Gaesco’s Gonzalo de Orovio: “The Spanish risk premium could stabilise below 250bp”

International Monetary Fund’s Christine Lagarde said a rising euro is a positive sign. Would you agree with her?

In a highly unstable economic environment, when the viability itself of the euro is being put in doubt, the price of our currency serves as an indicator. During the summer of 2012, amid one of the most critic moments for the eurozone–Greece was about to default and rumours of a Spanish bailout abounded–, the euro was down to $1.20, and this was the consequence of lack of investor confidence about the future of the common currency union. So I’m quite sure Lagarde meant that a strong euro sends a clear message that the euro is here to stay.

Why couldn’t the European Central Bank devalue the euro as the Federal Reserve has done in the US via Quantitative Easing?

First of all, the ECB is not like most central banks. Its main duty is to guarantee monetary and price stability in the European Union, that is, following the German central bank’s tradition. The Fed, though, has a wider mandate and can purchase sovereign and mortgage debt if it decides to do so.

The ECB, one would say, is more orthodox. But on the other hand, we must admit that the effects of what the Fed has being doing are debatable, to put it mildly. Also, the ECB has proved to be more flexible than most imagined, announcing that it could buy short-term government bonds in extremis, and only if the states being helped commit themselves to obey certain rules. It’s a different way of doing things, that is true.

Should the ECB change its policies?

The truth is that it cannot. And it appears it doesn’t have any will to change, either. The northern countries refuse to pay for the mistakes of the periphery. A euro breakup is in no one interest, so we will still see some moves to stabilise the situation in the weakest economies, but in exchange of discipline.

Morgan Stanley analysts recently suggested that Spain was on its way of recovery and could become the next Germany. Are you optimistic, too?

Taken out of context, it is an exaggeration. Morgan Stanley simply seemed to reach that conclusion out of Spain improving data and Germany growth falling. Labour costs in Spain have dropped and the introduction of a variety of reforms, together with a boost in exports, should favour a strong recovery. Germany is going the opposite way, with lower exports and lower competitiveness than at the start of the crisis.

Yet, in the short term is very hard to forecast a Spain leading Europe again. Its unemployment rates are staggering, the banking system looks fragile and credit is almost frozen–and will be in that situation during the next three years, according to market expectations.

What are your expectations about the premium risk on Spanish sovereign bonds?

It’s very difficult to make forecasts, really, but my guess would be that Germany, Switzerland and the US will remain seen as safe havens by investors during the next months. The 10-year German bund yield will be some 1.55 percent, and the US bond’s 1.89 percent.

For the Spanish 10-year bond, I think it would be reasonable to expect 4-4.25 percent, that is a premium risk of 245 basis points to 270.