“I’ve been telling the Spain-becomes-Germany-and-Germany-becomes-Spain story for quite some time now,” global economics expert Joachim Fels of Morgan Stanley Research said last Sunday in a report, “but on my visit to Madrid this week I felt it resonated for the first time with our Spanish clients.” It is no challenge to say that it does not with most common assumptions about the state of the economy in the euro periphery.
Fels noted in his analysis that Spain “is on its way to become the euro area’s next Germany” because unit labour costs are falling due to recession pressures and the success of government reforms, while exports performance remains strong. The Morgan Stanley paper even sent an optimistic message to prime minister Mariano Rajoy, dismissing the instability threats coming from revelations on corruption cases that affect several members of the ruling Partido Popular. “Hardly anybody I met believes that this has the potential to bring down the government or reverse the policy course,” it read.
It is to be seen, though, whether the governor of the European Central Bank Mario Draghi–who is appearing today in the afternoon before the Spanish Parliament–will endorse these views. Although Draghi has been heralded as a game-changer since his promises of unlimited short-term sovereign bond purchases if necessary, the ECB has not made any actual decision to ease credit conditions for the weakest links of the common currency union, like Spain and Italy.
Morgan Stanley’s hint on Spain seems inconsistent with its staggering unemployment rates. But so it would appear to be, against the negative headlines, the fact that six Spanish regions have already tapped in 2013 the markets for €4.6 billions, more than half their financing plans this year. In fact, Afi analysts in Madrid said foreign demand for regional debt–from autonomous governments not intervened by Madrid–has increased.
Is Morgan Stanley swimming against the tide? There is at least one more proof of the US investment bank’s contrarian positions. This week, it said in a comment on the British public finances that gilts should suffer a premium risk 170 basis points higher than they do now, that is, roughly where Italy finds itself. The bank’s experts explained that the ability of the UK’s government to repay debts will be diminished during the next months as reforms are introduced. Also, pending referendums on Scotland’s independence and British EU membership cast uncertainty over the future for prime minister David Cameron.
At least, Morgan Stanley will be able to congratulate itself for being the first to talk about a different picture of what the majority of observers see these days. The truth, as usually happens, must be somewhere in the middle.