Spain: Show Me The Improvement

Submitted by: Colin Lokey
      Recently, I wrote a piece entitled "Retiring The Debt: Spain Drains Pension Fund To Prop Up Bonds," in which I outlined the rather alarming fact that Spain has managed to squander 90% of its pension fund on the purchase of its own sovereign debt. I noted that given the market's fragile psyche, the possibility certainly existed for yields on Spanish debt to stage an encore of last July's frighteningly steep ascent. Given this, it seems foolish to inextricably tie the fate of the country's pensioners to the Spanish bonds.
      Additionally, I noted that the Spanish government's contention that this practice is acceptable as long as the country retains market access is absurd on its face given that one of the reasons the country has retained market access thus far is that it has apparently offered-up the pension fund to ensure that there is a marginal bid for government debt. As such, claiming that everything will be fine as long as market access is retained simply begs the question...
Were it not for the purchases made from the Social Security Reserve Fund, Spain might have lost market access last year. So to say that this practice is sustainable as long as Spain retains market access is basically a tautology. That is, if Spain depends on the pension fund for market access, then the pension fund cannot depend on that same market access - that is circular reasoning at its worst.
Apparently this didn't sit well with at least one Spanish fixed income dealer and a few of his cohorts as I received a flurry of rather amusing messages claiming that, among other things, Spanish bonds were in fact not bad bets, Bundesbank chief Jens Weidmann was losing his grip on the ECB, the OMT was a good thing for the EMU, and the inclusion of collective action clauses (CACs) in newly issued Spanish bonds were not in fact something investors should be concerned about.
        Of course all of that is absurd. I informed the group that they should probably thank Germany and TARGET2 for their next meal and I advised them that given the dire situation facing their countrymen, it might be time to consider a bit of introspective criticism rather than blaming the rest of the world for stating the obvious. In other words: just because you have a nice job as a fixed income dealer doesn't mean your country's position is in any way defensible when 25% of the population is jobless and people are being thrown out on the streets.
       In any case, a recent post on Naked Capitalism entitled "Spain Bucks The Happiness Trend" outlines the dire situation that persists in Spain. From a nearly 11% plunge in retail sales in December to a 9 billion euro lifeline request from Catalonia, Spain is in no better shape today than it was when yields on Spanish 10s were 200 basis points higher last July. I challenge anyone show me the reason for optimism in the following charts which show bad debt, GDP, and the unemployment rate in Spain:





 

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