Fisher Investments Editorial Staff
Developed Markets

A Spanish Sangria of Updates

By, 02/17/2012

While many folks were focused on a slew of overall positive US economic reports Thursday, we took note of developments unfolding in Spain.

The Iberian country continued its recent streak of successful bond auctions, raising €4 billion in the sale of three- and seven-year debt. Rates ticked up slightly from the last debt auction of similar maturities but remain quite low across the yield curve relative to rates seen through much of 2011. (See Exhibit 1.) Though yields were a bit higher, demand also increased sharply—coverage on the three-year bonds clocked in at 2.19x versus 1.63x only a week ago. Seemingly a reflection of increased investor appetite for Spanish debt—whether tied to actions of central bankers, diminished negative sentiment or other, it’s a positive worth noting.

Exhibit 1: Spanish Benchmark Sovereign Yields, since 12/31/2010

Source: Thomson Reuters, as of 02/15/2012.

Since January 1, Spain has already met around 34% of its overall debt funding needs for 2012 and about 54% of long-maturity debt—longer maturity bonds arguably being the more important indication of Spain’s ability to raise funds. In fact, Spain has no additional maturing long-term debt of significance until July, when 11.2 billion of 10-year bonds come due. And Spain has already raised funds to cover most of that rollover, making it quite unlikely Spain becomes Greece any time soon.

Spain also released its full assessment of Q4 2011 GDP growth on Thursday, which was in line with analysts’ estimates of -0.3% q/q and 0.3% y/y growth. The detailed report showed household, government and fixed investment components deteriorated. Net exports positively contributed—though a result of imports falling more than exports. All around, not a great report but highly unsurprising and nearly exactly as “not great” as expected.

Expectations are for full-year 2012 growth to contract -1.5%, but that‘s also a widely known factor and doesn’t necessarily presage inevitable doom for Spain or the markets. In the long term, Spain’s primary issue seems to be boosting competitiveness and, hence, economic growth. And already, the Spanish have taken important actions.

For example, thanks to new labor-market reforms, Spain has already increased its relative competitiveness in Europe. Exhibit 2 shows the ratio of labor productivity to unit labor cost—a bellwether indicator of economic competitiveness—for Spain and Germany.

Exhibit 2: Labor Productivity / Unit Labor Cost

Source: OECD and Eurostat, as of 12/31/2011. Indexed to 1 in 1999.

The improvement in recent years is noteworthy, but there’s clearly still a gap. Should Spain continue reforming successfully, the narrowing of that gap could be a tailwind for growth.

Spain’s issues won’t be solved overnight, nor in a week or month for that matter. Will subsequent auctions go as well? Or will its government continue to take sensible steps to stoke growth? Difficult to say, but given persistently dour expectations (on Spain and the eurozone in general), even minor steps forward will likely prove a nice tailwind for stocks.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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