There (Still) Is No Crisis In Spain, Or Europe

Includes: EU, EWP, FXE
by: Global Value Investor

You can twist it as you like: There is no European debt crisis. There simply isn't. The uncontrolled media frenzy that we experience again, is undifferentiated, baseless and harming investors who are selling shares in Spain instead of profiting from these extraordinary times and buying more of them - as would any serious investor do.

Most of the spectacle we witness is based on the discussion of debt levels which are now seemingly unsustainable, yet a few years ago nobody cared about the same debt levels which have remained fairly stable as a percentage of GDP. My basic intention in my last post regarding Spain was to offer investors an alternative way of thinking, one that allows for more reflection than following.

As we all know, Spain has one of the largest unemployment rates in Europe with 21.5% and has to deal with the bursting of a property bubble that was equally destructive as the one in the US. But one thing Spain does not have: high outstanding public debt as measured as a percentage of GDP. Spain's public debt as a percentage of GDP remained around 50-60% between 2009 and 2010, the height of the financial crisis.

Even according to recent estimates by the IMF, Spain's public debt as percentage of GDP will be around 70%. The harbors of stability Germany and France are expected to reach ratios of 81.5% and 86.26 respectively. With so many other countries (US, Japan, European member countries) having higher debt levels, wouldn't it be an inconsistency to isolate Spain in particular for its debt levels and budget deficits?

The market has been quite clear that it is not willing to distinguish between Spain, Italy and Greece despite fundamental and starkly contrasting debt levels, refinancing costs and structural differences in the national economies. The market is very negative toward Spain as can be seen in the 2-year IBEX chart:

The main argument critical investors have is: Spain will not be able to resort to expansive monetary policy as austerity measures require restrictive fiscal policies. Since the ECB controls the monetary policy and not Spain's central bank, Spain is effectively deprived of its ability to devalue its currency and rehab itself through exports.

What this argument neglects is that, 1, Spain is a sovereign nation and can leave the union any time it wants, and 2, Spain profits hugely from the Euro in terms of trade and tourism. With Greece having even higher debt levels and worse fundamentals than Spain, its decision to not leave the Euro speaks to the advantages of staying in the Union, which provides both tangible and intangible benefits.

Spain is not Greece. The "crisis" is overhyped. It is more likely that the news cycle follows its main purpose: Pick one, destroy one, move on to the next one. One year from now, nobody will talk about Spain.

Disclosure: I am long TEF.