Practical analysis for investment professionals
06 March 2013

Eurozone in Crisis: Why Talent Is Fleeing from Spain

Posted In: Drivers of Value

Spain has been one of the main countries of concern for investors during the last three years, which shouldn’t be a surprise to anyone. If Spain abandons the euro or defaults on its debt, it could trigger a Lehman-style meltdown. In spite of the good performance of Spanish sovereign debt and stocks in these first weeks of the year, this meltdown scenario can’t be ruled out yet.

But Spain’s problems are far deeper than just the performance of its investment securities. A portion of the population ― those with greater employment opportunities, the better educated ― has fled the country because of the lack of career opportunities and the atmosphere of decay that is affecting all institutions, including the monarchy.

For those who want to understand how Spain has come to be in this dire situation, the video Simiocracia (“Apecracy”), by the comic writer Aleix Saló, is a perfect primer. The video explains the evolution of the Spanish economy from the bursting of the real estate bubble in 2008 (more on this in a video from the same author called Españistán) to the moment in 2012 when the authorities finally had to admit the extent of the losses in the banking industry in order to make the balance sheets of financial institutions more credible to foreign investors.

Along with the usual economic explanations (the shortage of credit, the damage that the combination of lower spending by the government and a raise in taxes has created on aggregate demand, the refinancing of zombie real estate companies, and the blindness of the regulator), Saló makes an interesting point about how the feats of Spanish athletes have created a narcotizing effect that has helped shift attention from the catastrophe of exploding unemployment figures and the mess created mainly by the inept management of the cajas (Spanish savings and loans).

The cajas, the part of the Spanish banking industry run by politicians, which before the crisis had more than 50% of the retail banking market , have been the only entities that have needed money from the credit line that the European Union extended to Spain to bail out its banking industry.

We still don’t know the final price for the taxpayer, given that in some cases the State is on the hook because it has provided asset protection schemes to the buyers of some of the defunct entities and the restructuring process is not closed yet. But we can try to calculate a figure with the information that has been made public, and in doing so, we reach an estimate of approximately €82 billion at risk (a proportional sum in the U.S. economy would be $1,172 billion), of which €22.7 billion has already been lost and €18.5 billion is in serious danger.

And on top of the inept management of the banking business of the cajas, a host of scandals, for which the cajas’ managers have been responsible, add insult to injury. NCG Banco executives awarded themselves huge golden parachutes just before the collapse of the institution, and others, such as the ones running CAM, had salaries far higher than what they could have received in the private market (given their academic credentials and experience). The board of directors of Bankia was composed of middle-rank politicians (most parties and unions were represented) who had no industry experience or education in finance and accountancy, and some of them were earning several times the salary of the prime minister.

The most shocking characteristic of all this nonsense is the lack of accountability, because none of those responsible for this terrible management, with many signs of being criminal, has entered prison. Those who have been charged may litigate for many years (because of the proverbial slowness of the Spanish justice system) before they receive a hypothetical sentence. Some of them will be old by then and may rely on that fact to avoid prison.

Furthermore, not a single day goes by without some news in the media about the generous perks the politicians grant to their cadre, while demanding continual sacrifices from the citizenship to overcome the crisis. For example, an adviser in the Madrid City Hall (of which there are 200 freely designated by the party, some of them uneducated) earns €50,000 a year, whereas a research scientist with an Ivy League graduate degree and a university professorship hopefully earns €30,000 a year.

Popular support for the two major parties that have ruled the country since 1982, which came to be 85% of the electorate in 2008, has declined to 53% in the latest polls (in which 96% of the citizens believe that the level of political corruption is very high). The problem is that currently there is no clear alternative to these political parties; the most active alternative is the former Communist Party, which has thought nothing of accusing Mercadona, one of the few non-exporting companies that thrive in the country, of robbing the people and encouraged people to loot several of its supermarkets.

As for me, from the beginning of this depression, I can say that what I’ve experienced reinforces the impression that there are very few options except to emigrate. Being a business development specialist, I have been working for years on the debt refinancing of the company I work for (writing business plans increasingly pessimistic, reducing costs, selling off the best assets, and reducing investments to the minimum). The problem is that with all the other companies focused on the same task (because of the high level of private debt), the Spanish labor market became in 2008 a game of musical chairs. So, I have seen my friends who fell into unemployment spending months looking for a job in Spain to no avail, until they were forced to emigrate when they ran out of savings. Currently, I have friends working in the United Arab Emirates, England, Germany, Sweden, Norway, and Chile.

Meanwhile, those with a job, thanks to their political connections, are going through the crisis unscathed, a fact that makes the departure of these professionals more painful. Those who have read the description of the vicious circle in which third-world countries fall, in The Undercover Economist by Tim Harford, know how dangerous it is for the country’s future to have a lack of meritocracy and contempt toward education. The cycle begins by establishing cronyism and ultimately destroys ambition and work ethic among the population (since it doesn’t yield results), with consequences for the quality of human capital.

Given that none of the international organizations (EU, IMF, OECD) foresee significant economic growth for the next five years, myself and those like me, who have made a significant investment in education and remain in Spain, have to decide whether we should keep holding on to increasingly deteriorating conditions, to the point of assuming an economic impairment of our human capital, or go to another country where despite the uprooting and distance from our loved ones, we can look forward with hope. Each day that passes without anything changing, my choice becomes clearer.


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Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

Photo credit: iStockphoto/id-work

About the Author(s)
Gustavo Teruel, CFA

Gustavo Teruel is a partner at Exxacon, a Spanish-Chilean company that manages investments in real assets for institutions and high net worth individuals since 1998. Apart from earning the CFA Charter, Mr. Teruel completed a M.Sc. in Civil Engineering at the University of Granada and an MBA at IE Business School.

3 thoughts on “Eurozone in Crisis: Why Talent Is Fleeing from Spain”

  1. Samuel says:

    Flaco favor el que haces a tu pais con este comentario. Creo que la mayor diferencia entre España y cualquier otro pais de su entorno es lo que nos gusta a los españoles tirarnos por tierra y no valorar ni lo que somos, ni lo que hemos logrado hasta ahora.

  2. Pedro says:

    Great article. Things are getting worse in Spain. Nobody is thinking about the country on the long run, probably because the situation is kind of scary. As I recently have seen on another article:

    “Argentina + Yugoslavia = España 2016”

    Looking forward to leaving the country with my family.

    The love for your country is not always requited

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