Spain ETF (EWP) Gets A Much Needed Boost

by on May 12, 2010 | ETFs Mentioned:

It’s been a rough couple of weeks for equity markets throughout Europe, but few regions have endured a rockier stretch than the iShares MSCI Spain Index Fund (EWP). As investors witness and analyze the implosion of Greece’s public finances, speculation has turned to other highly leveraged European economies that could be the next domino to fall. Spain is at the top of that list, as the Iberian economy has been hammered by a prolonged downturn in construction activity that once accounted for a significant portion of GDP. With unemployment now above 20%, tax revenues are down while benefits are up, a dangerous combination that can quickly lead to ballooning budget deficits and the beginning of a bailout conversation.

Amidst that backdrop, EWP has seen its value plummet in recent weeks. The Spain ETF lost more than 15% in last week’s chaos, including a nearly 7% decline on “Flash Crash Thursday” (see Ten Surprising ETF Charts From The Flash Crash). But EWP has clawed back some ground in recent sessions, and the latest announcement out of Madrid gave investors some hope that Spain won’t become the next Greece. In an address to lawmakers, Prime Minister José Luis Rodríguez Zapatero proposed an aggressive plan to proactively tackle the country’s budget woes. Public sector employees will see their salaries cut by 5% this year and frozen next year, while members of the government will take a sizable 15% pay cut. “We will ask for a bigger effort from everybody, in the first place our citizens and public sector employees,” said Zapatero.

The government also announced it is scrapping previously-approved increase in pension plans and will terminate a €2,500 subsidy for new parents; that measure was implemented in 2007 to boost one of the lowest birth rates in the world. The changes are expected to reduce the country’s deficit by an additional 1.5% of GDP over the next two years, lowering it to 6% in 2011 from a level above 11% in 2009.

Spain ETF Continues Surge

Investors cheered the news of self-imposed austerity measures, a sharp contrast to the recent riots in the streets of Greece protesting cuts to some of the most generous government services in the developed world. Following the formation of a $1 trillion emergency bailout fund, some investors had expressed concern that the presence of a safety net would alleviate pressure on cash-strapped governments to aggressively cut costs, but Spain’s plans seem to be easing some of those concerns as well.

EWP added about 1.6% in early morning trading, continuing a rally that has seen it gain more than 12% on the week. Spain isn’t out of the woods yet, but the latest developments are undoubtedly positive ones, pointing the country away from a bailout and towards a self-managed (and perhaps painful) fiscal recovery (see What Every Investor Should Know About The Spain ETF)

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Disclosure: No positions at time of writing.