I seem to recall a quotation to the effect that when accused of something, one should “deny, deny, deny.” I wonder, it being Holy Week and I a lapsed Catholic, if the use of the term three times is somehow a veiled reference to Peter’s thrice denying Jesus in the aftermath of the latter’s arrest. Regardless, it would behoove investors to remember that the modus operandi among European politicians has been to repeatedly deny even the remote possibility that their nation might need financial assistance up to, and almost including, the point of receiving such assistance.
Greece:
In December 2009, then Greek Prime Minister Papandreou stated that ECB President Trichet saw no possibility that Greece would need a bailout. Papandreou himself claimed that there was no possibility that Greece would exit the common currency. Trichet was clearly wrong on the first count and the latter remains an open question. Greece is highly likely to endure another debt restructuring that seems likely to result in its exit from the common currency. In September 2010, after receiving its first bailout earlier in the year, Papandreou stated emphatically “Restructuring is not going to happen.” Me thinks he protested a bit too much!
Ireland:
In November 2010, the Irish Finance Ministry claimed that “there are no talks on an application for emergency funding from the European Union,” claiming that “Ireland is fully funded into the middle of 2011.” Later that very month Ireland indeed became the second Euro-zone recipient of a bailout.
Portugal:
In the aftermath of Ireland’s bailout in November 2010, Portugal denied that it was being pressured by Euro-zone officials to accept an aid package. A government spokesman told the Financial Times that “There is no truth to these reports…There has been no pressure on Portugal to ask for assistance and we have no need to ask for a financial rescue.” Yet six short months later Portugal too received a bailout.
Spain:
On Monday, the Spanish Minster of the Economy stated that the country is in a “lose-lose situation” because markets will penalize it for either not implementing enough austerity or for implementing too much austerity. Yet when asked whether Spain will need to tap the Euro-zone rescue facilities, he stated that the suggestion was “an absurd idea.”
Summary:
Spain may not be as close to the abyss as the three current bailout recipients were when they made their denials, but make no mistake, the abyss beckons Spain as well. The housing bubble in Spain dwarfed that of the US. Excess housing inventory in Spain is, on a per capita basis, multiple times larger than that of the US. Already burdened with an unemployment rate north of 23%, Spain reentered recession in 2011 and new austerity measures will only deepen the recession this year. While the Spanish government optimistically estimates that the economy will contract 1.7% this year, we strongly suspect the contraction will be well in excess of 2%. In all likelihood the Spanish economy will suffer a significant contraction again in 2013.
As we have noted many times before, trimming budget deficits and debt ratios requires more than just austerity, it requires growth. Unfortunately, growth is something that is sorely lacking in Spain and across peripheral Europe. In its absence, further bailouts will be necessary and their need seems to be highly correlated to volume, persistence, and vociferousness of politicians'’ denials. We fully expect that Spanish denials will be met with financial assistance at some point in 2013 or 2014. If so, it opens up a whole new can of worms for Europe because unlike Ireland, Greece, and Portugal, Spain, the fourth largest economy in the Euro-zone, is systemically important.