of the disequilibrium for a selection of euro-area economies. Chart 5 below summarises our results.


For those of a technical bent of mind, Chart 5 has been generated from a set of econometric equations, one for each country, where we regress the real effective exchange rate against the current account balance and the unemployment rate gap (difference between actual unemployment and the non-accelerating inflation rate of unemployment, NAIRU).


REER = a + b Unemployment gap + c Current account balance + u


We then estimate the fair value by asking what exchange rate level is consistent with a zero current account balance and current unemployment compared with the equilibrium rate. The disequilibrium is the gap between the exchange rate and the fair value.


Chart 5: Currency Misalignment In The Euro Area



As discussed above, in a single currency area, real exchange rate misalignments can only be eliminated by relative adjustments to unit labour costs, but if you assume unchanged productivity growth, the brunt of the adjustment will have to take place through wages and inflation. Greece is running a large current account deficit, and unemployment is high. Under the current structure, unless we allow for a large depreciation of the euro, the economy will have to deflate its way to becoming competitive. Germany, on the other hand, is running a large current account surplus, and unemployment is well below the NAIRU. Our simple calculations suggest that Germany will experience a short period where inflation exceeds the euro-area average.


How quickly that disequilibrium will be eliminated is hard to know, but if we assume a gradual adjustment, say over a 10-year period, the 20% real exchange rate overvaluation in Greece will be eroded by 2% each year, the 15% in Spain by 1.5% each year, and so on.


Source: UBS


How patient will the market be in waiting for the promise of integration to cover this slow and steady competitive devaluation; or alternatively how patient will Greece's poverty-stricken population put up with it? The reflexive nature of the market will accelerate any perceived move in this direction... a 'painless' 15-20% devaluation in Greece and Spain backed by the ECB's promises seems to us the stuff of hopes and dreams and unicorn farts.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
max2205's picture

Ummm. Again, how to they internally devalue...thanks

markmotive's picture

Leave the Eurozone?

Save the Rich! Goldman-style black tie event gets punked!

TwoShortPlanks's picture that all. Make it 75% and I'll believe it.

Al Gorerhythm's picture

We plebs all wait in for the Global Union. Fuck you banksters.I'm out of your system and convincing more people, with your help, to do the same each day. You guys are making it easier as this goes along. Dopey bastards.

Anasteus's picture

Fantastic video... was this a real event or just a mise en scene?

TruthInSunshine's picture

They don't internally devalue because they can't, and if they leave the EU, this establishes a precedent for the rest of the insolvent member states, including France & Italy, to also go back to their prior currencies, which means holders of their debt get the shaft.

And that 15% will INEVITABLY grow to 20%, then 25%, then 40% and so forth and so on...

Either there's an effort put forth to have German taxpayers bail them out or bail out the holders of the euro-demoninated sovereign bonds assuming the EU shrinks significantly (which will fail, both politically and from a purely by-the-numbers approach) OR Greek & Spanish sovereign debt instrument holders get not one, but an ongoing series of haircuts, involuntarily, of course, on their holdings, in % terms unknowable at this point.

The former throws Germany into a full-on internal political and economic crisis, because this won't end with Greece & Spain (that's not conjecture, but fact arrived at via arithmetic), and the latter throws the global banking system into a crisis that rivals and then exceeds the meltdown in 2008/2009 (leveraged exposure of the type and magnitude that financial concerns have to PIIGS+France is so large that it's probably almost impossible to fathom the size of the cascading defaults that follows such haircuts).

Will German Politicians literally hang their necks out and radically debase the living standards of their own constituents in an effort to save the EU that is inevitably destined to fail at any rate (Germany CAN'T bail out the PIIGS)?

Will the council of wise people cram haircuts down the throats of holders of EU member sovereign debt instruments gone wrong?

The center will not hold.

On a really sour note, this is how the seeds for past major conflicts were sown.

Ghordius's picture

TIS, your assessment is correct, but it's based on nothing changing. A "muddle-through" scenario. But if the inflationists are correct and all this fresh $ and € that were printed pick up velocity then the picture changes quite dramatically.

Time will tell.

ACP's picture

Print their own euros! BWAHAHAHHAHAHA!

Please do it Greece! I'll support you 100%!!!

Fips_OnTheSpot's picture

Mind you: ELA (yet that wont devalue locally..)

ACP's picture


I'm suggesting Greece print euros in the same way North Korea prints US dollars...THAT would be a blast. I would SO love to see the reaction of the rest of the Eurozone if they did that.

Fips_OnTheSpot's picture

Greek Banks printing some hilarious Bonds/T-Bills and passing it upstream to ECB to gather cash. Next major expire is Nov, 16th, thus the further paddling.


EDIT: latest news on that:

ultimate warrior's picture

Money demands of you the recognition that men must work for their own benefit, not for their own injury, for their gain, not their loss the recognition that they are not beasts of burden, born to carry the weight of your misery that you must offer them values, not wounds that the common bond among men is not the exchange of suffering, but the exchange of goodsMoney demands that you sell, not your weakness to men's stupidity, but your talent to their reason; it demands that you buy, not the shoddiest they offer, but the best your money can find. And when men live by trade with reason, not force, as their final arbiter it is the best product that wins, the best performance, then man of best judgment and highest ability and the degree of a man's productiveness is the degree of his reward. This is the code of existence whose tool and symbol is money. Is this what you consider evil?

Francisco d'Anconia

Manthong's picture

"A strange game.

The only winning move is not to play."

Fips_OnTheSpot's picture

10 years forth, 10 years back.


UBS is just talking their book - if I just think of the needed liquidity injection over another 10 years, the brain starts spinning.

disabledvet's picture

I agree with this. The EZ is kaput and nothing says "hail Mary pass" more than this. I have to laugh...France won't have to devalue as well? They're by far the biggest lender to the region. In my opinion the real scenario is that France "jumps the gun" and exits the euro-zone first in order to sustain a moderate devaluation...rather than hang on to a broken system and pay the price of "forced inclusion" for Greece and...unbelievably in my view...Spain.

Nussi34's picture

I fully agree!!! France has to devalue at least by 20%. They have socialist policies like East Germany had....

BandGap's picture

No way this happens. Not with the current political climate in France.

Instant riots all around. I think these countries are going to let things run their course. Inaction allows them to blame others (those that will have to do something) for their plight.

the watchers's picture

The euro won't survive,its flawed and thee ecb is now being called the ecd THE EUROPEAN CENTRAL DUMP lol no credibility what so ever

Schmuck Raker's picture

My eyes started to sort of glaze over after...

"The equilibrium exchange rate is impossible to know..."

Well then shut up if you're just guessing like the rest of us. Sheesh.

"Greece and Spain are in a tough spot and it'll get messier."

There. Now somebody give me a six figure salary, letters after my name, and some stock options.

Joebloinvestor's picture

Do you really think they are repatriating gold because of the soundness of the EU, the dollar and the yen?

Joe A's picture

They are repatriating because they thought it would be safe in the hands of the Fed which of course is a delusion.

disabledvet's picture

There are potentially massive security implications to a sudden and precipitous end to the EZ as well. To date we have tread lightly here at Zero Hedge on this issue...but the reality of an EZ implosion (only spoken of here) speaks to a far different conclusion. I cannot stress the importance of not owning ANYTHING denominated in euros. That includes commodities including gold I might add...

Dr. Engali's picture

For crying out loud ...what is it going to take for these idiots to tell the banks to fuck themselves? If you took a risk on soveriegn debt and they can't pay it then you deserve what you get.I have made trades in the past where I made a lot of money,then I made trades where I lost my the point where I had to step away, clear my head, and re-evaluate my strategy. The logic behind lenders must be made whole simply does not compute with me. It's hard to believe we are still talking about a tiny little country of 11 million people three years later.


Snoopy the Economist's picture

I guess it all depends on who the lenders are; GS & JPM come to mind.

BandGap's picture

Do you really think these people are thinking logically? Or in the best interests of the long term? Finally, name one politician (not on the fringe like Nigel) you know that is willing to admit the system doesn't work, bite the bullet and do the right thing.

This is less about intelligence and more about emotion  and pure human greed. From the mindset that no one believes they should suffer, this ALL makes sense. And that's not going to end well.

Yen Cross's picture

  The ratings agencies will go apeshit if that happens. Where are the pigs going to come up with more collateral for the debt they already have, let alone issuing new debt for the ECB to ponzify?

pfairley's picture

To predict the future:

Should I keep struggling to decipher overly complex and run on sentences?


Assess the time delays and effects of workers struggling NOT to take wage cuts.... with no possiblity of currency devaluation...?

"how patient the market will be"  seems less of an issue than "how patient the voters will be"....sometimes politics are more predictable than markets....and markets are forced to follow the politics.

are we there yet's picture

Musical chairs game, except that all the chairs are derivative chairs, that are already taken away. Those with PM have a seat.

q99x2's picture

Greece is very competitive when it comes to getting German taxpayer bucks. Italy is going to have some catching up to do.

From CNBC concerning austerity measures this week:

Greece's powerful main public and private sector unions will launch a 48 hour strike against the legislation on Tuesday and plan marches in Athens' city center. Journalists, doctors, transport workers and shopkeepers are also planning stoppages.

In other words: Fuck you German taxpayers and Troika M'fers.

Peter Pan's picture

Devaluing wages will devalue property prices and therefore will leave the banks holding severely gutted first mortgages. Instead of devaluing internally through wage cuts, why don't they just get the Greek people to eat 20% less and put them out of their misery .

There will always be countries cheaper than Greece, so does Europe feel that Greek and Spanish wages should come down to Chinese levels?

Stuntgirl's picture


Minimum wages (€/month) are currently:

Luxembourg: 1802

Ireland, Netherlands, Belgium, France: 1425 to 1462

UK: 1202

Spain: 748

Greece: 684

Germany: NONE (Floor for temporary workers is about 1100 to 1400 depending on are and industry) However, there's a scary surge in low earners.

I'm not sure about the rest, but being a Spaniard, I observed that upon entering the Euro, inflation statistics became absolute bullshit. The Peseta was traded for Euros at 166,6 pesetas per Euro, and within a couple of years prices got "rounded up to 1€ = 100  pesetas, leaving not much difference in prices between core countries and Spain.

Devaluing wages... What can I say... Deflation should cover that 66% gap right off the bat and then some. Very feasible.

smacker's picture

"...within a couple of years prices got "rounded up to 1€ = 100  pesetas"

Confirmed. As a Brit I was holidaying in Spain in that period ...a meal which had cost me 2,000 Pesetas became €20 one year later. A beer at 300 Pesetas became €3.50. And the list goes on...And this fake exchange didn't include the regular price inflation going on but not captured by CPI. It was a racket ;-)

q99x2's picture

Banksters go for the gold.

From CNBC: Debt-crippled euro zone countries could see the yields on their sovereign bonds fall dramatically if they used their gold reserves as collateral for that debt issuance, according to Sylvester Eijffinger, professor of financial economics at Tilburg University

virgilcaine's picture

EUR/USD Parity next stop..!

Orly's picture

Spanish unemployment just jumped big time.  This is not a wonderful thing.  German bond yields went negative again.  I don't know if they can keep this puppy afloat much longer.


Stuntgirl's picture

Please bear in mind that unemployment statistics in Spain (and probably Greece) are absolute bullshit.

It is common practice to hire full time workers as part-time, and part-timers with no contract.

It is also common that your employer will require that you file as unemployed before hiring you to benefit from govt tax cuts and benefits for hiring registered unemployed. (I switched jobs ending on a Friday and starting the next on monday, and had my new employer, AIG as it happens, require that I file unemployment on Monday morning before going to work, so they'd file my new contract a week later.)

Self-employed people are swamped in taxes and I don't blame them for not registering as self-employed.

That said, the puppy is sleeping with the fishes, it just doesn't know yet.

cognus's picture

""  ditto.  We hate this answer because it requires little analysis, but it is, of course, the answer. Everybody knows that the musical chairs, in the end, are only occupied by banksters and the whores they purchase to keep them in the position of Gods.  The only wild card is military.  As the rebellious Zealots did in days of old, when the wheels come off, the rabble seize the instruments of debt and those who guard such, and burn them.  Heckuva idea. Its easier now.... neither matter nor energy can be destroyed, but the 1's and Zero's in those databases can be.

smacker's picture

OK, so the Greek population have to take a 20% hit over (say) 10 years and Spain 15%. Looking at the charts, it seems several other EZ member states need to take downward adjustments too.

If one assumes the populations of all these countries tolerate this reduction in their incomes and wealth-value to create equilibrium, it will magically align them with the EZ average, set by EZ member states up north. What then?

Those countries will still be uncompetitive when compared to EZ members up north, absent huge investment to maintain equilibrium.

But the real point is that after achieving the utopian goal of equilibrium (aka "we're all in this together"), we will then have a Eurozone comprising member states with a wide range of living & wealth standards which is no different to the time before the Euro was first introduced -- and exactly what the EU set out to eradicate when it created the Eurozone and went flat out to create a socialist utopia.

Something doesn't this another complete failure of socialism?