European PIGS Start to Fly

Do you remember the PIGS? That was the tag for the economies of Portugal, Ireland, Greece and Spain at the height of the Eurozone crisis in 2010.

Well, check out the news now. The Financial Times reports that Spain and Ireland are now the fastest growing economies in the Eurozone.

Ireland’s beginning to look like the greyhound of the pack, rising at six times the pace of the rest of Europe. The Irish central bank is forecasting growth for the next two years above 4%.

Check out how things have been travelling over the last few years…

Source: Financial Times

Click to enlarge

Of course, we treat central bank forecasts with the same amount of credibility as that of a mainstream economist. That’s somewhere next to the old guy at the pub with a red nose and no teeth.

But in this case they might accidentally be right. One reason is the ongoing recovery out of the housing bust in both countries. Private equity firm KKR announced plans to put up 500 million euros to lend to property developers, to increase housing supply. Irish house prices are up 10% for the year.

People in high places are sighing with relief when they see that. It means they find it easier to find a buyer so they can flog off their bad assets.

Major UK bank Lloyds, for example, just sold its 827 million pound portfolio of Irish commercial loans to a consortium betting on continued Irish expansion.

According to the Financial Times, ‘Rising house prices, an improving economic outlook and great availability of financing have helped Lloyds withdraw from its lossmaking Irish operation.’

Importantly for Lloyds, the sale continues the ongoing cleanup of its balance sheet after its disastrous exposure to the meltdown of the GFC. The sale will take its level of impaired loans down from 2.7% to 2.2%

It’s not alone there. Spanish banking giant Santander results came in last month too. Its overall percentage of non-performing loans fell from 5.45% a year ago to 4.64%. Net profits were up 17.6%.

What’s happening is expansionary for banks and bullish for stocks and the economy in general. When bank credit is expanding, the economy will inflate.

And despite the worries about the Fed or the Bank of England raising rates, this is actually good for banks. That’s because it will increase their net interest margin, or the spread between their costs and income to put it another way.

This is not just mere opinion. History shows it as fact. Some knowledge of cycles can also tell you the exact timing to profit from it.

Speaking of Spain, colleague Phil Anderson reported last week on the Chinese consortium that might have just sealed the real estate deal of the decade.

They were the sole bidders on a Spain’s Ciudad Real’s ‘ghost’ airport near Madrid, whose previous owners went bankrupt. Here’s the kicker. They put down €10,000 for an airport that cost €1 billion to build.

Soon Chinese goods will be flowing through Spain, alongside all the tourists. Spain’s economy has grown for eight consecutive quarters, with record spending by foreign tourists. That’s chocked up the country’s fastest quarter of growth since 2007.

And if you need another reason to be bullish, let’s not forget the price of oil. In the US, crude oil costs 51% less than it did a year ago.

Some of those costs savings Americans are enjoying appear to be giving consumer spending a boost, according to the Wall Street Journal:

‘The good news here is that real, or inflation-adjusted, personal consumption expenditures grew at a 2.9% annual rate in the second quarter, up from 1.8% in the first.

‘Though the evidence is still tentative, it may be that increasing confidence in the job market is making consumers more willing to spend the money they have been spending on gasoline.’

This is as we forecast in Cycles, Trends and Forecasts late last year. We said at the time lower oil prices were a trillion dollar boost to the US economy. It is difficult to think of anything that has a bigger beneficial impact. The mid 1980s oil price collapse, for example, kicked off a huge economic and stock market comeback.

It’s a time to be bullish. Don’t miss the opportunities because of worry. Get started here.


Callum Newman,

Contributing Editor, Markets and Money

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Originally graduating with a degree in Communications, Callum decided financial markets were far more fascinating than anything Marshall McLuhan (the ‘medium is the message’) ever came up with. Today Callum spends his day reading and researching why currencies, commodities and stocks move like they do. So far he’s discovered it’s often in a way you least expect.

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