Market Analysis

Noshing on News

In which we sample Spanish yields, European finger-pointing, ratings agency wrangling and a healthy slice of free trade.

Back to Spain

With Greek elections out of the way, media focus returned to Spain—which successfully raised €3 billion in auction on Tuesday. The maximum amount the government sought was raised, but at steeply higher rates—12-month bills went for an average interest rate of 5.074% (up from 2.985% in May) and 18-month bills fetched 5.107% (up from 3.302%). Higher rates aside, demand was strong. Bid-to-cover ratios were 2.16x and 4.42x for the 12- and 19-month bills, respectively—both better than last month’s auction of similar debt. An auction on longer-dated bonds will be held Thursday.

Certainly Spain would prefer lower rates, but these rates, naturally, don’t apply to all of Spain’s outstanding debt. Since Spain has addressed all of its longer-term maturing debt needs and most of its total planned debt issuance this year, a temporary spike in rates should have limited near-term impact on Spanish solvency, in our view.

Barroso’s bizarre blame-game

Apparently, the US owes Europe an apology. According to European Commission President José Manuel Barroso, America’s responsible for peripheral Europe’s troubles: “The crisis was not originated in Europe ... seeing as you mention North America, this crisis originated in North America and much of our financial sector was contaminated by, how can I put it, unorthodox practices, from some sectors of the financial market.”

Considering he was responding to someone asking why North Americans should “risk their assets to help Europe,” we can see why he went there. And to some degree, he had a point—US financial firms were at the heart of (though, as we’ve written, not the primary cause of) the 2008 credit crisis, and 2008’s events helped fuel many of Ireland’s and Spain’s banking problems.

But peripheral Europe’s competitiveness problems are homegrown: Certain nations’ uncompetitive economies, bloated public sectors, unproductive workforces, rigid labor markets, socialistic economic systems and rampant regulatory red tape have naught to do with American banks or policies.

But here’s what’s most disappointing: This unfortunately timed blame game has distracted from the many substantive things Barroso had to say—like pledging continued institutional support for Greece, Spain and European banks. Finger-pointing makes for a juicy story, but in our view, the continued will to prevent a near-term disorderly euro unwinding is far more meaningful.

Third time’s a charm?

For some time now, EU leaders have been at odds with the big three credit ratings agencies—Moody’s, S&P and Fitch. The perceived slight? Downgrading peripheral sovereign debt after rates have risen—in the EU’s view, piling on. The EU’s been working on a new set of rules targeting credit raters for some time—and the third draft in as many years emerged Tuesday.

Past versions of the EU’s rules principally targeted loosening the regulation-created (and -maintained) oligopoly of the big three, increasing competition by mandating debt issuers rotate raters used. The last draft called for rotation every three years, applying to many forms of debt. Yet now, it seems the EU is more comfortable with this oligopoly, considering rotation will now be required every five years—and only on a very narrow range of securitized debt. It seems banks weren’t actually in favor of using smaller ratings agencies (the big three’s competition), claiming investors could be skeptical of less well-known raters’ opinions.

And to be sure, there’s ample evidence bigger raters generate more reliable ratings. After all, it isn’t as though a well-known, large rater would have rated Lehman investment grade the day it went under. And certainly not Enron until very late in its scandal. (Oh right ... nevermind.)

Bigger raters aren’t necessarily any better, just as more regulations regarding ratings don’t ensure improved accuracy. Want better ratings? Then it’s likely more competition you seek. In that way, the EU’s third time doesn’t seem like much of a charm.

TPP progress

Mexico recently announced (to much local jubilation) it’s been invited to participate in Trans-Pacific Partnership (TPP) talks—a move the existing nine participants, including Australia, New Zealand, Peru, Chile, Singapore, Malaysia, Vietnam, Brunei and the US, unanimously agreed to. As Mexican President Felipe Calderon recently noted, Mexico’s (or really, any country’s) participation in the TPP (as with any other free-trade organizations, discussions, treaties, etc.) likely increases economic activity among participants, thereby benefiting companies and employees in said participant nations. So Mexico’s inclusion probably ultimately benefits not just Mexico, but also the US and the rest of its trade partners.

Meanwhile, Canada’s still on the outside looking in, though it’s apparently making progress toward gaining TPP admission—a path which, at the moment, seemingly largely runs through the White House since other participants have already approved Canada’s inclusion. US approval ostensibly hinges on some Canadian concessions related to intellectual property rights, among other things. Canada seems to recognize the importance of not becoming the North American odd man out of the TPP, though—a realization with which we wholeheartedly agree.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.