Is Spanish Austerity Really Good News?

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2 mins. to read

After weeks of social unrest, government meetings, EU threats, and analyst comments, the Spanish Government headed by Mariano Rajoy finally announced new fiscal tightening measures to be applied during the next year in a desperate attempt to reduce the nation’s public debt to sustainable levels. The austerity measures will most certainly hit the Spanish economy, leading to a likely increase in the unemployment rate that is already above 25%. GDP growth is likely to fail the current -0.5% estimate for 2013 and print a lower negative number yet the measureswere welcomed by EU politicians and the markets if not the Spanish people.

The Spanish government presented cuts to ministries’ spending, promised more liberalisation of the goods and services sectors to increase competitiveness, is planning the creation of an independent body to monitor public finances and announced many other measures for total savings of a remarkably small €13 billion given the social costs. The immediate reaction in financial markets was positive. Eurozone officials were also happy and stated that Spain is on the “right track,” implementing all recommendations and even going further. Still, this hasn’t stopped weekend reports of a fresh debt downgrade of the embattled Spanish economy to “junk” status.

Mariano Rajoy has certainly paved the way to apply for a full bailout now without having to comply with more immediate cuts. Everything seems fine externally, however, internally it isn’t with increasing numbers of demonstrations by the Spanish people. Social unrest will worsen even more and independence plans for certain regions may gain momentum. Catalonia wants to break away from the rest of the country as they are the richest Spanish region contributing billions in taxes and still suffering from austerity (sort of a reverse Scotland!). Under this scenario, we doubt that the Euro will have many shiny days, even though QE3 is pushing it higher. Indeed, it has already weakened from its post QE3 announcement high of 1.3176 to 1.285 at the end of last week

The Spanish IBEX35 has recovered exceptionally from the low seen on July 24 where it hit 5,956.30. In fact, the IBEX has risen more than 32% and outperformed its counterparts – usefully creating exceptional profits for those readers that followed our ‘pairs trade’ suggestion in the June edition of our magazine, page 40 of Long Ibex v Short S&P 500 (http://issuu.com/spreadbetmagazine/docs/spreadbet-magazine-v5_generic). With tough times ahead however, now is an oppportune time to close the tader or at least reduce exposure to it.

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