Last updated: 19:51 / Wednesday, 1 May 2013
Axa IM Research & Investment

Spain: Investors can get used to anything

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Spain: Investors can get used to anything

Maxime Alimi, economist at Axa IM has published a report about Spain’s fiscal sustainability. Spanish fiscal sustainability remains in question. In the first part of his analysis, Maxime Alimi shows that Spanish real GDP growth in the coming ten years is likely to remain low, at about 1.3% on average. This is due to shrinking working-age population, a very gradual decline in the unemployment rate and modest improvements in productivity growth.

Investors seem to have now learned to live in Europe’s new normal: banking crises, political uncertainty and growth disappointments

“This is one lesson we have learned from three years (and counting) of the European sovereign crisis. While the first episodes of the crisis led to unprecedented stress in euro fixed income markets, investors seem to have now learned to live in Europe’s new normal: banking crises, political uncertainty and growth disappointments.

Still, this apparent resilience should not lead bond investors to lose perspective. At the end of the day, what matters is getting your money back, which implies picking solvent issuers. And while markets have calmed down, the fiscal position of most euro-area sovereigns is deteriorating, with budget deficits still large (although shrinking) and debt stocks increasing. Worse, the market’s silence has led to more complacency vis-à-vis deficits: the European Commission has recently approved a new fiscal trajectory for Portugal in 2013- 2015 and the European Semester should reveal similar leniency for Spain, France and the Netherlands, to name but three.

Spain has been at the center of investor concern and remains one large European issuer whose fiscal sustainability is rightly being called into question. This analysis attempts to shed some light on whether Spain will be able to stabilize and eventually lower its debt to GDP ratio over the next ten years.

Fiscal sustainability is a highly complex issue to address due to the large number of moving parts: projecting debt to GDP over time implies assumptions about real GDP growth, prices, primary deficits and interest rates paid. This being the case, the first part of our work will focus on just one element: real GDP growth…you can read the full report following this link.

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