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Dovre Insight: The Spanish Flu

Spekuliantai.lt | 2012-04-10 | Kitos | perskaitė: 473
Raktiniai žodžiai: Rinkos
Dovre Insight: The Spanish Flu Dovre Insight: The Spanish Flu

 Spanish government bond yields have risen to the highest level in three months. Will the sick Spanish economy end the recovery market at Oslo Stock Exchange?

Spanish and Italian banks were lent huge amounts at the minimum rate of the ECB through LTRO scheme. The money was invested in the south-European government bonds with high interest rates. This contributed to a drastic reduction in market rates and risk premiums.
In recent weeks, however, the mood changed in the credit market and the market has begun to draw up. Spain must now pay 5.67 percent interest rate for ten year borrowings. This is a three-month high and is up one percentage point in six weeks.


What has caused the sudden turnaround in the Spanish credit market? One important reason is that the ECB has been on standby mode. LTRO scheme is closed so the effects from increased liquidity are gone.
Another shockingly bad piece of news about the state’s finances is that in a short time, the deficit on the Spanish national budget has been revised upwards from 6.0 to 8.5 percent of GDP for 2011. This is twice over the euro-zone average.

Greek taste

Some of the upward revision is due to weaker economic conditions. A significant part of the discrepancy, however, is a Greek flavor. As we have learned from Greece, there is a great difference between political decisions and implementation.
According to official figures the Spanish government debt was at 67.8 percent of GDP at the end of last year. Adjusted for insolvent state-owned companies and the like, many experts estimate that the real figure is closer to 90 percent. In this case, debt is higher than the euro-zone average of 86.8 percent.

Only half way

One of the greatest threats to Spain comes from the banking sector. The decline in house prices is accelerating and many experts predict that prices will return to 2004 levels. In that case, we are only halfway through the fall.
Spanish banks are thinly capitalized, while households and firms are among the most indebted in Europe. The danger is great that the losses in the banking sector will increase and that they will migrate over to the state through public rescue operations.

A lost generation

Spain's biggest problem, however, is the labor market. The overall unemployment rate is 24 percent, while unemployment among those under 25 is 51 percent. These unemployment figures testify that the Spanish economy is fundamentally sick and needs profound and drastic reforms. Reforms that are unparalleled in the Spanish history.
Galloping Spanish government bond yields soured the mood on the Oslo Stock Exchange in the prelude to Easter and we recommend following the yields closely moving forward. The reason is that the situation is fragile and could deteriorate quickly in a short period of time.

Dovre Portfolio

• Intex Resources
• Sevan Marine
• Savings Bank a northern Norway
• Telenor
• Statoil
• Sparebank 1 SMN

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