we learnt anything from the Russian or Latin American economic crises we've just got through?”
After nearly ten years in an integrated oil company, where I worked in several departments from 1991 until 2000, I was put in charge of the investor relations department at a gas transmission company, where I took part in the company's initial public offering (IPO). I had some years of experience in corporate communications and investor relations management, but it was a fascinating experience to have direct involvement in the IPO of a company that at that time was unknown to the market. To work with investment banks, draw up the paperwork, understand what the main messages were that would have to be conveyed in order to make the company look attractive, analyse and revise the models and reports of the analysts, travel the world to explain the company's strategy… None of this was new to me, but to do it for a relatively unknown entity that had never even been listed gave me an entirely different perspective on things. Securing each little victory and achieving each target was complex and arduous.
The gas transmission company was very old school. It had never been listed or had quoted bonds and its team of managers not only lacked interest in the market but actually viewed it with suspicion. Fortunately, the company's chairman had first-hand knowledge and experience of the financial world. When he was in the oil sector, where we had previously met, he had participated in many IPOs and institutional trips (the so-called roadshows) to explain the company's strategy to prospective investors. He had prepared many presentations. I felt privileged to have the opportunity to work for a company that was to undertake a stock market launch for the first time, and to have the full support of an executive who perfectly understood this world, its needs and the crucial importance of financial disclosure. True, we had experience, but the task that lay ahead was monumental. We had to convince potential shareholders that a small, unknown company with sizeable risks and regulatory uncertainties was a good investment.
This was not easy. I recall, for example, a trip across the United States visiting far-flung places, such as Des Moines (Iowa) in the middle of the American heartland, to talk with a farmers' pension fund. At the end of the meeting, we flew immediately to another state where someone might want to listen to us. To place a small Spanish company on the stock market map is no easy feat. Many investors received our presentations with doubt, suspicion or outright boredom. We covered five states in four days and then returned to Europe to do six countries in another four days. We had to stand out from the thousands of securities that were competing for capital. And the only way to do this was by being better, more transparent and more committed.
It was like having a huge white canvas and a palette of colours to create the picture we had always wanted to paint. Over those years, we set up an investor relations office, we organised shareholder meetings, did all the paperwork and everything else we could to put the company on the map. Thanks to an outstanding team, which is still there today, the share price doubled in three years, and today it continues to be one of the few Spanish IPOs since 2001 that has created value for the shareholder, despite the enormous uncertainties surrounding the group's results, the lack of regulation and the fact that some of the major shareholders have had to reduce their ownership positions.
The successes we achieved in that time – including several awards for the Best Work in Investor Relations and the Best Offer of Securities to the Public of the year – cemented my interest in and passion for the financial markets. And so we arrive at the year 2003.
Spain was experiencing a boom. Everything was going up, and Europe looked on enviously and held us up as an example of an economic miracle. Our companies got bigger by the day, absorbing all kinds of foreign companies at high prices. Debt had increased by 200 % since 1996 and the world was our oyster. Despite having been through the Latin American crisis a few years earlier, which left many conglomerates on the verge of bankruptcy, we went on to conquer the world… accumulating debt. Suddenly, your next-door neighbour was an expert in property, shares and investments. “In the long term, everything goes up.”
Maybe I was an oddball, but I noted something was amiss. None of this tallied. And numbers that did not tally were very important to me, and would be even more so in the future. We had overlooked the balance sheet and forgotten the importance of debt. I still recall a conversation with a senior executive of a listed company who explained to me, without blushing, that the debt from the recent strategic acquisitions undertaken by the company “should not be taken into account”, because “when we sell at much higher prices we repay it and even generate a profit”. We were dominated by the so-called greater fool theory, which states that after a malinvestment or an expensive purchase someone, preferably foreign, will always turn up who will purchase at an even higher price.
In conversations with my friends, I was always told, “You're wrong, Daniel. This can and will continue.” Few people doubted that it was possible to experience annual growth levels of three per cent for the next 20 years. I was very dubious.
An enlightening crisis and a real shock
I should say the reason I doubted that Spain's boom would be long-lived was because I had witnessed the Argentine crisis of 1999 to 2001, after which my children were born. Yes, triplets after a crisis that almost swept away the company for which I had spent a decade working. For some reason, my sense of caution and perception of the risk were dramatically affected. That shock led us from being praised for strategic transactions of international envy to searching for ways of securing liquidity on a daily basis. These experiences are never forgotten.
Before the crisis – which produced the massive devaluation of the Argentine peso – we were on cloud nine. After it, the successes, the bonanza, the euphoria, the feeling that “everything is going well” vanished and we had to deal with the basic problem of survival. This situation had such an impact on the company that a number of investment banks began to cast doubt on the group's future. Experiencing the Latin American crisis and learning from the corporate managers who saved the company from disaster helped me focus on what is really important when analysing a security, bond or country.
We love vague expressions such as “The company is a global leader”, “It's always been like this” and “Everything will turn out all right in the end”, and we forget the figures. What really counts is the cash, the balance sheet, the debt, the working capital. Liquidity and solvency. However, just three years after the Latin American shock, few seemed to remember those indicators. Business schools frequently discuss concepts like “increasing debt to lower the cost of capital” or “creating value by leveraging an asset”. These ideas are correct to a degree, but cease to be so if one forgets the debt saturation threshold, that is the moment when an additional unit of indebtedness does not generate positive marginal returns but negative ones.
And we forget. In 2014, barely six years after the biggest financial crisis since 1929, we are back to complacency and are forgetting debt and solvency ratios.
In England, they say: “Hope for the best, but prepare for the worst.” I had the impression that Spain had bypassed all security checks, and that all the lessons learnt from previous economic crises had been forgotten. All the Spanish autonomous communities acquired the right to more debt, an airport, a high-speed rail link. They all had to have the same economic model for growth, the same limitless resources. The same happened in Greece, Portugal, Italy and Ireland. Debt created the illusion of wealth. The US Federal Reserve announced the tapering, or partial withdrawal, of monetary stimulus in 2015, after almost two trillion dollars had been spent. However, despite a low 6.3 % unemployment rate, the US showed the lowest labour participation rate since 1978 and 11 million people taken out of the labour market and not counted as unemployed.
What is the problem? Monetary policy has not benefited the ordinary citizen, only financial market participants. But the risks are paid by the citizens. Easy money has inflated financial assets, and the cost of reducing unnecessary expansionary policies was met by heaping massive financial burdens on ordinary taxpayers.
The middle class lost in the
