Iniciado por Viviendo Digno

“Sólo el bajo nivel de deuda pública respecto a PIB (que permitiría expandir el gasto público) y el fuerte flujo inmigratorio pueden librar a España de una recesión”, concluye Garthwaite. “101 meses después del nacimiento del euro, la elección por países a la hora de invertir, vuelve a ser más importante que nunca. Como debía haber sido siempre.”

The stage is set for life to get hotter in Spain and Ireland
By Andrew Garthwaite

Published: June 14 2007 03:00 | Last updated: June 14 2007 03:00

One hundred and one months after the euro was born, it is easy to see the advantages enjoyed thanks to the single currency.

The first advantage is that owing to deflationary pressures in Germany, Spain and Ireland inherited an inappropriately low "one size fits all" interest rate. This has kept interest rates in these countries well below their prevailing inflation rates for most of this decade. Second, Spain and Ireland joined the euro at an undervalued exchange rate.

Clearly, if the exchange rate can't adjust, then domestic price levels, and with it asset prices, have to. This in turn created a lending, property and economic boom.

There are plenty of signs that Spain and Ireland are going to find life getting tougher. The catalyst for change is, in part, the European Central Bank. We believe the ECB will push rates to 4.5 per cent by the year-end and possibly beyond. After all, capacity utilisation is close to 30 year highs, GDP growth is above sustainable levels and unemployment is at 25 year lows.

About three- quarters of Spain and Ireland's consumer debt is floating (in contrast to France and Germany where 70 per cent of mortgage debt is fixed).

Spain's economic outlook looks particularly worrisome. First, both corporates and consumers are over-leveraged (corporate credit to gross domestic product ratios are double those of the UK while household debt to GDP is 30 per cent too high on our estimates).

Second, housing is very expensive (the house price to wage ratio is above the UK and more than double its long run average).

Third, the economy is sensitive to housing and construction, accounting directly for nearly a fifth of GDP and nearly a third of economic growth. Finally, Spain has suffered a loss of competitiveness owing to a 30 per cent rise in unit labour costs relative to Germany since 2000.

All this might be acceptable if Spanish equities were cheap. They aren't. We find the IBEX 7 per cent overvalued relative to the rest of Europe on a discounted cash flow basis while its price/earnings ratio trading on a 7 per cent premium to its norm. Specifically, Spanish domestic banks trade on a 20 per cent premium to European banks on underlying (or pre-provisioning) profits.

Moreover, the risk is that the tax deductibility of goodwill provides a false incentive to Spanish companies to acquire rather than return cash to shareholders. Spain may have underperformed continental Europe by 4 per cent since the end of last year but it has still outperformed by 29 per cent since 2000.

The "safety-valve" is that Spanish government debt is still low at 21 per cent of GDP and thus there is room for flexibility. This, combined with strong immigration, should allow Spain to avoid a recession.

Ireland shares many of the same worries: excessive corporate leverage, average house prices that are on average 15 per cent above UK levels and housing starts that are, according to the OECD, 26 per cent above sustainable levels. Planning permission is down 20 per cent year-on-year while construction related employment growth is still up a dizzy 40 per cent. Irish house prices have fallen by 1.5 per cent since the start of the year.

Real estate now accounts for 64 per cent of Irish bank lending compared with just 40 per cent in 2000. We find the Irish market 7 per cent overvalued and Irish banks trading on a 10 per cent premium on pre-provisioning profits to their continental European peers.

Ireland has three distinct advantages over Spain: very low government debt (5 per cent of GDP); only modest consumer over-leverage and a relatively low stock of housing.

Does Italy share these problems? It seems relatively immune: household leverage relative to GDP is nearly a third of Spanish or Irish levels, corporate leverage almost half. Housing and commercial real estate is more affordable: just a tenth of GDP is housing/construction related. Finally, on our model, equities appear to be 10 per cent undervalued.

So 101 months on, it seems that "country" investing in Europe is becoming more important again, as it always should have been.

Copyright The Financial Times Limited 2007

Sólo el bajo nivel de deuda pública respecto a PIB (que permitiría expandir el gasto público) y el fuerte flujo inmigratorio pueden librar a España de una recesión.