Spanish corralito

Argentinian readers know very well what I say with the word corralito. Back in 2001, Argentinians were happy buying foreign products when the Argentinian Peso-USD peg was at full speed. However, one good day at the end of that year, when there were no more dollars left in reserve, the insanity was suddenly over and those dreams based on the lie in which they had dollars deposited in their bank accounts crumbled with no warning. People rushed to the banks to withdraw dollars as a reaction to the news of a Peso depeg, and demanded USD back, invoking the cognitive dissonant normalcy bias they had been surrounded with for years. Obviously they were answered to suck it up and go home, with their Pesos, if they wanted. Families' fortunes were decimated in just a few days.

As per the law just passed last Thursday, the subjects of the Kingdom of Spain must disclose any bank or brokerage account they have abroad. Also, an unprecedented financial amnesty was declared by the government to repatriate up to 2,500 million EUR. My take on this is that the Spanish government is seeking to repatriate these funds not only as a desperate measure to boost the economy, but also as a means to have access to more capital when a possible southern Euro is introduced in Spain.

I arrived at this conclusion by considering that if the euro falls, so does Europe itself, and such a powerful Mammoth will fight to survive, even if it means exhausting everyone underneath. Also, taking into account the inflationary means by which the currency issuer has access to the currency users' wealth, and that it is impossible for Spain to pay back the principal plus the interest of both private and public debt, namely by:

• An European/IMF bailout
• BCE LTRO to infinity
• Spontaneous industrialization and trade surplus achievement

and jointly with the taxation and possible forced repatriation of private funds thanks to the mentioned disclosure law, the most likely solution under my point of view is that the plan of a two-speed Euro might already be in place.

This would be simple: They would say that Europe has not failed since a basic framework of free commerce is preserved. However, people living in the south would struggle to maintain their wealth, and getting Southern Euros to the north would be extremely penalized.

As a first step, only residents of a country would be allowed to exchange their old euros to the newly issued north or south euros at a 1/1 exchange rate in that country, at par with their northern neighbors, ECB guaranteed an all. Savvy southern travelers will try to get some northern euros in their hands but they will be denied amounts that exceed ordinary expenses. Then, as the devaluation commences in a controlled but perceivable way, the general public will flock to their banks, demanding northern euros just as ECB/State/EU had reassured and they will be slapped in the face. At that moment, maximum amounts in withdrawal would already be in place and all electronic transactions would be under strict financial scrutiny by the state treasuries. Such a controlled but steady devaluation with closed boundaries will immediately be met by internal capital flows. Semi-large fortunes will invest their capital in state-denominated job-creating assets, while others will try to get anything they can to preserve value, but everything will be heavily taxed: gold, farms... even housing would (internally) experience some kind rebound, relatively alleviating pressure on big banks at the cost of Juan taxpayer. This means that most of the powerful families will react rapidly and maintain or relatively increase their wealth, while the working class will be made poorer.

From the outside, a mechanism of safe trade would be made available to foreign investors (yes, you have to think bureaucratically), which would act like some form of firewall. Thus, stored wealth and cheap labor could be harnessed by southern countries under the umbrella of inflation without disrupting the northern economies past the upcoming LTRO3 (which are already experiencing unpleasant bubbles).

There are many more problems ahead. Contrarily to what some analysts say, Spanish housing prices have not tumbled since banks have refinanced realtors and home builders during the last four years, even though they have been broke since the peak of 2008. The public and the international investor still need to see what those banks' balance sheets really look like. And Spaniards still need to experience the true meaning of corralito when they finally realize the argentinization of Spain.