Thursday, August 16, 2012

Spain Has Serious Economic Issues, Deleveraging and Austerity (Trends and $EWP)

After writing about Italy's recession, bond yields, and the Italian ETF (down 70% from its peak in 2007) on Tuesday, I looked at economic trends in Spain and the iShares Spain ETF ($EWP).

Spain's Industrial Production Y/Y Growth (INE.es pdf)
In June of 2012, Spain's Industrial Production Index declined 6.9% year-over-year (the "adjusted" value was -6.3% y/y, see below). In May, industrial production declined 5.7% year-over-year.

In Q2, Spain's unemployment rate was at 24.63%, up from 24.44% in Q1. And youth unemployment (16-24) was at 53.3%, up from 52% in Q1. In Q2, Spain's GDP ("advanced estimate") declined 0.4% and 1% over Q1 and year-over-year, respectively.

So Spain is right in the middle of a recession (ending June 30) which is being fueled by austerity measures and a vicious deleveraging cycle. Keep an eye on the iShares Spain ETF (EWP) to see when it starts, or attempts, to price in an economic recovery. Spanish sovereign debt and bank bailouts, or lack thereof, will be catalysts going forward for at least trades. But Spain's economy is suffering from a significant amount of negative forces that could prevent a recovery even with bailouts.


Source: INE.es (PDF)

Source: INE.es (PDF)

According to this Natixis report, massive intervention by the ECB wouldn't even help Spain's economy. Spain is suffering from a severe deleverging cycle after its housing bubble burst in 2006-7, which completely destroyed employment in construction. So large-scale bond buys by the ECB, which would lower interest costs on Spanish sovereign debt, wouldn't do much to help the Spanish economy. But it turns out Italy would benefit.

"3. Growth

The growth prospects are dramatic for Spain and Italy (Chart 4A). The fall in long-term interest rates would have a significant positive impact on growth if the contraction in activity were largely due to the high level of long-term interest rates.

This would be the case if the contraction in activity were due mainly to a decline in investment, and not another cause, such as job losses due to the bursting of the real estate bubble, and deleveraging.

The decline in investment is far more dramatic in Spain than in Italy (Charts 4B and C), whereas consumption is declining in both countries (Chart 4G); but the sharp decline in investment in Spain can be attributed to the collapse of the construction sector (Chart 4D) and the need for deleveraging, which exists in Spain but not in Italy (Charts 4E and F); a fall in interest rates would not be sufficient to revive growth in Spain, but would help in Italy."



Source: Natixis

To conclude, here are trend lines on EWP's chart, the iShares MSCI Spain Index Fund ETF, which is down 66% from the November 2007 high of $71.85. It is currently testing the March 2009 low, which is now ceiling resistance at $24.33. It failed to break above that level on July 6 so we'll see if this time is a go. It recently crashed through that level and bottomed at $19.73. Going forward, EWP will need to battle a few downtrend resistance levels and eventually test the $30 ceiling. There is definitely a risk that EWP could retest the recent low or chop around for a bit. It would be interesting to see how euro denominated Spanish stocks would react to both the ECB printing money and more austerity measures affecting the economy and earnings. I asked this question before about the U.S. What if the Federal Reserve started QE3 right when we fell off the fiscal cliff at the end of the year and broke through the debt ceiling?




Bloomberg articles today:

Spain Said To Speed EU Bank Bailout On Collateral Limits
Spain June Export Growth Slows Amid Worsening Recession

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