For those that read our article on Greece, we probably sound like we are on a Contiki tour though Europe. Sadly, no tapas or sangria for us, this time. Instead, rather like Greece, the outlook is pretty bleak – yet will yield great trading opportunities for those looking in the right place. That seems to be the thing – everybody looks, but only some people see – and this article on Spain Economic Outlook for 2013 will certainly be an eye opener for you.
Spain is the world’s 12th largest economy – the 5th largest in Europe and this is why the problems of Spain, well less covered in the media, are probably more significant, economically than Greece.
Through the 1990’s and particularly from 97 to 2007, Spain’s property boom was massive. With more than 12% of the workforce employed in the sector and 16% of GDP, it was the only place to be. Spain, like us here in Australian, has a strong culture for property ownership and with the rampant growth in the Sector, everyone wanted a piece of the action. At one point, forecasts showed that Spain’s per capita income would outstrip “rich cousin” Germany, by 2011. Much of this was of course funded by lower interest rates, given Eurozone membership. Then, along came the GFC, the music stopped and things changed dramatically.
How hard has the impact been for Spain?
To give you some indication, there are currently more than 5.6 million empty homes in the country. Each day, another 159 people face eviction, due to being behind with mortgage payments. Bare in mind of course, that herein lies the problem – the banks are massively exposed to a major and most certainly “popped” property bubble. With additional exposure to incomplete projects, where there currently is no incentive to finish the job and very little residual.
Unemployment rates are at 25% – that is 5m people and when looking at youth unemployment, that number is running closer to 53% – an extremely alarming level and one which is fuelling the leftist side of Spain’s political spectrum.
One indication of this, is the risk of votes of independence amongst Spain’s regions. A few months ago the region of Galicia – to the north of Portugal (home to clothing giant Zara and one of the better beers in the world, Estrella Galicia) began making noises about becoming an independent region. More recently, the Catalonian region (Barcelona being the hub) joined the cause. Catalonia’s budget is larger than that of Portugal, and certainly raises a massive concern. The region is seeking a central government bail out, including a mere Euro 5bn, to help fund its payments on its Euro 42bn of debt. This will almost certainly require the Spanish government to shake the tin around its European cousins.
For those that like to use indicators, perhaps the fact that private depositors in Spain’s banks withdrew more money in August than at any time since the country joined the Euro (clue, this has also been happening in Greece).
The reality for Spain, should it fracture internally, is the broader problem of its membership of the Euro. Its banks need substantial help at a regional level. Requiring help from the national government. Which in turn, is needing help from its European cousins.
So where is the trade here?
Assuming you aren’t looking to buy into some very cheap Spanish real estate. Then where can you be capitalizing on the scenario outlined above? Most likely, we would say, in the Spanish government bonds. As risk increases, bond yields rise. In other words, investors seek a greater level of return to compensate for the higher risk. As bond yields rise, then bond prices fall (there is an inverse relationship). Therefore a short position in these bonds may be what you are after. With the risk of collapse/default a more likely. And higher probability than an economic miracle. The upside in the trade is meaty, the downside – really limited – especially through the use of a stop. Hasta Mañana!