Pioneer positive on Spanish debt despite questions over LTRO effectiveness

Italy’s Pioneer Investments takes a “mildly positive stance” on Spanish debt in its European fixed income portfolios, although it warns “time running out” for the effectiveness of the European Central Bank’s cheap loan program to narrow spreads on much peripheral Eurozone debt, as it did earlier this year.

Nevertheless, Pioneer argues Madrid is “doing what is necessary” to repair public finances, and trust in its creditworthiness.

Cosimo Marasclulo, Pioneer’s head of government bonds and FX, said Madrid’s latest deficit/GDP ratio target for 2012 of 5.3% was “ambitious”, though a planned €10bn reduction in health and education spending must be explained “before being accepted as credible and providing relief.

“From a fundamental point of view, recently, we have not seen further deterioration in the Spanish economic indicators and for this reason we continue to maintain a slightly positive view on Spanish Government debt.

“The economy is weak, with structural imbalances – low competitiveness, high unemployment – a situation common to other peripheral countries. But the government in place since the end of 2011 has a significant parliamentary majority, and should be able to put in place measures to address fiscal austerity, together with measures, such as the labour and banking system reforms, to improve flexibility and competitiveness.”

While this heartens Pioneer, it emphasises the “path may not be easy, as evidenced by election results in Andalusia”. It expects volatility in Spanish debt as elections approach in Greece and France, and Ireland readies a referendum.

Another crucial matter will be how protective the ECB’s three-year cheap loan program remains. Spanish and Italian banks combined took out more than €300bn of the more than €1trn of cheap three-year ECB loans made to banks by its president Mario Draghi.

As financial markets start testing the effectiveness of such measures, Marasclulo said: “The ECB will continue to play a key role, using unconventional policies for a long time and giving governments time to make the economic reforms to re-launch the economy in the medium term.”

Bue he added Draghi’s “room for manoeuvre may be diminishing (and) another dose of LTRO, or similar, does not appear to be around the corner”.



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