Renaissance capital

11 December 2012

Thoughts from a Renaissance man Is the euro immoral?

Charles Robertson +44 (207) 367-8235 [email protected]

Is an economic policy that has produced 25% unemployment in Spain and Greece, and is forecast to make this worse, a morally acceptable policy choice? How does an electorate react to such a

socially damaging man-made disaster? History is unequivocal. The electorate will reject the policy. Taking the Great Depression template for countries leaving the gold standard, we should expect Greece to leave the euro in 2013 and Spain to follow in 2014-2015. The former might see markets decline by 10-20% over one quarter. The latter is a Lehmans II event, likely to trigger a 50% fall in markets before a strong rebound.

Yet we should buy equities today and sell US treasuries. History tells us that forecasting a departure from a

fixed exchange rate regime is nearly impossible even weeks before it occurs, yet we (perhaps foolishly) assume Greece will not leave in the next quarter and will have only a temporary market impact, while Spain should remain stable enough throughout 2013. We share the view of many that equities today offer better value than debt, until closer to the time when the political events we fear come to fruition.

Why have we turned more negative on Spain? Until now we have argued that Spain had a 50% chance of

pushing through structural reforms that would allow jobs creation by 2014-2015. We always saw high risks, because Spanish households have a net savings structure closer to the devalue-and-inflate model of the UK and the US, than Germany or Italy. Greece has now joined Spain in this camp. Today we are cutting our estimate of euro survival for Spain to 40% from 50%, for the following reasons:

Spain and Greece now record 25% unemployment rates. We can find no example of a country experiencing

an unemployment surge to this level and remaining in a fixed exchange rate regime. Ben Bernanke’s work on the Great Depression implies they will leave. No major institution expects Spain’s unemployment to improve in 2013. The OECD and EU Commission both expect deterioration in 2014 too. The IMF expects Spain will not record GDP growth above 1.7% by 2017. Since 1981, Spain has not seen job creation with GDP growth lower than 2.4%. We tentatively assume another 1.5mn job losses in Spain in coming years based on IMF growth forecasts.

Export growth has collapsed after encouraging (but inadequate for job creation) growth of 20% in early 2011. Spain’s

current account improvement is due to falling domestic demand, not export growth. Exports of goods, services and income remain too low for Spain to benefit from Baltic/Irish levels of openness. Productivity gains – as seen in the Great Depression – do not offer a solution unless they are creating jobs. Rising unemployment and falling wages will hurt household consumption.

Budget deficits estimated at 6% of GDP in 2014 – by both the OECD and EU Commission – suggest no scope for

Spain’s government to spend more in 2013-2014 to produce jobs.

ECB intervention in the bond market is no solution. It is unlikely to produce the zero (or negative) nominal bond

yields that we believe are needed to encourage corporates to ramp up investment and create jobs.

The welfare state may yet keep Spain in the euro. A crucial difference from the 1930s is the government

provision of welfare to the unemployed. As no rich country has seen the unemployment surge now experienced by Spain and Greece, we have no way of quantifying if this will be sufficient. The Spanish people may also prove to have greater fortitude and resilience than any society previously. Surprises that may keep Spain in the eurozone would include stronger global growth, a radical change in German economic policy towards growth promotion, massive euro depreciation, and/or proof that structural labour reforms in Spain have reduced the growth rate required for job creation.

Democracy is immortal in Greece and Spain, and Germany’s export model would survive a much stronger euro. We strongly disagree with those arguing the opposite.

We will not use this piece in our global economic forecasts. No-one else will.

From Russia to Nigeria and Turkey to South Africa, the public and private sector are preparing for this scenario. We continue to favour them in the short and long term.

© 2011 Renaissance Securities (Cyprus) Limited. All rights reserved. Regulated by the Cyprus Securities and Exchange Commission (Licence No: KEPEY 053/04). Hyperlinks to important information accessible at www.rencap.com: Disclosures and Privacy Policy, Terms & Conditions, Disclaimer

http://www.rencap.com/eng/legal_notice.asp#privacy

Renaissance Capital Thoughts from a Renaissance man 11 December 2011

2

The most important question for investors over the next few years is whether Spain

will leave the eurozone. If it does, we should assume a Lehmans-style market

reaction, with equities plunging 50%, before rebounding strongly some three-to-nine

months later. Many banks across Europe may need to be nationalised. The world

will experience another global macro-shock. Africa and Asia will still grow, but

emerging Europe and Mexico will be hit hard. Investors will flee to US treasuries

and bid yields down to around 0%.

Of course none of these investment strategies are correct today. Rather the

opposite. We don’t believe for a second that Spain will leave the eurozone in the

next few months. So investors today should be gearing up for a somewhat better

global outlook going into 2013 – selling US treasuries in favour of EM/frontier

equities – and indeed, perhaps buying Spanish bonds too, as 2013 will likely see the

ECB step into the bond market.

Where we increasingly differ from the market is regarding the outlook for 2014-2015.

Today, we read that some expect US treasuries to sell off aggressively that year,

ahead of a Fed rate hike in 2015, because US growth will be picking up strongly

towards 3.0-3.5%. If that is correct, then EM hard and local currency bonds will

become significantly less attractive. Instead of debt investors hunting yield – a hunt

that today has already created a global ‘hard’ currency bond bubble – the US

treasury market will itself begin to offer yield. Would the markets still over-subscribe

a debut Zambian eurobond more than 10x, at around 5.5% yield, if US treasuries

were offering 3-4% for 10 years? Would South African or Turkish or Russian local

currency bonds look so attractive at their low real yields? A more bullish outlook for

the US and world economy in 2014-2015 – while positive for EM growth – would

also have some negative impact on EM and frontier markets.

But it is 2014-2015 that we believe carries maximum deflation risk. The work we

have done below tells us to be increasingly worried about Spain’s ability to remain in

the euro over those years.

We will not make Spain’s departure from the euro our base-case forecast for any

economy or stock. No other bank will. If we forecast the start of a sharp western

recession in 2014-2015, then our earning numbers for shares, and our assumptions

for currencies, would become radically different from the market’s, require a very

different ‘fair value’ for a share, and make us entirely useless for investors trying to

trade in 2013. In addition, there is still a good chance (albeit less than 50% as we

see it today) that something happens to surprise us positively. So we will stick close

to consensus for our US and European GDP forecasts, but will strongly doubt them.

But most importantly, our pessimism about Spain is rooted in assumptions about the

level of pain that a population can take, and we may be wrong. The Spanish may

prove to have more fortitude and resilience than any other society in history.

Why have we shifted from 50/50 to 60/40?

This economist’s concerns about Spain are not new. A Spanish financial newspaper

cited them back in September 2010, just months before moving to Renaissance

Capital. Indeed, it was these concerns that were a push factor for the move to this

emerging market investment bank. But until now, we’ve argued that Spain had a

50/50 chance of pushing through the tough reforms that Germany recommends, and

that the Spanish people endorsed with a landslide victory for the centre-right Popular

Party and Prime Minister Mariano Rajoy himself in November 2011.

The trigger for our change of view was the IMF’s World Economic Outlook forecasts

of October 2012. The fund forecast that the maximum growth Spain could expect as

late as 2017 is just 1.7%. That looked to us to be too low to create jobs in Spain, and

indeed, since at least 1981, Spain has not created jobs with growth of less than

Spain’s euro departure would be another

Lehmans-style event

But we believe buying global equities is a

good strategy today

It is 2014 where we differ from the market

We will not make Spain’s euro departure

the base case for our forecasts, even

though we think it is likely

The Spanish people may have more

fortitude and resilience than any other

society in history

We have shifted from seeing a 50%

chance of Spain staying in the euro to

40%

Because no major forecaster sees jobs

growth in 2013-2014


3

2.4%. We would have to assume that the structural labour market reforms enacted

already in 2012 have lowered that growth threshold to 1.5-1.7% to believe that Spain

will see jobs created in 2015-2017. That is pretty heroic, so the implication is

Spain’s unemployment rate will keep rising.

Figure 1: GDP and employment data in Spain 1980-2017E

Source: IMF World Economic Outlook

Very oddly, in our view, the IMF believes unemployment will fall, from 25% in 2012-

2013 to 24% in 2014 to as low as 20.5% by 2017. We strongly disagree that the

IMF’s forecasts for growth and unemployment will prove to be consistent. If it is right

on growth, we tentatively assume another 1.5mn jobs will be lost from 2012-2017

and unemployment will rise above 30%.

Figure 2: GDP % ch (rhs) and net job creation (000s, lhs) with Renaissance Capital forecasts for 2012E-2017E

Source: IMF World Economic Outlook, Renaissance Capital estimates

Indeed, the EU Commission and OECD have both now produced forecasts that

differ from this rosy IMF view. The EU Commission sees 26% unemployment in

2013 and the OECD sees 27% in 2014. These are more credible but may prove too

low.

-8

-6

-4

-2

0

2

4

6

8

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Employment % ch GDP % ch Since 1981, Spain has not created jobs when GDP growth was less than 2.4%

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

-1500

-1000

-500

0

500

1000

1500

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

GDP real pc change Net job creation (000s, Rencap forecasts 2012+, lhs)

These growth rates don't create jobs in Spain


4

Figure 3: Unemployment rate forecasts (EU Commission, autumn 2012), OECD (2012, Volume 2), IMF (October 2012)

Source: IMF World Economic Outlook, EU Commission, OECD Economic Outlook Volume 2

What this means is that Spain will have to endure an unemployment rate of 25% or

more for 2012-2015. So far, it has managed just one year. Even if you are as

optimistic as the IMF, Spain will need to manage an unemployment rate of 20% or

more for eight years. So far Spain has managed just three, and voter anger was so

high in 2011 that the (then) ruling Socialist party suffered its worst-ever election

defeat in three decades at the local elections, before getting hammered in the

parliamentary elections.

Most damaging of all is the lack of hope that we believe will have engulfed Spain by

2014. It is not just that unemployment will have risen to 27% if the OECD is correct,

or 30% if we are correct, but that there will be no feeling of hope of improvement.

Note that even if growth surprises on the upside before then, electorates do not feel

positive about growth of up to 2%. Former US President Bill Clinton famously beat

former President George H Bush in the 1992 election with the tag-line, “It’s the

economy, stupid”. Yet the economy was in a strong recovery mode in 1992 and

high-yield bonds were rallying hard. The electorate did not feel it. Only 3-4% growth

feels good to a developed market electorate. Spain will not have that in the IMF

forecast period even in 2017.

So having got worried about the unemployment outlook, we hunted around for data

to judge whether Spain can cope with this unemployment rate. The answer is very

discouraging.

What country can bear unemployment this high? And for how long?

No economy (as far as we are aware) has ever sustained this unemployment rate

and maintained a peg to a fixed exchange rate. Since the Second World War, we

can find no example of a European country that has seen sustained unemployment

above 20% except Spain itself, with three years above 20% in the 1980s and five

years in the 1990s. But in neither episode did unemployment top 25%. In addition,

Spain then had a currency that the market could (and did) force weaker to help

produce jobs. Moreover, and we believe this was of huge psychological importance,

the 1985-1987 unemployment peak coincided with Spain’s entry into the EU which

gave many hope that life would improve. The 1993-1997 period coincided with Spain

being given approval to adopt the euro, which again provided hope of growth and

jobs. Indeed, private sector debt trebled from 70% of GDP to nearly 210% of GDP.

Both times, the population was right to be hopeful.

15

17

19

21

23

25

27

29

2009 2010 2011 2012 2013 2014 2015

Spain unemployment rate (%)

OECD IMF EU Commission

Spain has managed one year of 25%

unemployment; it probably has to

manage three more years

Growth well above 2% is required to

create a feel-good factor

Spain has had high unemployment

before, but always with good reasons to

hope it would decline


5

Figure 4: EU entry in 1986 and euro adoption (and a massive rise in debt) helped cut unemployment previously – neither can help now

Source: IMF

Today, we see nothing to provide hope to sustain those unfortunate enough to be

unemployed. For households, wages are still likely to fall to boost competitiveness.

Households are deleveraging and defaulting, not borrowing more to fuel

consumption. We cannot see how the government can dramatically increase

spending, when the budget deficit in 2014 may still be 6% of GDP, double the 3%

deficit limit aimed for by eurozone member states. We do not expect companies will

decide Spain (over Poland, for example) is the best place to invest in for future

production. Meanwhile exports are too small to give Spain the chance to echo

Ireland’s recovery.

Figure 5: Spain: Key forecasts by OECD, IMF, EU Commission

2010 2011 2012 2013 2014

OECD Economics Outlook, Volume 2012 Issue 2 GDP (real % ch) -0.3 0.4 -1.3 -1.4 0.5 Unemployment (%) 20.1 21.6 25 26.9 26.8 Gen Govt budget balance (% of GDP) -9.7 -9.4 -8.1 -6.3 -5.9 C/A balance (% of GDP) -4.5 -3.5 -2 0.5 1.8

IMF, World Economic Outlook, October 2012 GDP (real % ch) -0.3 0.4 -1.5 -1.3 1.0 Unemployment (%) 20.1 21.7 24.9 25.1 24.1 Gen Govt budget balance (% of GDP) -9.4 -8.9 -7.0 -5.7 -4.6 C/A balance (% of GDP) -4.5 -3.5 -2.0 -0.1 0.7

EU Commission, Autumn 2012 forecasts GDP (real % ch) -0.3 0.4 -1.4 -1.4 0.8 Unemployment (%) 20.1 21.7 25.1 26.6 26.1 Gen Govt budget balance (% of GDP) -9.7 -9.4 -8.0 -6.0 -6.4 C/A balance (% of GDP) -4.4 -3.7 -2.4 -0.5 0.4

Source: OECD, IMF, EU Commission

If we go back to the Great Depression that began in 1929, we find plenty of

examples of high unemployment in the mid-teens and ranging up to 33%, and in

every case, the country involved dropped its adherence to the gold standard,

devalued and/or imposed capital controls. Fed Chairman Ben Bernanke wrote a very

good paper on this, and we can all see that he has learnt a lesson from history1. The

benefits of leaving gold were not just the export boost (US exports were a very small

share of GDP) but also the freedom given to governments and central banks who no

longer had to maintain a costly peg via inappropriately high interest rates.

1 http://www.nber.org/chapters/c11482.pdf

0

5

10

15

20

25

30

0

50

100

150

200

250

300

1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012

Spain

Private debt (% of GDP, lhs) Govt debt (% of GDP, lhs) Unemployment (% rate, rhs)

Spanish unemployment plunged as private sector debt doubled. How high will it rise in a deleveraging scenario?

There is no hope provided by any major

forecast today

The Great Depression saw

unemployment reach 33% in the

Netherlands; one of the last to leave gold


6

Figure 6: The Great Depression: Policy changes on gold, capital controls and devaluation

Suspension of gold standard

Abandoned gold standard 1929-35 with date, or abandoned full gold

standard in 1931

Foreign exchange control

Devaluation

Austria Apr-33 Yes

Sep-31 Belgium

Yes (1935) Mar-35

Denmark Sep-31 Estonia Jun-33 Yes

Jun-33

Finland Oct-31 Yes

Oct-31 France

Yes (1936) Oct-36

Germany (Jul 31 according to other

sources) Yes Jul-31

Greece Apr-32 Yes Sep-31 Apr-32 Italy

Yes (1934) May-34 Oct-36

Netherlands Yes (1936) Oct-36 Norway Sep-31

Spain (not on gold) May-31

Hungary

Yes Jul-31 Latvia

Yes Oct-31

Poland

Yes (1936) Apr-36 Oct-36 Romania

Yes (1932) May-32

Sweden Sep-31 Yes

Sep-31 UK Sep-31 Yes

Sep-31

Australia Dec-29 Yes (1929) Mar-30

Canada Oct-31 Yes

Sep-31 Japan Dec-31 Yes

Dec-31

New Zealand Sep-31 Yes (1930) Apr-30 US Mar-33 Yes (1933) May-33 Apr-33 Notes: League of Nations, Yearboo, various dates; and miscellaneous supplementary sources

Source: http://www.nber.org/chapters/c11482.pdf

What is surprising is how long some countries lasted. Lightweights such as the UK

managed two years of the Great Depression before coming off gold in 1931. The

Netherlands held onto gold until 1936, by which time its unemployment rate had

reached 32.7%. This date – 1936 – will be roughly equivalent to 2014 for Spain2.

2 Note there are an absurdly large range of estimates for unemployment rates in the 1930s. To

take Sweden as one example, we have seen 30% cited in http://www.ekonomifakta.se/en/Swedish-economic-history/From-War-to-the-Swedish-Model/ and 7% cited in http://www.tcd.ie/iiis/assets/pdf/Workshop25-26Feb2011-Lindvahl_Responding_to_the_Crisis[1].pdf . The data source we have cited is perceived to be reliable, but we should be aware of the variation.

This is roughly equivalent to 2014 for

Spain

http://www.ekonomifakta.se/en/Swedish-economic-history/From-War-to-the-Swedish-Model/

http://www.tcd.ie/iiis/assets/pdf/Workshop25-26Feb2011-Lindvahl_Responding_to_the_Crisis%5b1%5d.pdf

http://www.tcd.ie/iiis/assets/pdf/Workshop25-26Feb2011-Lindvahl_Responding_to_the_Crisis%5b1%5d.pdf


7

Figure 7: Unemployment rates, yellow to show departure from gold standard

Unemployment rates

1930 1931 1932 1933 1934 1935 1936 1937 1938

Belgium 5.4 14.5 23.5 20.4 23.4 22.9 16.8 13.8 18.4 Germany 15.3 23.3 30.1 26.3 14.9 11.6 8.3 4.6 2.1 Netherlands 7.8 14.8 25.3 26.9 28 31.7 32.7 26.9 25 Poland 12.7 14 15.6 16.7 16.3 11.9 11.8 12.8 8.8 UK 11.2 15.1 15.6 14.1 11.9 11 9.4 7.8 9.3 Sweden 12.2 17.2 22.8 23.7 18.9 16.1 13.6 10.8 10.9 Denmark 13.7 17.9 31.7 28.8 22.1 19.7 19.3 21.9 21.3 Norway 16.6 22.3 30.8 33.4 30.7 25.3 18.8 20 22 Switzerland 3.4 5.9 9.1 10.8 9.8 11.8 13.2 10 8.6 US (Lebergott) 8.7 15.9 23.6 24.9 21.7 20.1 16.9 14.3 19 US (Derby) 8.7 15.3 22.9 20.6 16 14.2 9.9 9.1 12.5 2008 2009 2010 2011 2012 2013 2014 Ireland 6.3 11.9 13.7 14.7 14.8 14.7 14.2 Greece 7.7 9.5 12.6 17.7 23.6 24 22.2 Spain 11.3 18 20.1 21.7 25.1 26.6 26.1 Portugal 8.5 10.6 12 12.9 15.5 16.4 15.9 Italy 6.8 7.8 8.4 8.4 10.6 11.5 11.8

Source: International Historical Statistics, Europe 1750-2000 by Brian Mitchell for 1930-38; EU Commission forecasts 2009-14, IMF estimate for 2008

Today we are in the equivalent of 1934, a year after 1933 when the US came off

gold (unemployment was 21-25% depending on which measure you use) and three

years after the UK had led a number of European countries off gold with it. These

countries, from Sweden to the UK, were the ones that suffered least from the Great

Depression. Those that devalued last, France, the Netherlands and Poland, suffered

for longer.

The Great Depression tells us not to worry too much about Ireland or Portugal, and

that we should relax about Italy. Their 2012 IMF estimated unemployment rates of

14.8%, 15.5% and 10.6% are just not high enough to warrant the same concern that

we have about Spain and Greece.

Countries that left gold last, suffered the

most

Figure 8: GDP % ch, 1929-1938, yellow for suspension of gold standard, blue for devaluation

1929 1930 1931 1932 1933 1934 1935 1936 1937 1938

Australia -1.0 -4.9 -4.5 3.8 5.7 3.8 4.1 4.8 5.7 0.8 Austria 1.4 -2.8 -8.0 -10.3 -3.3 0.9 1.9 3.0 5.3 12.8 Belgium -0.9 -1.0 -1.8 -4.5 2.1 -0.8 6.2 0.7 1.3 -2.3 Canada -0.1 -3.3 -15.4 -7.1 -7.1 10.6 8.1 5.4 9.4 2.6 Denmark 6.7 5.9 1.1 -2.6 3.2 3.0 2.2 2.5 2.4 2.4 Finland 1.2 -1.2 -2.4 -0.4 6.7 11.3 4.3 6.8 5.7 5.2 France 6.8 -2.9 -6.0 -6.5 7.1 -1.0 -2.5 3.8 5.8 -0.4 Germany 1.2 -6.1 -10.2 -9.3 10.5 7.7 9.1 10.5 6.0 7.7 Italy 3.3 2.7 -7.9 3.2 -0.6 0.4 9.6 0.1 6.9 0.7 Japan 3.1 -7.3 0.8 8.4 9.8 0.2 2.8 7.3 4.8 6.7 Netherlands 0.8 -0.2 -6.1 -1.4 -0.2 -1.8 3.7 6.3 5.7 -2.4 New Zealand 3.6 -4.3 -8.5 -2.5 6.6 5.0 4.7 18.6 5.4 7.0 Norway 9.3 7.4 -7.8 6.7 2.4 3.2 4.3 6.1 3.6 2.5 Sweden 6.1 2.1 -3.6 -2.7 1.9 7.6 6.4 5.8 4.7 1.7 Switzerland 3.5 -0.6 -4.2 -3.4 5.0 0.2 -0.7 0.6 4.8 3.8 UK 2.9 -0.7 -5.1 0.8 2.9 6.6 3.9 4.5 3.5 1.2 US 6.1 -8.9 -7.7 -13.2 -2.1 7.7 7.6 14.2 4.3 -4.0 Note: US

Source: International Historical Statistics, Europe 1750-2000, Brian Mitchell

Unemployment in Ireland, Portugal and

Italy have not reached unprecedented

levels


8

Figure 9: Unemployment rates: EU Commission data, average for 1992-2008 and then annual from 2009-2014

Source: EU Commission

Departure from the gold standard or euro will be hard to forecast six months ahead

One key lesson to take from leaving a fixed exchange rate is that they are very

unpredictable even three months ahead of time. Former US President Franklin D

Roosevelt did not campaign in the 1932 election on the promise of leaving gold. But

he enacted the policy quickly after coming to office, when the dire economic

situation forced a policy response.

The UK in August 1931 had just formed a new national coalition cabinet with the

strength to push through harsh budget cuts required by the gold standard and the

markets. Yet it was cuts in public wages, leading to a naval mutiny (exaggerated by

the media) in September 1931, which forced the UK government to abandon gold. It

was a humiliating retreat for a country that had seen its return to gold in 1925 as

indicative of its global strength and imperial longevity. We should not for a moment

assume that officials found it easier to leave the gold standard than Spanish leaders

may find it to leave the euro.

The most recent example we are all more aware of is of course Argentina in 20013.

The country was still seriously considering full dollarisation in 2000. Harsh austerity

measures were still being advanced in 3Q01 supported with new IMF money. While

the opposition won mid-term elections in October, the government was still

functioning and in November 2001 was able to enact significant debt swaps to

reduce the debt burden. Yet a bank run that began on 30 November, amidst 18%

unemployment, led to riots and chaos. In December 2001, Argentina was ruled by

four successive presidents4.

What timeline could we expect from Spain?

Having just argued that the end of the euro will be quick and unpredictable in its

precise timing, we are still foolish enough to make a stab at forecasting the date. We

have not been worried for the past year, because in 2011, the Spanish had a chance

to vent their rage at the incumbent Socialist government and elected PM Rajoy with

a large majority, despite his promise that the road ahead would be painful and filled

with tough reforms. Few would cope well with the cognitive dissonance of taking to

3 http://www.guardian.co.uk/world/2001/dec/20/argentina1

4 http://fpc.state.gov/documents/organization/8040.pdf

5

10

15

20

25

30

1992-2008 2009 2010 2011 2012 2013 2014

Ireland (unemployment) Greece (unemployment) Spain (unemployment)

Portugal (unemployment) Italy (unemployment)

The departure from a fixed currency

regime is hard to forecast even months

ahead of time

Public sector wage cuts forced the UK off

gold in 1931

Argentina was considering dollarisation

in 2000, and did a big debt swap in 2001,

just weeks before abandoning the dollar

peg

Spanish politics meant eurozone

departure was not a threat in 2011-2012,

and probably not in 2013


9

the streets to protest against a man who has delivered harsh tough reforms which

you have just voted for.

Figure 10: Support for the main establishment parties has fallen from 84% in 2008 to 54% in the latest November 2012 poll

Source: Wikipedia

Even taking to the streets in Rajoy’s second year (2013) will prove a little difficult to

reconcile with having voted for him in 2011. Yet already there are murmurs of

discontent, that Rajoy has been unable to keep his promises.

We assume that by 2014, the Spanish will be able to justify to themselves that Rajoy

has failed them, and that his reforms have failed to deliver prosperity. People may

then take to the streets and demand change.

There is a chance that the Rajoy government survives until a heavy defeat in

parliamentary elections in December 2015, but it seems hard to believe the

electorate will be that patient. And today no large party exists which offers the

Spanish a choice. That will change. No-one outside Greece had heard of Alexis

Tsipras before May 2012, yet by June he was seen as a plausible prime minister.

For both Greece and Spain, we tentatively assume that summer is more likely for

political unrest than winter, given the example set by Argentina (summer is in

December), and many other countries.

Democracy is immortal in Greece and Spain

While we believe the 1930s is a valid template when considering economic policy

options, it is totally invalid to suggest that democracy is under threat. As we showed

in the Revolutionary Nature of Growth (click here), no country has lost democracy

with a per capita GDP above $9,800 in 2005 PPP dollars, and it is very rare to lose it

above $6,000. Spain ($27,600 in 2009) and Greece ($27,300 in 2009) are hugely

above this figure. As PPP dollars do not collapse like nominal dollar comparisons

do, we can see no way in which democracy would be threatened in either Spain, or

indeed Greece.

In the 1930s, those countries with a per capita GDP of $5,000-6,000 (in 1990

international Geary-Khamis dollars, so not quite the same) such as the UK, the

Netherlands and Switzerland maintained democracy; Germany lost democracy with

a per capita GDP of $3,500 in 1933.

0

5

10

15

20

25

30

35

40

45

50

2007 - local 2008 - general

2011 - local Nov-11 general

Aug-12 Sep-12 Oct-12 Nov-12

Socialists People's Party Plural Left

We believe 2014 could be the crunch year

It is hard to believe in an unchanged

policy stance until elections in December

2015

7,000 data points tell us democracy is

immortal in southern Europe

Spain and Greece in 2009 were 8x richer

per capita than Germany in 1933

http://research.rencap.com/eng/download.asp?id=12638


10

What about Greece?

Greece is in a very similar situation to Spain, but is further advanced on the road to

euro exit. A coalition government even before elections meant the electorate did not

want to vote for either of the major status quo parties in 2012. The two dominant

parties, New Democracy (ND) and PASOK, failed to get even 50% of the

electorate’s votes in either the first May election, or more worryingly, in the second

election of June 2012. Ahead of the second vote, the Greek population was

effectively told by the EU that EU loans would cease unless they voted for pro-EU

bailout parties. Only 42% voted for ND or PASOK. Fortunately, the Greek electoral

system gives bonus seats to the largest single party (the ND), but Greece’s

population is no longer a country committed to the euro.

And little wonder. Unemployment is also above 20%. The EU sees it rising from

23.6% in 2012 to 24% in 2013. The IMF sees it rising from 23.8% this year to 25.4%

in 2013. GDP is already down 17% from the 2007 level and will be 20% down from

the 2007 level in 2013. Of 17 countries during the Great Depression, only four

experienced a bigger decline than Greece has already experienced, and all major

forecasters assume the situation will get worse in 2013.

Our assumption is that the Greek government will fall in 2013, quite possibly also

involving a further splintering of PASOK and ND too. Opposition leader Alexis

Tsipras will be very well placed to take power, having correctly told the electorate in

2012 that a vote for PASOK and ND would produce more pain. We assume his

premiership would take Greece out of the euro.

This might delay (or even prevent) similar happening in Spain. The experience of

many countries when they first devalue and default is one of financial and economic

chaos – see Russia in late 1998 or Argentina in 2001-2002. Greece will look very

messy from the outside and feel worse from the inside. Assuming Greece leaves the

euro in 2013, many Spaniards may be deterred from following in late 2013 or early

2014.

However, by late 2014, Greece’s export recovery should have begun and the strong

growth and job creation in 2015 may prove to be as tempting to Spain, as the UK or

German boom of the mid-1930s was to the Netherlands and France in 1936.

We do not believe the market will react for too long to a Greek euro exit. Investors

have largely divested their exposure to Greece. French banks have taken large

losses to shut down their operations. Companies are moving their stock market

listing out of Greece. A 10-20% fall in markets over one-to-three months is as much

as we expect from this. We assume a fall, because Greek departure is not yet priced

in. Interestingly 80% of 56 fund managers in a recent Reuters’ poll expect Greece to

still have the euro by the end of 2013.

The Spanish and Greeks want to keep the euro

We have no doubt that those with jobs and savings would like to keep the euro.

However, this no longer reflects the economic interests of many Greeks or

Spaniards5. Our estimates suggest that most Spanish households now have more

debt than cash or bond savings. Since the Greek bond default on the private sector,

and capital flight, we assume the same for Greece. It is ironic that by adopting the

euro, and greatly increasing personal debt levels, it is likely that Spain has moved

from being a country with a net savings structure that was well aligned with

Germany’s preference for low inflation and a strong currency, to becoming a debtor

5 for more detail on this – click here for Thoughts from a Renaissance Man, Who supports

inflation/deflation, 20 June 2012

Less than half of Greeks supported pro-

euro bailout parties in the June 2012

election

Greece’s GDP decline is frighteningly

similar to Great Depression declines

It will surprise us if the Greek

government survives 2013

Greece’s euro departure might (initially)

deter the Spanish from following

Global stock markets may fall 10-20%

upon Greece leaving

Spanish and Greek household saving

structures are now very different from

Germany’s



11

country like the UK where society is more likely to favour a weaker currency, and

inflation to erode away that debt. Italy by contrast, remains a country where most

households should favour deflationary policies.

Figure 11: Household cash and bond savings minus household debt, as a % of GDP (2007-12 data)

Source: IMF, various national sources

The Germans won’t allow the euro break-up – we disagree

We think the market makes two fundamental errors when it analyses Germany’s

attitude to the euro. These errors are rooted in market beliefs about Germany’s self-

interest in having a weak euro and its commitment to a political project.

First, the market assumes the Germans can’t afford a euro break-up because the

residue euro, or Deutschemark if it comes to that, would strengthen to excessive

levels and destroy German competitiveness. We could not disagree more.

Germany is a saving nation. Like Japan or Switzerland, and more recently China or

the Czech Republic, this means its currency will appreciate over time because a

saving nation will run current account surpluses. Those savings provide a cheap

source of funding for the banking system, and therefore the corporate sector, which

invests to become more efficient over time. In the 10 years after former US

President Richard Nixon took the US off gold, the Deutschemark appreciated from

DEM3.6/$ to DEM1.8/$. This did not destroy the German export base. In the

1980s, the Deutschemark appreciated from DEM3.2/$ to DEM1.5/$ and Germany

survived that too. Today, were it not for the euro, Germany might well have a

currency at DEM1/$ instead of DEM1.5/$, but we see no reason to believe that

German industry could not cope with it.

-40

-20

0

20

40

60

80

100

120

140

Japa

n

Italy

Chi

na

Aus

tria

Gre

ece

(200

7)

Cze

ch R

ep

Ger

man

y

Indo

nesi

a

Rus

sia

Tur

key

US

(1Q

12)

Hun

gary

Pol

and

Ukr

aine

Rom

ania

Gre

ece

(201

2)

Por

tuga

l

Fra

nce

US

(20

06)

Spa

in

UK

Inflation should be politically popular in these countries

Deflation should be politically popular in these countries

US savings structure shifting away from inflation preference while Greece shifts towards inflation

The Germans can cope with an

appreciating euro/Deutschemark


12

Figure 12: Deutschemark has appreciated for 40 years against the US dollar – and still we buy German goods

Source: Bloomberg

Since 1971, both Switzerland and Japan have coped with a similar appreciation. Yet

both record current account surpluses and have massive FX reserves. Germany will

be in a similar position if it ever left the euro. Yes, Germany would suffer a little, but

in the long run, the deflationary bias of an ever stronger currency, is something

which German industry has always been able to cope with, and which German

households’ saving structure says the population should support.

Figure 13: Swiss franc has appreciated for 40 years and still the world’s 20th biggest economy runs the 9th biggest C/A surplus

Figure 14: Japanese yen appreciates for 40 years and still their FX reserves are among the largest in the world

Source: Bloomberg Source: Bloomberg

Second, the market assumes an open-ended German commitment to a political

project, but forgets the deal that Germany made. Germany agreed to sacrifice the

euro only if other countries were prepared to do the structural reforms required to

make the single currency work without massive federal transfers between countries.

Governments from Spain to Portugal, Italy and Greece said they would do these

reforms when necessary. Their elites believed that only the euro strait-jacket could

deliver the long-term prosperity that Germany enjoyed, and keep their populations

from following the devalue-and-inflate model they had adopted previously. They did

not do these reforms when times were good. Germany did, enacting the Harz IV

reforms of the mid-2000s.

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1-M

ar-7

1

1-N

ov-7

2

1-Ju

l-74

1-M

ar-7

6

1-N

ov-7

7

1-Ju

l-79

1-M

ar-8

1

1-N

ov-8

2

1-Ju

l-84

1-M

ar-8

6

1-N

ov-8

7

1-Ju

l-89

1-M

ar-9

1

1-N

ov-9

2

1-Ju

l-94

1-M

ar-9

6

1-N

ov-9

7

1-Ju

l-99

1-M

ar-0

1

1-N

ov-0

2

1-Ju

l-04

1-M

ar-0

6

1-N

ov-0

7

1-Ju

l-09

1-M

ar-1

1

1-N

ov-1

2

DEM/$

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

1-M

ar-7

1

1-Ju

n-73

1-S

ep-7

5

1-D

ec-7

7

1-M

ar-8

0

1-Ju

n-82

1-S

ep-8

4

1-D

ec-8

6

1-M

ar-8

9

1-Ju

n-91

1-S

ep-9

3

1-D

ec-9

5

1-M

ar-9

8

1-Ju

n-00

1-S

ep-0

2

1-D

ec-0

4

1-M

ar-0

7

1-Ju

n-09

1-S

ep-1

1

CHF/$

50

100

150

200

250

300

350

400

1-M

ar-7

1

1-Ju

n-73

1-S

ep-7

5

1-D

ec-7

7

1-M

ar-8

0

1-Ju

n-82

1-S

ep-8

4

1-D

ec-8

6

1-M

ar-8

9

1-Ju

n-91

1-S

ep-9

3

1-D

ec-9

5

1-M

ar-9

8

1-Ju

n-00

1-S

ep-0

2

1-D

ec-0

4

1-M

ar-0

7

1-Ju

n-09

1-S

ep-1

1

JPY/$

Switzerland and Japan both run C/A

surpluses despite massive FX

appreciation since 1970


13

Figure 15: Germany did harsh reforms when the world was growing – unemployment rates %

Source: IMF

Today Germany is prepared to support governments on the reform path support, via

the ECB, but it cannot keep doubling down on the bets it is making. If pessimists

about Target-2 contingent liabilities are right, Germany’s public debt could rise from

80% of GDP to around 110% of GDP. Even if they are not right, Germany’s long-

term pension obligations and poor demographics mean it cannot endorse

significantly more fiscal transfers to Spain. We do not expect Germany’s late 2013

election to change this. Spain is largely on its own.

The ECB can step in and help out

Up to a point. Let’s optimistically assume the ECB piles into the Spanish bond

market in January, and cuts yields on 10-year debt to 3%. If you are a Spanish

corporate, able to borrow at, let’s say 4%, and the economy will not grow faster than

1.7% by 2017, would you 1) invest your cash in the bond or 2) invest in a slow

growth economy. Or if you have a job in Spain, will you 1) borrow money or 2) save

money, when your wages are falling, house prices are falling, the economy is

shrinking and private sector (household and corporate) debt levels above 190% of

GDP are among the highest in the world. If Spanish bond yields were cut to zero,

then we would get a little more optimistic. What Spain really needs, and what any

country needs when its economy is weak, is interest rates in negative territory in real

terms. This is not likely. ECB support is closer to an aspirin, than a cure.

Spanish productivity has improved sharply – it has become much more

competitive

What all economists are looking for is a sharp improvement in Spanish and Greek

productivity and this is under way. However, the improvement in unit labour costs

partly reflects a fall in wages, but also the surge of unemployment to 25%. If

unemployment rose to 50%, the figures would probably get better still, but this is not

politically sustainable. Spain needs job creation and urgently. That is not in the

ECB’s mandate, although the maintenance of the euro may require it.

Note also that productivity booms were very obvious during the Great Depression

too. To cite one example we found last week, Belgium’s iron and steel sector saw

huge productivity improvements from 1930 until 1935, when Belgium finally left the

gold standard, and began to create jobs again.

0

5

10

15

20

25

30

1980

19

81

1982

19

83

1984

19

85

1986

19

87

1988

19

89

1990

19

91

1992

19

93

1994

19

95

1996

19

97

1998

19

99

2000

20

01

2002

20

03

2004

20

05

2006

20

07

2008

20

09

2010

20

11

2012

Germany Greece Ireland Italy Portugal Spain

Germany did Harz IV reforms when times were good

Germany cannot afford large transfers to

Spain

ECB intervention is unlikely to create

jobs in 2013-2014


14

Figure 16: Belgian productivity rose until it left the gold standard in 1935, (tonnes per man per year)

Source: The Unbound Promotheus (1969), David Landes

Spanish exports have risen and the C/A deficit has disappeared

Among the reasons we have turned more pessimistic is that Europe’s double-dip

recession has wiped out what was a potentially better story for Spain. Exports of

goods (in euros) were up 20% in early 2011, but the latest data show this has

collapsed to nothing.

Figure 17: Spanish export growth (% ch in euros) - not exceptional in 2010-2011 has disappeared

Source: Bloomberg

Exports of goods, services and income are now 35% of GDP, barely up from 34% of

GDP in 2011 or 32% in 2001. And GDP is down 15% since 2007. This is a broader

measure than we would ever normally look at, purely to emphasise how unlikely it is

that Spain is to emulate the Irish or Baltic economic recoveries. Do click here to see

Thoughts from a Renaissance Man – why the Latvian model is not valid for Greece

(26 October 2011) – which highlights trade comparisons and that Latvia in 2011 was

3x richer than in 2000, even after its 2008-2011 austerity.

0

100

200

300

400

500

600

700

800

1930 1931 1932 1933 1934 1935 1936

Smelting Crude and semi-finished steel

-40

-30

-20

-10

0

10

20

30

40

50

Sep

-92

Jul-9

3

May

-94

Mar

-95

Jan-

96

Nov

-96

Sep

-97

Jul-9

8

May

-99

Mar

-00

Jan-

01

Nov

-01

Sep

-02

Jul-0

3

May

-04

Mar

-05

Jan-

06

Nov

-06

Sep

-07

Jul-0

8

May

-09

Mar

-10

Jan-

11

Nov

-11

Sep

-12

Exports Imports

The good news of Spanish export growth

has disappeared

Total exports are a small share of GDP;

unlike Ireland or the Baltic states



15

Figure 18: Exports of goods, services, and income do not look high enough as a % of GDP

Source: Bloomberg

The improvement in Spain’s current account to around 2% of GDP from deficits of

10% of GDP looks good, but is due to a collapse of internal demand. Admittedly this

means Spain is no longer seeing cash flow out of the country, but no export growth

means we are not seeing inflows either. On the FDI side, 2012 has seen more

inflow than any year since 20036, but we are sceptical this will be sustained.

Figure 19: The improved C/A and net FDI balances do not look good enough to warrant optimism

Source: Bloomberg

A massive depreciation of the euro to the $0.65/EUR levels seen in the mid-1980s

could save the day. It does not look likely, although the last year has seen some

belated Asian currency appreciation against the euro which will help Germany.

6 Among deals cited earlier this year, French energy management company Schneider Electric

is moving to buy Spain’s Telvent for EUR1.4bn; the IT sector and Barcelona geographically have attracted investment in 2012 http://www.fdiintelligence.com/Trend-Tracker/Spain-takes-larger-share-of-global-FDI-in-2012?ct=true

0

5

10

15

20

25

30

35

40

45

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Exports (Goods, Services, Income) as % of GDP Imports (Goods, Services, Income) as % of GDP

-12

-10

-8

-6

-4

-2

0

2

4

6

8

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Outward net FDI Inbound net FDI C/A % of GDP Net FDI as % of GDP

The C/A improvement is due to no

domestic demand


16

Figure 20: $/EUR rate since 1975 -- Spain would benefit it we saw 1985 levels

Source: Bloomberg

The Spanish unemployment data are misleading – the black market will save

Spain

We totally agree Spanish unemployment rates may be misleadingly high. Even at

the peak of the Spanish boom, there was still an 8% unemployment rate, which is far

higher than in other over-heating economies. But even assuming the real rate was 4

ppts lower, this still implies that Spanish unemployment today is around 21%. And

the unemployment rate is higher than it’s ever been and it is likely to rise further.

We also have no doubt that there is increasingly reliance on the black market in

Spain – but this means less taxes for the government and therefore more austerity

from the public sector. In addition, wages are likely to be lower, which will make

servicing mortgages more difficult. Not paying taxes may help some manage for a

year or two, but it is not a sustainable long-term strategy.

The Spanish can emigrate

We hear many anecdotes about people leaving periphery Europe for jobs

elsewhere, and are aware that many Spanish worked in France during the 1980s.

However, we are more convinced by the anecdotes that the Portuguese, Irish and

Italians are leaving – the boom in Angola is making it easy for the Portuguese to

move and the Irish are famous for their willingness to move (is there a capital city

without an Irish bar?). When we read that the Spanish Chamber of Commerce in

Brazil, the world’s sixth-largest economy, receives 100 CVs a month from Spaniards

looking to find work7, it does not take long to work out that if every one of them gets

a job, it will only be another 5,000 years before there is no Spanish unemployment.

More obvious still are the unemployment rates in those countries, which are 40-60%

lower than in Spain or Greece, suggesting emigration is helping Ireland and

Portugal, but it is not solving Spain’s unemployment problem.

The welfare state and being richer than our grandparents

In our view, the most important differences between the 1930s and now are 1) the

development of the welfare state and 2) the vast increase in wealth in Western

Europe relative to the 1930s. Some would argue that the welfare state is partly the

cause of Europe’s budgetary problems. But more important today is that the welfare

state means that unemployment is probably sustainable at far higher levels than

ever before, and for far longer than ever before.

7 The Future of Spanish Business, Financial Times, 30 November 2012

0.6

0.8

1.0

1.2

1.4

1.6

1.8

Jan-

75

Jan-

76

Jan-

77

Jan-

78

Jan-

79

Jan-

80

Jan-

81

Jan-

82

Jan-

83

Jan-

84

Jan-

85

Jan-

86

Jan-

87

Jan-

88

Jan-

89

Jan-

90

Jan-

91

Jan-

92

Jan-

93

Jan-

94

Jan-

95

Jan-

96

Jan-

97

Jan-

98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Jan-

11

Jan-

12

Inflationary 1970s

Volcker's high interest rates

Plaza accord

German re-unification

Tech bubble deflates

37-year average is 1.19/EUR

Spanish unemployment numbers may be

overstated – but are still far too high

Growth of the black market is a negative

for government finances

Spanish unemployment figures suggest

less emigration is happening than in

Italy, Portugal or Ireland

The welfare state may be the single most

important factor that could keep Spain in

the eurozone


17

In addition, the personal stored wealth of an individual and their family, is far greater

than in the 1930s. Virtually all in the West have more savings and/or more

possessions than their grandparents had at the same age, again potentially giving

more resilience in the face of an income collapse. There is an offset to this of

course. Many of us also have far more debt, and also higher expectations regarding

their standard of living, meaning they may in fact struggle to cope with a sustained

loss of income. The West may actually be less resilient. We will find out in which is

true through Spain’s experience in the coming years.

So where’s the upside?

Spain’s euro departure would of course be messy, as in Greece, but the upside

would come swiftly. In the past 12 months, exports of goods, services and income

were worth 35% of GDP. Let us assume that profits are 10% of this, and are worth

3.5% of GDP or roughly EUR35bn. If the peseta devalued from ESP1/EUR to

ESP3/EUR, then exactly the same volume of exports would now deliver ESP105bn

of profits, giving more corporate tax revenues to the government and more cash for

companies to invest in Spain. Yes, peseta GDP would inflate too, but not as quickly,

and at first the benefits would be very significant. Exporters would boom once the

global macro shock began to fade.

Moreover volumes would rise too. Germany’s Volkswagen Spanish subsidiary,

SEAT, would see exports soar, perhaps at the expense of French and Italian

models. Domestic sales would benefit due to import substitution. Spain, already one

of the world’s most popular tourist markets, would gain a competitiveness boost

relative to France, Italy and Turkey.

Spanish companies in the Ibex 35 now make 61% of their revenues outside Spain8.

In pesetas, this would grow hugely, giving Spanish companies liquidity, and

producing corporate taxes that would again help close the Spanish fiscal gap.

Santander alone gets an estimated EUR5bn of its total EUR7bn profits from

overseas – though its adverts suggest its exposure to Spain is even less than this.

We would expect Spanish companies and Spanish corporates to bring money home

after devaluation.

This Spanish boom would lead to job creation, leading to more government budget

revenues, investment as well as higher domestic demand. For some years, the

boom could be self-sustaining even without a well-functioning banking sector.

Continuing rows with the rest of Europe over the Spanish default would last years,

but each year would give Spain more growth, and budget revenues and therefore

scope to reach a deal that satisfied its most important partners.

And Portugal, Italy, France?

It is hard to see how Portugal could remain inside the euro if Spain left. The far more

important question is could France and Italy remain inside? On that we have no

strong view.

Conclusion

We believe Greece is likely to leave the euro in 2013 and believe Spain may leave

by the end of 2014. The timing of each will be determined by domestic political

unrest and unlike for example, the chances of democracy surviving (100%), we find

this impossible to quantify. We cannot know how much pain the Spanish and Greek

people will be prepared to take. However history suggests staying in the euro with

unemployment at these levels would be an unprecedented achievement.

8 The Future of Spanish Business, Financial Times, 30 November 2012

Export profits could treble if Spain leaves

the euro, on the currency effect alone

Overseas profits would also help greatly


18

Positive surprises that would make us re-evaluate our views would include 1) any

sign that structural labour reforms already enacted have lowered the growth rate

needed to create jobs, 2) a significant euro collapse to well below parity to the dollar,

which would boost European growth, 3) a huge shift in northern European thinking in

favour of GDP growth, 4) any sign of global growth accelerating hard which may lift

Europe’s prospects and 5) a massive Spanish default on private and public debt,

cutting the total debt load by perhaps 150% of GDP or EUR1.5trn, paving the way

for renewed borrowing by both.

Given the poor prospects for the eurozone in coming years, we continue to believe

that emerging and frontier markets are the better place for investors who hope to

see capital appreciation in the short and long term, and an income stream too. The

domestic demand we see in Russia, parts of emerging Europe (especially Turkey),

and Africa, fed by the likely rise in bank lending from systems that are less inter-

twined with the European banking system, means these markets can grow.

In addition, we see evidence across from Russia to Turkey and Nigeria to South

Africa, that the public and private sectors are preparing well for Spain’s euro

departure. Nigeria is targeting a 20-25% lift in FX reserves to over $50bn, Russia’s

budgetary plans aim to reduce the dependence on energy so that a commodity price

fall will be less damaging, South Africa is maintaining low interest rates and a

competitive currency so that growth might be sustained even in this scenario, while

Turkey is re-orientating trade towards the Middle East. Many governments and

companies are pushing out the duration of their debt, to avoid refinancing problems

in 2013-2015. We assume a commodity price shock would be short-lived, as growth

in Asia would continue and a global shock would limit new investments in supply.

All recognise that markets will be severely disrupted by departures from the

eurozone, but their levels of preparation for this are improving every month.

Nonetheless, we’d expect their markets to be hit hard in 2014 if Spain does leave

the euro, before bouncing back strongly in 2015

We need to see growth to turn more

positive on Spain remaining inside the

Euro

Our key markets are preparing well for

Spain’s euro departure

Renaissance Capital Moscow T + 7 (495) 258 7777

Renaissance Capital Ltd. London T + 44 (20) 7367 7777

Renaissance Capital Johannesburg T +27 (11) 750 1400

Renaissance Securities (Cyprus) Ltd. Nicosia T + 357 (22) 505 800

Renaissance Securities (Nigeria) Ltd. Lagos T +234 (1) 448 5300

Renaissance Capital Nairobi T +254 (20) 368 2000

Renaissance Capital Ukraine Kyiv T +38 (044) 492-7383

Renaissance Capital Almaty T + 7 (727) 244 1544

Renaissance Capital Istanbul T +90 (212) 362 3500

Renaissance Capital Harare T +263 (4) 788336

This Communication is for information purposes only. The Communication does not form a fiduciary relationship or constitute advice and is not and should not be construed as a recommendation or an offer or a solicitation of an offer of securities or related financial instruments, or an invitation or inducement to engage in investment activity, and cannot be relied upon as a representation that any particular transaction necessarily could have been or can be effected at the stated price. The Communication is not an advertisement of securities nor independent investment research, and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Opinions expressed therein may differ or be contrary to opinions expressed by other business areas or groups of Renaissance Capital as a result of using different assumptions and criteria. All such information is subject to change without notice, and neither Renaissance Capital nor any of its subsidiaries or affiliates is under any obligation to update or keep current the information contained in the Communication or in any other medium.

Descriptions of any company or issuer or their securities or the markets or developments mentioned in the Communication are not intended to be complete. The Communication should not be regarded by recipients as a substitute for the exercise of their own judgment as the Communication has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. The material (whether or not it states any opinions) is for general information purposes only and does not take into account your personal circumstances or objectives and nothing in this material is or should be considered to be financial, investment or other advice on which reliance should be placed. Any reliance you place on such information is therefore strictly at your own risk. The application of taxation laws depends on an investor’s individual circumstances and, accordingly, each investor should seek independent professional advice on taxation implications before making any investment decision. The Communication has been compiled or arrived at based on information obtained from sources believed to be reliable and in good faith. Such information has not been independently verified, is provided on an ‘as is’ basis and no representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness, reliability, merchantability or fitness for a particular purpose of such information, except with respect to information concerning Renaissance Capital, its subsidiaries and affiliates. All statements of opinion and all projections, forecasts, or statements relating to expectations regarding future events or the possible future performance of investments represent Renaissance Capital’s own assessment and interpretation of information available to them currently. Any information relating to past performance of an investment does not necessarily guarantee future performance.

The Communication is not intended for distribution to the public and may be confidential. It may not be reproduced, redistributed or published, in whole or in part, for any purpose without the written permission of Renaissance Capital, and neither Renaissance Capital nor any of its affiliates accepts any liability whatsoever for the actions of third parties in this respect. The information may not be used to create any financial instruments or products or any indices. Neither Renaissance Capital and its affiliates, nor their directors, representatives, or employees accept any liability for any direct or consequential loss or damage arising out of the use of all or any part of the Communication.

© 2012 Renaissance Securities (Cyprus) Limited. All rights reserved. Regulated by the Cyprus Securities and Exchange Commission (Licence No: KEPEY 053/04).

Renaissance capital

Documents

Transcript of Renaissance capital