Some will say that the recovery of the Spanish economy is a fact, and that to say the opposite is to be prophetic, unpatriotic or worse. Moreover, the markets momentarily endorse the solvency of the Spanish economy. Yes, those same schizophrenic, inefficient and bipolar markets that good investors know how to take advantage of in the long term. And the fact is that the Mátrix in which we live is pricing assets such as Spanish debt at the prices of when Cayenne Porsches and Audis flooded Spanish cities, in the days when there was plenty of work and credit, and a shortage of workers. The news is nothing less than that the Spanish 10-year bond is trading at a paltry 3.39%, breaking records from 2006!
But to give you an idea of the irrationality in which the markets seem to be installed, below we compare some macro figures of the Spanish economy in 2006 and the 2013 estimates, which are incontestable:
GDP 2006=1.24B vs GDP 2013=1.01B.
Debt 2006=39.7% GDP vs Debt 2013=96.8% GDP.
Government surplus 2006=2,40% vs Government deficit 2013=-7,25%
And yet 10-year bond yields have just equalled 3.39% in 2006..How is it possible that the markets are pricing the risk of Spanish bonds at the same level as a much more insolvent economy? Well, Central Bank distortions aside (which affect Greece as much as Germany, by the way), the rest is pure market inefficiency when it comes to assessing the risk of Spain's default, fostered by political and media manipulation. And the same could be said of the bonds of the rest of the European periphery or even France, which are trading at laughable rates compared to the capacity of their economies to repay their debt, which is overwhelming them. Greece itself, with a probable default in sight this August, is paying less than 7% for its 10-year bond!
The million-dollar question is whether this situation is pure systemic magic, whether we live in Mátrix or where the f... is the knight in shining armour. And how long is this brutal risk/return distortion going to last? And the answer is between a little and not much, as at some point the markets will once again collide with the stubborn economic reality of insolvent countries still suffering from persistent public deficits and recessions, i.e. each year that passes they are more insolvent than the last. Therefore the intrinsic risk of buying debt from insolvent countries such as those in the periphery is much higher than the return they offer at the current price.
The end of the story may well be a mixture of peripheral debt restructuring (default) coupled with a extraordinary wealth confiscation of the citizens involved in the corresponding insolvencies, as we have already warned on several occasions. All in order to bring the debt down to «acceptable» levels - below 80 or 90%% - which will allow new indebtedness to get the engine started - here Luis Moya's famous phrase comes to mind... - In other words a reset, with greater or lesser probability of success, at the expense of the most incautious citizens and investors and less far-sighted, This is, to some extent, not without a hint of justice.
But it is not all bad news. Finally, a glimmer of hope for the Spanish economy: the year-on-year increase in SS contributors in February. This is the first This is a really positive sign in recent years. However, to be able to say that it is really significant, this increase in contributors must be consolidated over the coming months and years. If that happens, we will have succeeded in slowing down our growing insolvency. But nothing more, as we are still a long way from our GDP growing with sufficient vigour to prevent a foreseeable rise in the risk premium from increasing our public deficit, absorbing this first green shoot of contributors and much more besides. So, green shoots, yes, but only to slow down our insolvency spiral, whatever the markets of Mátrix may say.