Barclays: “Those who believe Spain is highly leveraged should think twice”

MADRID | On Wednesday, the markets gave some credence to the possibility of reviving the Eurobond, but once again this option ended up hitting what Barclays describes (our emphasis) as

“the wall which Merkel and Germany have turned themselves into. It is clear that in order to launch a Eurobond, the governance system in the euro zone has to improve, and not only that, it will also need a reform of the EU treaty that would allow one country to rescue another.

“It is difficult to see that how the proposed Eurobond could work in the short term. Nor is it clear that Spain and Italy need immediate solutions; so far, the duration of the debt of both countries is six years and several years would have to go by before reaching levels that in principle would be considered unsustainable. Unfortunately, the market may spin off into an irrational spiral, which could knock down just about anyone and precipitate events. It is true that Spain does not have an economy with the same degree of competitiveness and efficiency as the US, yet it is difficult to compare it with other countries’ economies and conclude that we are not competitive in a global or European sense.”

The Spanish debt per GDP, Barclays in Spain says, is clearly below the European average. Private debt is high, but the families are indebted more or less to the same degree as the European average.

“The problem is corporate debt, but this is concentrated in one industry: construction and housing. Many analysts say that Spain has a serious problem because of its high leverage, but without analysing its source.

“No doubt the degree of leverage has risen in recent years, but is difficult to conclude that this is excessive. The Spanish consumer behaves like the American one: reducing his savings, which does not indicate that they are suffering great financial traumatic stress despite the high unemployment rates. In addition, the net indebtment ratio in relation to household wealth is only 50%. Clearly the Spanish consumer is not a hedge fund. Neither the evolution, for example, of mortgage delinquencies, which stands at around 2.5%, is typical of a highly leveraged consumer in the middle of a never before seen crisis.

“How is it possible that if Spanish companies have a serious problem of competitiveness and even so, curiously enough, they have not lost a share of the global market? We know that our unit labour costs have risen sharply, but so have in China and no one says they are uncompetitive. It is obvious that Spain is not an export powerhouse, but if we had as many competitiveness problems as they say, we probably should have lost market share.

“In short, the market can behave irrationally with Spain and make us go bankrupt, but it could also do the same to both France and Italy … or Germany, because they too will lack a last resort lender.

“The market is pushing us to make reforms, not because Spain and Italy are insolvent, but because they are necessary for the EU to function and evolve into a real Union and complete the evolution that began 10 years ago; and if this is not done now, they are not going to happen in a long time. We do not think that the EU is in danger, and I think that eventually we will come out of this situation much stronger, but now it’s time to tighten our belts.

“As this occurs, the GDP in the US could be reduced considerably and this makes us pessimistic about the chances of the US economy working as the locomotive of the world in the short term.”