Today we have another politician selling the “this time is different” meme in regards to Spain. The politician confuses a temporary improvement in conditions with a permanent abatement of the crisis.
The reasons that Spanish yields have come down is simple. Central bank easing coupled with a belief in the financial markets that the ECB has everything under control have caused a rally in all PIIGS debt, not just Spain’s.
The 2nd Iron Law of the Eurocrisis exhorts us to ignore the politicians and focus on the numbers, so let’s debunk Senor Gonzalez-Paramo’s spin of recent events. He tells Bloomberg, “It is by no means excluded that a bailout will not be requested, if a sequence of good news is produced in terms of the deficit and other things.”
What makes him so optimistic are three facts. Spain is experiencing a trend of rising exports, the treasury has already sold its bond allotment for 2012 beginning work on 2013, and foreign buyers are entering the bond market.
Spain’s exports have been rising nicely indeed:
So what? The rise in exports has not translated into increasing GDP or employment:
The rise in exports is actually an indication showing how desperate Spain’s situation has become. The home market has collapsed, so producers have no choice but to export their products. Note how the rise in Spanish exports correlates very well with the rise in Spanish unemployment. In fact, the rise in exports does not even put a dent in the decreasing economy, because retail sales have fallen off the cliff in the last two years:
The rise in exports is a cherry-picked fact that merely adds to the “This Time is Different” narrative but actually proves the reverse.
A lot of people, not just the source for this article, are very happy that Spain is done with its planned bond sales for 2012 and is getting an early start on 2013. The key word here is “planned.” When the plan was created, Spain had projected a 6.3% budget deficit. The actual number will be between 8 and 10%. Higher budget deficits require more bond sales, in this case €20 to €40bn more.
Spain is not actually selling ahead for 2013; it is really filling this year’s larger budget hole. For some reason, the mainstream media has completely missed this story. You can take it to the bank that next year, when no one is looking, Spain will update 2012’s budget deficit just like it did this year for 2011. Once the budget numbers are examined, they do not prove the source’s narrative, but rather disprove it.
The last fact that the source uses to speculate that Spain will not need a bailout is that foreign investors have reentered the market for Spanish debt. While true, this fact is meaningless.
Before eventually going under, the stock of both Bear Stearns and Lehman Brothers rallied several times. Recall that pundits were telling people that these large institutions would never fail and the price dips were an excellent time to buy. Investing in a dying entity is like “picking up dimes in front of a steamroller” as Kyle Bass said. You will line your pockets with lots of dimes, but then the steamroller comes.
Investors have purchased Spanish debt because they believe that the ECB has everything under control and will not allow any of these countries to default. Unfortunately, the lessons of the last financial crisis have been forgotten in three years. No one has anything under control. While the day of reckoning can be delayed, it cannot be canceled.
The truth is that this time is not different. Spain is in perilous condition and has entered the Greek zone where a depression causes much greater decreases in government revenues and GDP then anyone predicts. Spain will first request a bailout, but some day will simply default on all its debt no matter how much the situation improves in the short-term.