No, Prime Minister, Spain Is Not Uganda

“Aguanta, somos la cuarta potencia de Europa. España no es Uganda.”
---Text message from Spanish prime minister Mariano Rajoy to his finance minister earlier this year.

I’ve been in the credit analysis business since 1978 and I have seen more than my share of “good” credits turn bad. Among them: Continental Illinois, E.F. Hutton, Drexel Burnham, Latin America, Security Pacific, BofA (the first time), the New York money center banks, the Texas and New England banks, the entire S&L industry, Mutual Benefit Life, BCCI, Mexico (again), Credit Lyonnaise, WestLB, Thailand, Korea, Russia, Lehman Bros. (the first time), Argentina (again), Enron, Arthur Anderson, the entire merchant energy industry, the California utilities, WorldCom, Global Crossing, Bear Stearns, Northern Rock, IKB, Allied Irish, HBOS, Lehman Bros. (the second and final time), Merrill Lynch, BofA (again), Citigroup, Greece, Ireland, Portugal, and now.....Spain.

When credit is all you do, your gut sense should become as educated as your intellect. Good credit people should be able to smell bad credits. When Enron began to unravel in the fall of 2001, I read their 2000 Annual Report. As I read, I got a pit in my stomach, almost a panic reaction. Enron’s glossy and entirely invented report was a blinding array of flashing red lights and warning klaxons. I felt in my stomach the utter bottomlessness of their financial situation. Similarly with Thailand and Korea.

What each of these credits (and many of the other catastrophes listed above) had in common was this: a credit whose trajectory was upward. Bad credits (like Uganda) don’t have credit crises, because they don’t depend on market confidence. It is only the “stars” and the “tigers” and the “most admired” companies and countries like Spain that suffer crises because their psychology and their finances were geared for growth, not for reversal. Bad credits are generally ponzi schemes in the sense that they must continuously borrow more to stay afloat.