“The last real estate bubble still to burst in Europe is France’s”

MADRID | In an interview with the Spanish business daily El Economista, head of the Absolute Return department at Edmond de Rothschild Benjamin Melman said the Spanish government’s austerity plan is credible, but the markets doubt that it will help the economy grow. Unlike most market participants, Melman explained why he is more worried about France than about Spain or Italy.

After the sovereign risk rally that we saw last week, would you invest in Spanish and Italian bonds? The Italian bond risk hike has been impressive. The good news is that now it is discounted, from our point of view. Spain benefited from the reforms last year, but not this year. We would not recommend buying Italian or Spanish bonds at the moment. The reason is that the markets are focusing on the credibility of the fiscal policies that those countries are going through, not because they are not politically credible but because an environment of recession could pose extreme difficulties.

Rajoy’s government has introduced the toughest budgets in the history of Spanish democracy. Is austerity the right thing to do? Spain is doing what needed to be done, as always. However, the fiscal adjustment expected in the next two years is very harsh. The private sector will also try to rebuild its savings. Unless there is an improvement on existing accounts, it will be very difficult for both the public and the private sectors to make savings at the same time.

So there are risks about the recession getting worse, all of which would jeopardise fiscal targets as in a feedback loop. We believe that investors remain cautious about the Ibex because they doubt that the Spanish economy can afford such austerity. What worries me, though, is not Italy or Spain, but problems in France. The biggest problem, according to economic data, is that the French housing bubble is the one still to burst in Europe.

Do you think the Federal Reserve will activate the QE3? It’s tricky, because I see that the improvement of the US economy has surprised very few people. US inflation is above what the Fed expected, and therefore we think it might be willing to implement QE3, as they really want to strengthen the recovery. You may not see it in the coming months, but as soon as the economic pick-up weakens, I am sure they’ll go for it.