The rally in Spain

A correspondent from Spain writes to me:

I want to proudly show you
some renewed sentiment on Spain. On new info, new probability said
Bayes. Now we have new info, now I'm bullish on Spain. And happy for
being able to show it !

are experiencing a good and consistent rally. On debt, equity and CDS.
Everywhere. This is isolated from other peripherals, so the reading if
this may be even more bullish on implicit spanish risk alone.

I really think we deserve it. We've taken all the steps to see this:
reforms, austerity, and changes in the Savings and Loans entities.

In general I take a more cautious interpretation of market price movements, but I did think it was worth passing this along.  The graphs behind the link are striking (they cover some other countries too).  If you are curious, here is a Bloomberg update article on Spain.  In particular, there was a very recent decision and budget vote:

The budget shortfall was 11.2
percent of gross domestic
product last year and the government aims to cut it to 6 percent
in 2011 by paring public workers’ pay by 5 percent, reducing
infrastructure investment and raising taxes.

The extra yield investors demand to hold
Spanish debt
rather than German equivalents reached a euro-era high of 233
basis points on June 17. The spread narrowed to 169 basis points
yesterday from 176 basis points a day earlier.

I don't view this story as over, by any means, but that's the latest.  The market is rewarding a more cautious fiscal policy from Spain.


Tyler, the Sintetia's analysis is propaganda. Forget about the data and pay attention to the explanation. After listing silly arguments (for example, they talk about the reforms as if they had already been implemented), they conclude "Y es que no olvidemos una última causa de este movimiento: nuevas dudas sobre la fortaleza del crecimiento americano, que benefician en general a Europa." Assuming that you're familiar with the Mafalda story (you claim to know well B.A. steaks), only Manolito could have written such a pathetic comment.

Like always, what was the market predicting, let us say, last Fall for Spain? What was the market saying a month ago? What will it be saying tomorrow?

"Hedge funds were massively long Europe in May"

Not a chance. Impossible. "Not even wrong". Hedge funds were massively short Europe in May. CFTC commitment of traders shows near record speculative shorts in the Euro contract during much of May.

This rally is a short covering rally. Type in Macro Man or even Zero Hedge for more information.

The idea that the Euro is going to fail through loss of value or buying power is predicated on widespread aversion to the Euro. In the real world, this aversion can only happen if China decides to abandon the Euro. China just gave a very public statement that they are going to continue buying Euros and they bought hundreds of millions of Euros of Spain's most recent auction.

The austerity measures are only useful in that they gave China cover to buy Euro debt. China has an industrial policy based on being a low cost provider of goods to rich countries. There aren't many rich countries, so China was going to buy Euro debt anyway to keep their currency much weaker than it should be.

If the austerity programs are so powerful, why isn't China buying up all of the Ireland debt? they could easily do it and send a powerful message about what they want from their debt issuers.

I agree with Barandiaria, that is a pure propagandistic pamphlet. And I don´t see why the recession in US can benefit Europe! It smell very much to the classic spaniard antiamericanism...

Andres and co: I think "propaganda" is very gentle to describe what you do.

Henri, I go along w/ u. This is the natural life of bond market. Just want to reinforce a very basic idea: comment on the downward, but also on the upswings... In my view, is fair. And the figures are there.

Hey, that's all what we do! We put figures. So as to show the whole movie, not just an scene.

Obviously, we all have to be cautious. As always.


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