As you said, it´s impossible to know why the market perceives so much risk for Ireland yet virtually none for Spain. I would argue that Spain´s story and heavy problems are just beginning to surface in the international press. Ireland´s system is just more transparent apparently.

They (Spanish banks & the Government) have done a good job at masking their loan and mortgage fiasco.

Did you see that GMAC sold a Spanish RMBS at 14.5 euros cents recently?

Well, what’s happening in the market is, as you point out, rather strange at the moment. Basically, I can’t see why they imagine the problem is such a serious one in Ireland and yet not so serious in Spain, while Ireland is trying (for good or for bad) to tackle the problem, and Spain’s banks and government are simply keeping their fingers crossed and hoping it will go away.

I have no idea at all why people who trade CDS are taking the view that the former is a more risky policy. Spain is simply Ireland ten times bigger.

On whether Ireland will need to go to the IMF, really I have no crystal ball. Basically I think it is a political question. The IMF only really helps when the politicians need a “bad cop” to enforce cuts – look at Hungary and Latvia, the EU pay the bulk of the money, but get the IMF to do the real serious negotiating.

If the Irish political class are unable to get the Irish voters to back the inevitable fall in living standards and cutback in services, then the IMF will come on the scene.

The EU Commission and the ECB can always fund, but they can’t fund situations which only deteriorate indefinitely, this is my point about Spain.

The worst of all this is that there is now no easy answer. We are still playing around with a fire two years after it broke out, and the solution will not come cheap.

If you really think the IMF is going to have to come to the rescue of Spain in a year or so wouldn’t you think Credit Default Swaps for Spain’s sovereign debt would reflect that?

The CDS market isn’t pricing in any such problems for Spain. In fact, the cost of insuring Spanish debt has fallen substantially in the last 6 months.

If Spain’s government finances are under so much strain I would imagine that the market would be pricing in some chance of a credit event like they are doing in the case of Ireland.

Roughly Spain’s CDS are priced at 70bps vs Ireland’s 200+bps.

Also Spain’s bond yields aren’t that wide compared to other Euro governments.

I wonder what your thoughts are about this?

Do you think Ireland will need help from the IMF at some point and when?

Thanks,

Patrick

We are undergoing the worst real estate crisis in Spanish history. Prices of houses have gone down, but very little. Prices as they were are not sustainable. 6 out of 10 workers earn less than 1100 euros, which is more or less what you paid for a mortgage some months ago. Our workforce is badly paid, we have a huge education problem (look at the lists of where is Spain in the PISA report). In addition, our political system is centrifuge, chaotic, and will be more chaotic in a near future (remember, as a painful example the fights between our Supreme Court and the Constitutional Court). We have an historic identity crisis, we dont know how to deal as a nation with our Global word, we dont know who we are. At least Argentinians know who they are. We do not.

Going back to the real estate crisis. We don’t have any experience about such a huge real estate crisis. In Japan they have. In USA, they have. In the UK they have. People believe that real estate prices always go up, never go down. Everybody buys.

You should read the opinion of Jose Garicano, now at the London Economic School: it will be a financial tsunami for our nation. We are in the middle of a tunnel, and this will last a decade at least. No way out until the government changes, the prices (real estate and other) implode, and a new consensus is reached in order to stabilize the whole political system, maybe with Cataluña out of Spain.

Wait and see….

The “poorest sections” are moving to grey economy or looking for work in neighbouring countries, correctly speaking, in the grey sector of neighbouring economies.

I think you make some very valid points.

“Perhaps the ‘consumer confidence’ polls reflect people’s impression that, so far, the situation is not as bad as they had at first feared.”

Good point. I’m not sure that this will now hold up as we go into the winter. A lot of the economics coverage in the news slots looks more to me like publicity “spots” – eg last week they gave some importance to the fact that the OECD revised their forecast for 2009 to slightly “less bad” than expected, but largely omitted to mention that they singled out Spain as a country which was unlikely to recover quickly. That is there is quite a large gap at the moment between the debate and level of awareness inside Spain and outside.

I also noticed that Elena Salgado came out at the G20 – where she was pushing for the stimulus programmes to be maintained and extended – and said that this was important since countries like Spain counldn’t really expect improvement until sometime in 2010. This is rather different from what she had been saying on Spanish TV the day earlier, where she was informing Spanish viewers she could already see “tentative signs of improvement in Spain” – as you can see above, all indicators except consumer confidence are still deteriorating, some of them deteriorating less rapidly than before, but that is all.

This has all been going on now since August 2007, and I suppose you are right, I suppose I should not underestimate the patience of the Spanish people in allowing themselves to be systematically mislead.

“There are reasonable social security mechanisms in place and functioning, and family and community solidarity.”

Well, the decision to introduce a 420 euro minimum payment for everyone was certainly a good and historic one. It filled a gap in the social security system that I had long felt was a major omission, and I am sure the IMF, when they finally come to our rescue, will firmly keep this one in place to protect the poorest sections of our community as they are doing in Latvia and Hungary. But much of the rest of the social support system – schools, hospitals, contribution based pensions – is soon going to notice the shortage of funds, and I expect systematic cuts in all of these (as well as the number of government employees) as we now move forward. Talk of raising taxes – which will of course only make the economic contraction worse – is simply a breif glimpse at the way things are now going to go. The present ballooning of the deficit is quite evidently not sustainable.

“Do not underestimate the resilience of the “black economy”.”

I don’t. And I imagine this is the way things are going to move, with more and more of the economy “running for cover”, and avoiding any kind of taxes. The result will be that headline GDP will contract even faster, and of course the government will have less and less money, which is why I think come late 2010 or early 2011 we will have a “fiscal crisis of the state”, and the IMF economists will be being flown in from Washington to write the laws for the Spanish parliament – you know, the ones they won’t write for themselves unaided.

1). Since Spain had been booming during the last 20 years, thanks in part to a). the transition to ‘democracy’ and b). joining the EU and qualifying for regional infrastructural development funds, few people are surprised that the years of “vacas gordas” (fat cows – good times) had to come to an end. Towards the end, surely few people were not aware that the construction and associated speculative bubbles were vastly over-inflated.

2). People still hope that the current period of “vacas flacas” – lean times need not last too long. They may well be mistaken in that. But, for most ordinary people, what they have now is still far better than what was available under the Franco dictatorship. Perhaps the ‘consumer confidence’ polls reflect people’s impression that, so far, the situation is not as bad as they had at first feared.

3). There are reasonable social security mechanisms in place and functioning, and family and community solidarity.

4). Do not underestimate the resilience of the “black economy”.