Daniel Lacalle

My interview about the Spanish vote and Brexit

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With Spain heading to the general election voting booth (again!) this Sunday, below we offer special commentary from a Hedgeye contributor, Daniel Lacalle, to contextualize the vote.

Daniel is an economist, CIO of Tressis Gestion and author of Life In The Financial Markets and The Energy World Is Flat. He presented Sell Spain conference call for Hedgeye customers back on 10/21/15 (Audio Replay and Materials) and was a contributor at Macrocosm 2015.

As Daniel points out, the political climate has shifted very little since the country’s last vote in December 2015 (research). The hung parliament that resulted from the last vote has carried through to present day with no clear movement towards coalition building across the various parties. What does this spell? The high likelihood of a repeat of December’s results, or the lack of a new government with a strong majority, and a fragile economy weighing in the balance.

Daniel will join us LIVE on Friday’s Macro Show. Tune in and feel free to lob him questions about the Spanish vote and the UK’s Brexit vote.

“Here I go Again, On My Own”

Here we go again. Spain has spent almost six months without a new government, and elections are again on our doorstep. The 26th of June, unfortunately, is unlikely to deliver a major change and uncertainty remains.

The economy in the meantime hasn´t done so badly. GDP growth has been revised up to 2.7% for 2016, and unemployment continues to fall. However, investments and consumer confidence have fallen and the path of job creation is somewhat slower than last year.

Polls show that the likely outcome of the elections will show a rise of the Conservative Popular Party (PP), but without a clear majority, and of the populist radical left (and anti-austerity) Podemos party. This move to the left of the voter shows that Spain seems polarized between those who will vote against the rise of communist-radicals and those who will vote for anything, even if it´s populist, to get the conservatives out of power.

So the marginal vote seems to be “against” not in favor of an option.

The major risks and likely outcome of these elections are:

– Vast majority of Spanish citizens vote for moderate, center parties [PP, PSOE (socialists) and Ciudadanos (liberals)]

– Neither PP+Ciudadanos nor PSOE+Podemos reach clear majority for government

– Key to stability and growth will be to find a coalition between Conservative PP and Ciudadanos and maybe PSOE

– Biggest risk is a coalition of populist radicals Podemos with PSOE and other radical and nationalist parties looking for constitutional changes and anti-EU measures

The push to unwind all the reforms that have helped Spain recover from the recession is quite relevant. Most parties seem to have forgotten budget stability and are aiming at more public spending in a country with 5% deficit and 100% debt to GDP.

In Spain, the main economists behind the opposition parties believe in the inexistent “growth multiplier” of public spending and in the positive effect of large deficits. This poses a huge threat to the economy just at the time when corporate profits seem to be slowing down and tax intake is very fragile and dependent on the recovery.

However, most parties – except the conservatives – promise large tax increases and huge public spending. In Spain it seems that the voter believes that somehow all this will be paid by someone else, not him or her.

If a left-wing coalition unwinds all reforms made by the PP and starts a constitutional change it could mean 0.7% to 1.0% impact on GDP and zero job creation.

In a country where non-financial sectors debt to EBITDA is at 5x (versus 3.3x in EU27) and where budget deficits have been in excess of 5% since 2008, large tax increases and public spending plans are likely to lead the economy to another shock once low rates and ECB stimulus fade.

The challenges of the economy remain, and the uncertainty might last well beyond the election day as coalitions will likely be fragile and with parties that have different agendas.

Key elements to watch:

– A high unemployment rate, despite the large reduction and the evidence that many jobs are hidden in the underground economy and counted as unemployed.

– A large fiscal deficit. Despite the massive adjustment, Spain´s deficit is well above the EU stability pact target.

– External debt remains at 100% of GDP and public debt at 97%.

In any combination, the new government will probably not have a strong majority, and most of the likely agreements may only come with parties who promise more spending.

The risk of Spain falling under the QE trap, putting all the bets on the European Central Bank, as it did in 2008, and going back to the same mistakes of deficit spending and public sector white elephants to “boost growth” is not small. Halting reforms and going back to past failed measures will likely give the same results. Less growth, less jobs, more debt.

With world growth slowing and keynesian measures failing from Japan to the Eurozone, there is a risk that if Spain votes against the Conservative Party and in favor of anti-austerity measures, the country could suffer another setback similar to 2010´s.

-Daniel Lacalle

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