Wednesday, September 22, 2010

PIMCO vs Spain

From today's WSJ:

Prime Minister José Luis Rodríguez Zapatero declared that the European debt crisis is over but said that the governments have to work better together and with markets to stave off such events.

"I believe that the debt crisis affecting Spain, and the euro zone in general, has passed," Mr. Zapatero said in an interview with The Wall Street Journal on Tuesday.

Mr. Zapatero said his message is that "confidence has been restored," particularly after the country released results of tests that evaluated the soundness of its banking system in late July. The risk aversion toward Spain has also subsided as the government has shown progress in reducing its deficit. 

PIMCO is saying the exact opposite.

“Market measures of risk for peripheral European countries (Greece, Ireland, Portugal and Spain) are at or near danger levels,” El-Erian wrote in an article posted Monday on Pimco’s Web site.
That’s despite “exceptional” support from the European Central Bank, the European Union and the International Monetary Fund, he added.
“The failure to reduce risk spreads means that the public sector bailout is not working,” El-Erian wrote. Rather than provide assurances of better times ahead and, thus, encourage new investments, ECB/EU/IMF support funding is being used by existing investors to exit their exposures to the most vulnerable peripheral European countries.”

I don't always agree with PIMCO as I believe that they are often talking their book (by pushing for government intervention in Fannie/Freddie while they hold billions of their bonds). Spain is "talking their book" as well, as they hope to build confidence in their economy and their bonds. However, in this case, I side with PIMCO.

History is littered with these types of statements just at the time that crisis worsens. In May 2008, there were tons of declarations that the credit crunch was over, when in reality, it was only a pause before the real credit crunch started.

The Euro is approaching its summer highs at 1.34 as it ignores the developments that PIMCO highlighted, but I believe that before the year is done, we should see a return to the 1.15-1.25 range that I highlighted back in late 2009 when the Euro was near 1.48.

Ultimately, the Euro is heading back to par or lower but that may be something for 2011 or 2012. I believe that a super strong US dollar would wreak havoc on the stock market.

Disclosure: Position in the Euro and US dollar.

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