2009 Forecast: 170,000 Job Losses a Month and an IMF Bailout

The 2009 forecast that anticipated the bailout and capital controls

On 5 February 2009, with construction collapsing and international credit dried up, someone published a four-year roadmap. It did not come from an investment bank or a research department: they were numbered paragraphs. The first claimed that employment would be destroyed at a rate of 170,000 people a month, that the public deficit would reach 12% of GDP and that real GDP would fall by 10%, half of which would be accounting window dressing. The rest of the scenario was even harder to swallow: intervention of entities with public money, an IMF and European Union bailout, possible capital controls, exit from the euro and, by 2013, a real income equivalent to 50-60% of that of 2007. The discussion generated by that text lasted more than a year and a half and led into the Greek crisis.

170,000 fewer jobs a month: the figure that ordered everything

The starting point was the labour market. With construction and the automotive industry sunk, the forecast calculated a sustained monthly loss of 170,000 workers during 2009 and 2010, with an increase in loan defaults of 6-7 points each year and the Social Security system entering deficit. The reserve fund, according to that calculation, would be drained by some 10 billion in the first year and reduced to 25 billion by the end of the second. To that was added a public deficit of 12% in 2009 and above 15% in 2010.

The arithmetic did not add up for everyone. A parallel calculation took the starting figure and stretched it: 170,000 unemployed per month for 24 months equals 3.4 million more, which added to the official 3.3 million left 7.1 million; with the additional three million in 2011 and 2012 it reached 10.1 million unemployed, close to half the active population. Another objection pointed out that if GDP falls by 10% the deficit rises much more than that 12%, because the denominator itself shrinks. Nobody disputed that the starting point was bad. The discussion was how bad.

What the bailout that nobody wanted to name demanded

The most uncomfortable part was the list of conditions that would accompany the European bailout. The document spoke of a disbursement of 100,000 to 150,000 million euros a year, between 12% and 20% of GDP, for 10 or 15 years, and detailed eight demands: cleaning up social spending, eliminating subsidies—from the PER and REMI to aid for renewables or social organisations—, raising VAT and income tax, liberalising entire sectors, labour flexibility with free dismissal and a downward revision of the minimum wage, privatisation of health, public transport, water and universities, cuts to pensions and subsidies, and a reform of the civil service that would allow 30% of public employees to be dismissed.

At the time that sounded like science fiction. And there lies the paradox: whoever wrote those lines presented them as the lesser evil, not as an apocalyptic prophecy. When asked whether they were his or a government trial balloon to make people pack their bags, the answer was blunt: "They're mine, and I don't think they're very pessimistic given the situation."

Foreign debt: 914,000 million and a real-time clock

The underlying argument was not unemployment, but the international investment position. The Banco de España published a statistic that almost nobody looked at and that this analysis turned into the axis of everything: what Spain owed abroad on a net basis. In the first quarter of 2009 the figure was 870,000 million euros, and in the second the supervisor itself revised it upwards to 914,000 million. Spain was, after the United States, the country with the worst position in the world.

From there came two calculations repeated ad nauseam: the system needed to inject some 14,000 million euros a month from abroad to sustain consumption and investment, and reserves covered about 40 days of public and private debt maturities plus the deficit. To drive the message home, a counter of foreign debt growing in real time was even set up, in the style of US websites.

From bubble to euro: internal devaluation

As the conversation pogre, the focus moved from collapse to mechanism. The thesis that gradually took hold was that Europe was not going to bail out Spain to save it, but to collect. The ECB announced it would buy up to 60,000 million euros in mortgage-backed securities, and the reading was immediate: it was not generosity, it was giving breathing room to creditor banks while imposing austerity. The instrument of adjustment had a name: internal devaluation. Liberalising markets, making wages more flexible and cutting spending to provoke competitive deflation, reduce imports and increase exports.

The reference to Keynes was explicit: in the General Theory it was already explained why that adjustment is neither quick nor painless when demand collapses. The predicted result: a huge unemployment rate and a loss of population that would prevent housing from ceasing to fall even at the end of the period. The summary circulating was that no exit was good; at best, the least bad.

Greece as a mirror: 20,000 million and a special envoy

In early 2010, Greece ceased to be a theoretical case. The Spanish three-year spread was around 125 basis points and the FROB had still not issued debt. The Eurogroup, chaired by Jean-Claude Juncker, convened emergency consultations by videoconference, and the European press spoke of an aid package of up to 20,000 million euros that could be closed within days. It also leaked that Germany was proposing a special representative for Greece, a name that sounded like supervised intervention.

The Greek prime minister, George Papandreou, appeared without taking questions to commit to meeting deficit reduction targets. In Madrid, internal reports from the Ministry of Economy made it clear that the numbers did not add up. And while the Spanish prime minister assured that recovery would come in 2010 and that net employment would be created at the end of the year, German chancellor Angela Merkel warned that her country's economy would still go through "critical situations". The two diagnoses could not have been more different.

The counterattack: those who saw exaggeration

Not everything was acceptance. The most repeated reply was that of excessive pessimism: capital controls and the dismissal of 30% of civil servants were considered unlikely, although nobody bet on positions being called. There were open parodies of the scenario, with social unrest and survivors wandering around Europe, and even someone resorted to astrology to date the disaster, planetary squares included; the response was an express class in astrophysics and quite a bit of humour. Part of the conversation drifted into hypotheses about a military intervention that others dismissed outright, and another into the distribution of blame between the two major parties.

Against that, defenders of the scenario insisted on the same thing: the numbers were in the Banco de España bulletin, not in a crystal ball. And uncomfortable comparisons appeared. The most cited, that of Latvia, the former Baltic tiger that had gone from accelerated growth to brutal austerity. The most detailed came from Argentina: a participant described the end of convertibility, the law of intangibility of deposits that was supposed to protect them, the faith that the IMF would not let go and the subsequent capital controls. His summary of what peine with the bailout money was a quote from Vergés: "peso that enters the country, dollar safely stashed in Miami."

Where it all ended up

The forecast was never closed. The conversation ended cut off by server performance problems, not by an outcome. Whoever had written it had already published two updates: one postponed the IMF intervention to September 2011, with unemployment around 5.7 million and 24%; another considered internal devaluation a failure and placed the exit from the European monetary system at the end of 2012. Spanish youth unemployment was then close to 43%, against the German 10% cited as a contrast.

With those figures on the table, the question is not whether the scenario was fulfilled entirely. It is what part of that adjustment ended up arriving through other channels, slower and better disguised, and how much of what then seemed like catastrophism simply became the fine print of the last decade.