Fisher Investments Editorial Staff
Developed Markets

Aphorism Tuesday

By, 07/25/2012

No one expects the Spanish inquisition …

Spanish bailout chatter got louder on Tuesday as two more regions requested aid, borrowing costs rose again and unnamed Spanish officials told El Economista they’re considering asking the EU for a bridge loan to cover a €28 billion euro bond redemption looming in October (original article, en español, is here). Before assuming this means Spain needs help in October, however, we’d suggest considering some key developments.  

First, Spain’s official stance is that its success at auction earlier this year—it’s covered about 68% of its planned issuance—allows it to stick to its “prudent strategy” at upcoming auctions. Meaning, Spain plans to continue tapping primary debt markets. Bailout talk was noticeably absent from a joint statement from Germany’s and Spain’s finance ministers late Tuesday.

Second, politicking is in overdrive. ECB chief Mario Draghi recently said the bank has a mandate to safeguard the euro, and he sees no “taboos” in the way of doing so—but the bank’s bond-buying program has lain dormant for months. Spain, in recent days, has argued heavily for the ECB to resume purchasing Spanish debt on the secondary markets in an effort to suppress yields. Thus far though, Draghi’s not yielding.

On Tuesday, Spain took a different tack: The government issued a statement announcing Spain, Italy and France “demand the immediate execution of the agreements” made at June’s summit and see “a worrying delay.” In other words, Spain wants bank rescue funds off its balance sheet pronto (ignoring, it would seem, that the establishment of a eurozone banking regulator is a precondition), and it’s willing to risk some political capital to do so, as France and Italy subsequently denounced the statement.

It could be Spain’s using words to incite action from institutions it can’t control—in hopes they take actions that lead to lower borrowing costs. They might very well push for the bridge loan, but we also wouldn’t be surprised if the bridge loan comments were more jawboning—raising the specter of a mini-bailout, which neither side likely wants, in an attempt to goad the ECB into doing something. How successful they are remains to be seen.

The tax adage strikes again …

If there’s one universal truth about taxes, it’s this: Tax something, and you typically get less of it. A lesson learned by many in various countries over the years—and it seems France may soon become the next to (re-)learn it when its new transaction tax takes effect on August 1.

Traders in the UK are already familiar with a similar concept, facing their own “stamp duty” of 0.5% on share purchases—and so have come up with a fairly effective means of avoiding it: contracts for difference (CFDs), which allow investors to make money on a stock’s movement without owning the underlying security itself. But there’s a catch: Such instruments are largely only available to institutional investors, meaning individual investors ultimately bear the majority of the tax’s brunt—which no doubt wasn’t the legislation’s original aim.

Nor is it French President François Hollande’s intention, yet there are already indications institutional investors will employ similar tactics in France once the transaction tax takes effect. Either that, or they’ll no doubt look for ways to invest in other markets—particularly those that charge either a lower overall tax or don’t charge one at all. Meaning not only will individual investors likely foot much of the bill, but the aphorism looks likely to prove true yet again: Tax investing, and you overall get less of it.

Better never than late …

Moody’s changed its outlook for Europe’s three top-rated countries to “negative” Tuesday, citing, well, factors anyone not living under a rock the last three years likely is aware of. In its decision, Moody’s noted Germany, the Netherlands and Luxembourg all face increased financial shocks should Greece leave the eurozone or Spain and/or Italy require additional support. Perplexingly, they also noted the countries would likely bear most of the periphery’s bailout burden should they keep the monetary union whole. Talk about being stuck between a rock and a hard place.

Aphorisms aside, the concerns Moody’s noted demonstrate again that ratings agencies often serve more as confirmation of what we already know, rather than a forward-looking assessment of risk. That core Europe likely bears the brunt of whatever direction the eurozone takes has been widely known and discussed for the better part of the last three years. Markets move on that which is fundamental, but underappreciated. Of late, ratings agencies’ opinions have been rarely that.

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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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