Outlook for Spanish firms darkens as crisis mounts
The outlook for Spanish companies is taking a turn for the worse as the country becomes Europe’s new crisis victim, moving out of sync with firms in other eurozone countries such as Germany, France and Italy, where the momentum has improved.
Concern that the eurozone’s fourth-biggest economy won’t be able to meet tough deficit targets and fix its struggling banking sector have prompted investors to dump Spanish assets this week, from equities to government debt.
Despite new tough budget measures, Spain’s borrowing costs have been surging, with Spanish 10-year bond yields hitting 5.8 per cent on Thursday, their highest level since before the European Central Bank’s massive liquidity injection in midDecember.
As the country slips into recession and its public debt as a ratio to GDP jumps this year to its highest level since at least 1990, the spectre of a Greek scenario for the Spanish economy — plagued by an unemployment rate above 20 per cent — resurfaces.
A European bailout is not on the table and would be the worst possible outcome for the country’s debt troubles, Economy Minister Luis de Guindos said late Thursday.
“We have not asked for it, it’s not on the table . . . it would be the worst possible outcome, it would be the last resort. Spain cannot lose its autonomy with respect to economic policy,” he said.
After showing resilience in 2011 — thanks in part to strong exposure to Latin America’s solid economic growth — Spanish share prices have fallen. Madrid bourse’s benchmark IBEX index fell to a seven-month low this week.
“While Italy has been giving strong signals to the market about the country’s efforts to fix things, Spain has become the focus of all attention,” said Franck Nicolas, head of global asset allocation at Natixis AM. “Divergences between countries have become extremely important within the bloc.”
Despite the 15-per-cent slump in the IBEX since mid-february, the index isn’t attracting bargain hunters seeking a good deal, as stocks are not getting cheaper in terms of valuation metrics.
The proportion of analysts slashing forecasts for Spanish companies in the past three months versus the ones raising their forecasts — a key measure known as ‘earnings momentum’ — has risen by about five percentage points since early February, Thomson Reuters data shows.
The sharp rise in downgrades on Spanish company outlooks bucks the trend seen across Europe, where the momentum has improved.
The IMF is assessing details of Spain’s newly unveiled budget, which outlines steep spending cuts, said spokesman Gerry Rice. The European Union has demanded Spain’s deficit be cut by 3.2 percentage points this year.
“We will point to the need to ensure compliance with the new target, not just at the central level (but) also at the regional government level,” Rice said Thursday. “Clearly the challenges Spain is facing are severe (and) market sentiment remains volatile.”
De Guindos blamed the sharp rise in spreads on general market nerves about the lack of growth in European economies and said the issue was not restricted to Spain. Borrowing costs for countries and the private sector were not sustainable at these levels, he said.
“It makes it hard for Spain or Italy to finance themselves, it makes it hard for the private sector, namely the banks, to finance themselves. It’s a situation that must be turned around.”
Pierre-yves Gauthier, head of equity research at Alphavalue, thinks investors have been overreacting, which will create opportunities for stock pickers at some point.
“The Spanish market is feeling the pinch from the economic headlines, and a lot of investors don’t make any discrimination: they sell everything, and some use trackers and exchange-traded funds to go ‘short’ on the index,” he said.
“But for most of the country’s big companies, there is no reason to panic.”