9/21/12 – The Pain in Spain Is Back Again

Posted by Brad McMillan, CFA, CAIA, MAI

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This entry was posted on Sep 21, 2012 12:04:31 PM

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As expected, the problems in Europe have not been solved. The eurozone continues to shrink, and a Spanish bailout continues to look inevitable. The papers had multiple stories.

The overarching story, of continued contraction in the eurozone, was not front-page news. It is important, but it is not breaking news. The Financial Times (FT) put the story on page 4, “Eurozone slowdown accelerates,” and the Wall Street Journal (WSJ) put it on page A8, “Falling Euro-Zone Activity Stirs Fears.” The WSJ analysis was the better one, with some good charts showing just how bad the situation is. The primary driver of the decline has been France, which, as the second largest economy in the zone, has a disproportionate effect on the whole. Although Germany appears to be recovering a bit, France’s decline more than offset that. Southern Europe, particularly Spain and Italy, also continues to be very weak. Interestingly, both stories highlighted China’s ongoing weakness—clearly there is a connection, as a struggling Europe is in no position to buy Chinese (or American) goods.

Amid the continued instability, Spain is coming back to the front pages—but for more than just economic reasons. The FT has “EU talks on fresh Spanish bailout” on the front page and “Madrid Catalonia talks hit buffers” (p. 4), and the New York Times (NYT) has “Spain’s Leader Fails to Reach Deal with Catalonia” (p. A4). As I discussed in my earlier special report on Europe, the regional/country divide will make any bailout of Spain not only more complicated, but also more necessary. The FT has a very good special report on Spain, “Unfinished business” (p. 7), which outlines many of the issues in detail and notes that, in fact, the country is handling the stress comparatively well overall.

Because of this, perhaps, and certainly because of the European Central Bank support action, debt markets seemed to suggest that they were looking past all of the bad news. “Spain’s Bond Sale Successful Despite Economic Data” in the NYT (p. B3) and “Spain Sale Improves Funding Prospects” in the WSJ (p. A8) both make the points that the feeling is that the problems will be solved and the risk associated with peripheral markets has largely been contained. We have been here before, and I certainly hope the markets are right this time.

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