Market Extra: Spain is trying to avoid being Europe’s next debt bomb
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A man staples a Greek flag under a sign reading “United against austerity” during a demonstration in Madrid. Three years ago, another eurozone country, also known for pristine beaches and great food was submerged in crisis, working investors into a frenzy and triggering talk of the “end of the euro.”
That previous troublemaker, Spain, has worked hard to dig its economy out of a hole, an effort that has paid off in the eyes of money managers who believe history won’t repeat, and that Greece’s seemingly never-ending crisis now won’t infect the Iberian country.
Spain has churned out some impressive statistics, with its economy growing at an annualized 2.7% in the first quarter, beating out Germany, France, the U.K. and Italy. The International Monetary Fund recently raised its Spanish growth forecast to 3.1% for this year and 2.5% in 2016.
“One has to look at the green shoots that we have right now and Spain is growing 2%-plus, and is one of the fastest-growing economies in Europe,” said New York-based Michael Testorf, senior portfolio manager at R Squared Capital Management. He holds real-estate investment firm Merlin, Properties SA MRL, -0.09% and some of banking group BBVA BBVA, -0.81%
Still, economists fret about the work left to be done.
Edward Hugh, a Barcelona-based independent economist, maintains that Spain wasn’t treated as harshly as Greece a few years ago, and was allowed to bring its borrowing rates down and enact austerity slowly because the European Union didn’t dare risk strangling one of its largest economies.
Hugh fears the worst may be yet to come.
“We’re at a strong phase of the [economic] cycle here, but cycles aren’t always going to be the same. In fact they’re running a quite large deficit at a strong moment in the cycle,” Hugh said. “How long it is or how it’s all going to work out in the medium term, we don’t know because we haven’t been here before.”
Never again the peseta: In a sign of what’s being whispered in quiet corners—a Sprexit—Spain’s Prime Minister Mariano Rajoy said Tuesday that a Greece euro exit would send the message that euro membership can be reversed. He said his country “fought hard to avoid a national-level bailout,” which was worth any amount of pain.
The single currency has brought “intangible benefits” to Spain, such as low interest rates that have helped sustain private debt levels in Spain—187.2% of GDP in 2013 compared with 121.5% in Italy, said Raj Badiani, economist at IHS Global Insight, in a recent note.
“Should Spain decide to walk away from the euro, it would be faced with spiraling interest rates, triggering numerous defaults in the household economy, laying waste to the sizable retail mortgage market,” said Badiani, who adds that if anything, the Greek crisis will push Spain to keep restoring fiscal discipline and repairing its fragmented labor market.
Read: Greece crowdfunding campaign tops 16,000 pledges
Spain accounts for 7% of gross domestic product of the entire European Union, the fifth-biggest chunk behind Germany, France, the U.K. and Italy. And, as was the case in 2012, when the country was forced to ask for a bailout for its savings banks due to the collapse of the housing market, the country can be a significant drag on the regional economy when things go wrong.
While Spain’s fiscal picture had appeared relatively healthy in the years leading up to the financial crisis, the country’s economy was subsequently laid low by the collapse of a housing bubble. The economy only last year returned to growth after three years of contraction, and Madrid has received earned global praise for implementing a range of austerity measures, albeit unpopular ones, including spending cuts, as well as labor market reforms. The legacy of those reforms, however, is an unemployment rate that remains second highest in the EU at over 20%.
“Spain is among our preferred countries as a whole. It’s one of the very sensitive parts, but we do see Spain among the countries that clearly have quite positive growth forecasts for this year and next, around 3%,” said Luxembourg-based Guy Ertz, chief investment adviser at BNP Paribas. “Of course short-term political risk from Greece needs to be monitored, but contagion risk is still estimated to be low.”
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