Path of Least resistance, is Spain next?

June 23, 2011

FOREX, Global Macro

Even as markets bounce on the fact that Greek PM Papendreou won the no confidence motion so we are now faced with a change in focus toward Spain. Spain is a significant European economy but with more than 20% unemployment, thousands of properties that have never sold and regional Governments and Cajas that are struggling to stay afloat European dithering is now giving traders and excuse to focus more closely on the situation on the Iberian peninsula.

Bloomberg reported yesterday,

Spain, which escaped debt-market contagion as Portugal sought a bailout in April, risks a return to the center of Europe’s debt crisis as local governments struggle to contain borrowing and leaders squabble over Greece.

 The extra yield that investors demand to hold Spain’s 10- year bonds instead of German bunds of similar maturity rose to the highest since November as speculation about a Greek default intensifies. Demand for Spanish debt declined at a sale of six- month bills yesterday, a week after the central bank released data showing the regions’ finances are worsening.

The key point here, I think is that policy makers just don’t get markets. They think they can control them by making soothing noises but the reality is that markets are predators – they find the weak and they chase them to ground. A less crude analogy would be that they are like flowing rivers looking for the path of least resistance.

But either way dithering is never good but unfortunately European politicians are good at dithering.

Indeed Bloomberg says,

Sentiment has shifted since Portugal’s rescue, when Spanish borrowing costs were falling relative to those of Germany.

Spanish bonds gained 2.5 percent in the first four months of 2011 on confidence that Prime Minister Jose Luis Rodriguez Zapatero’s austerity measures would differentiate the euro- area’s fourth-biggest economy from Greece, Ireland and Portugal, the three countries that have sought outside help.

“If you look at the longer-term position, it’s pretty ugly,” said Michael Riddell, a London-based fund manager at M&G Investments, which oversees about $323 billion. “Markets have been looking at this firewall between Spain and the three smaller countries that have been in trouble. That may be an illusion.” Riddell said he doesn’t hold Spanish bonds.

Spain’s 17 regions, from Galicia in the northwest to Catalonia on the Mediterranean, account for more than 33 percent of the country’s spending and employ half of all public workers.

Their total debt rose to a record 11.4 percent of gross domestic product in the first quarter from 10.8 percent in the previous quarter, according to central bank data released last week.

Now frankly I’m a little tired of worrying more on the negatives all the time. As I noted yesterday in the piece on Nouriel Roubini we prefer markets to be in good shape not skatty and funkish but we can and do trade both sides of the market and our research tells us to be wary.  We just don’t think policy makers are going to get this right because there is no one European song book from which to sing.

The Bloomberg story quotes Tim Geithner as criticizing the European strategy,saying that it

“would be very helpful” for the group to send “a clearer, more unified” message on how it plans to improve the region’s finances. It’s difficult “to understand what the strategy is when you have so many people talking,”

AMEN to that. But as markets look for the next victim it is increasingly becoming likely that it will be the bigger, too big to save, economies that are in their sights. This is not a good outcome even if the markets concerns ultimately lead to nothing. In the interim we are in for an uncomfortable period in Markets.







I’m on the road for the rest of the week and will try to post if possible but I will definitely be back for the Weekend Reading and Weekly Wrap Saturday.

This blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial advice we are happy to help and if you are an adviser and would like to join our network we are also happy to help.

Please Email the team at Lighthouse at or Greg directly on


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