The key to Spain’s turning the corner as 2013 begins is the housing market. This takes on increasing importance given the reprieve in crisis interest rates. House prices are still falling and the economy is contracting despite the improvement, making a return to crisis possible.
The positive narrative for Spain would be that the Spanish are finally doing what the Irish have done and recognizing the bad debt in the financial sector. Having done so, Spain is now experiencing a tailwind courtesy of the ECB’s support. Despite the contraction in the economy, the crisis will fade away as the writedowns from bad debts diminish and the banks are recapitalised.
That’s the narrative supporting purchases of Spanish debt right now. And while I think much of this narrative makes sense, it doesn’t fit together because some of the facts on the ground do not support it. [Content protected for Gold members only]