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CEO of Spain's largest listed landlord slams ECB interest rate policy

The European Central Bank's policy of keeping interest rates close to zero is economically unsound and will damage eurozone economies in the long term, according to the CEO of Spain's largest listed landlord.

Speaking on the sidelines of the European Public Real Estate Association's annual conference on Sept. 11, Ismael Clemente, the chief executive of MERLIN Properties, said the lower for longer interest rate policy that the ECB has adopted is "a little bit absurd" and "cannot last forever."

Clemente said that the eurozone is facing "very challenging times," but that he disagreed with the ECB's policy in both a personal and professional capacity.

"I don't like to see [such low interest rates] as a citizen or a taxpayer," Clemente said. "As an economist, I don't think it is good to have a prolonged period of interest rates that are so low or in many cases negative. When you look at the rates at which many countries are financing themselves these days, you wonder whether the world is mentally sane."

The lower for longer interest rate policy is an "undercover expropriation of wealth" from the people who are capable of saving, he said, and a transmission of that wealth to people who are incapable of saving, "which is not good." This is particularly pertinent in Spain, where the re-leveraging of the public sector at incredibly low yields has been used to subsidize everybody, most notably the target voters, he said.

"From an economic theory standpoint, if you sustain that over the long term, this is the wrong incentive to the economy," he added.

The ECB announced Sept. 12 that it was cutting its deposit rate to negative 0.5% from negative 0.4% in a bid to force banks to lend more as growth in the eurozone slows and hopes dim of reaching the bank's 2% target inflation rate. It also announced a widely expected resurrection of its bond-buying program at a monthly pace of €20 billion, and it left the interest rates on its main refinancing operations and the marginal lending facility unchanged at zero percent and 0.25%, respectively.

Key benefactor

Real estate has been one of the main beneficiaries of the low interest rate policies pursued by the ECB and Bank of England in response to the 2008 global financial crisis. Investors took advantage of the relatively attractive yields offered by real estate and plowed money into property above assets such as bonds.

"Circumstantially, lower interest rates are good for real estate," Clemente said. While the low rates are nice, he added that as a real estate manager, he has to be prepared to weather the storm no matter where the rate cycle stands.

MERLIN and the Spanish economy may have to weather the impact of a global recession in the next 12 to 24 months, if the forecasts of an increasing number of economists prove accurate. The U.S.-China trade dispute is seen as the most likely catalyst for a global contraction, and due to its limited trade with the two sides, Spain is likely to avoid the initial impact of a global recession, Clemente said. But its primary trading partners including the U.K., Germany and France are more exposed to the tensions, and a slowdown in these economies would likely have a delayed secondary impact on Spain.

Still, Spain's economy is in a much better position to handle the fallout from another global downturn than it was prior to 2008, said Clemente. Spain's recovery from a deep prolonged recession following the global financial crisis has been slow and steady, while personal and corporate debt levels are much lower than they were before 2008.

"The past recession has left profound scars in people and in company managers," he said. "People have learned that they have to be careful when they play with debt, because it's somebody else's money, not yours."