Fools and Their Money: Spanish False Dawn edition

5 min read

Anthony Peters, SwissInvest Strategist

Spanish stocks opened on Monday 4.4% in the plus, rallied up to +5.89% within ten minutes and then began a long slide which left them to close -0.54% on the day.

Bit by bit the questions as to how this non-bail-out was going to work became louder as the answers from the authorities became quieter and, by the end of the day, all that was left in the markets were losses and scepticism. Having defied the definition of a credit event once before over the Greek default which was apparently not default, the powers that be obviously feel that they can now swing things around with impunity. Maybe they can.

When my father taught me to play bridge, he also drummed into me to make mistakes but to make them quickly. The markets might be prepared to forgive the authorities for getting things wrong for they too are having to make things up as they go along. What they appear to struggle with is the recurrent habit of trying to dress up prevarication and procrastination as decisiveness.

Financial markets are being asked to suspend their disbelief but, having spent the past five years being blamed by the politicians for pretty much all evils in the world other than the weather, they are not in the mood to be taken for fools.

At the very least, one could have expected them to have announced through which vehicle the loans will be made available. The difference in the implications of issuing the loans through the EFSF or the ESM is significant. Should the ESM do the lending, then this loan will become senior to existing government debt under Article 12 of the ESM Treaty, thus structurally subordinating Bonos.

The total Spanish sovereign bills and bond market is worth, give or take, €600bn. That might put the mooted €100bn in context. The original sum which the IMF suggested would be required in order to shore up the Spanish banks was €40bn and the aim of the eurozone leaders by announcing a facility of up to €100bn was probably in order to scotch suggestions that they had once again not done enough.

However, as in all these cases, the proof of the pudding is in the eating – in this case the valuation of the property assets in question. I have heard estimates that Spain has an overhang of between 800,000 and 1,000,000 completed but unoccupied residential properties. Putting a value on these is like pinning the tail on the donkey.

One number quietly doing the rounds yesterday was that the worst case scenario was for a potential write down of a total of €249bn. Personally, I wouldn’t lend that figure too much credence for anyone who decides to report €249bn might just as well have reported €250bn - it’s all guesswork anyhow and I am naturally sceptical of people who put precise numbers on speculative guesses.

Irrespective, there is no way of placing a precise value on that excess housing stock – as there isn’t in Ireland either – and hence the lending bank’s balance sheets will remain works of fiction for years to come. Financial markets are being asked to suspend their disbelief but, having spent the past five years being blamed by the politicians for pretty much all evils in the world other than the weather, they are not in the mood to be taken for fools. They have no problem with making mistakes but making them quickly.

Taking issue

Meanwhile, as credit markets opened firmer yesterday, bond syndicate managers got the horn and issue after issue was announced; France Tel, Telecom Italia, Michelin, Accor, VW and many more. However, the early enthusiasm was swamped by a market which spent the entire day fading and what had looked like a cheap deal when it was announced was already no more than fair value by the time the books closed and had become expensive when it was launched and priced.

Likewise, secondary markets looked better than they were. Although bids appeared on paper to be a lot firmer on the open, they didn’t work any better than they had done lower down. A friendly trader of Tier I bank paper unwittingly gave me the heads up to this early on and I desisted from trying to jolly along frustrated customers who have been trying to rid themselves of Spanish bank risk for some time.

This might not be the end of the world but markets have greeted central action once again with a resounding “So what?” C’mon, they are trying. I can only repeat the comment which Suki Mann of SocGen made some months back when he reminded that, despite everything, the authorities have kept the ship afloat against all expectations. As he said, in the end they always come up with something. Let’s see what comes next.