Based on their 2011 performance, maybe neither…

Amidst the critical economic scenario in Spain, it seems that there is no consensus among investors about the health of the country’s economy and trustworthiness.

The investment firm Pacific Investment Management (Pimco) is on the side that trusts Spain. In an interview with German newspaper Die Zeit, the firm’s CIO Mohamed El-Erian said he keeps buying and holding – very carefully – Spanish and Italian bonds. “It is important to distinguish the situation of each country. Spain is not insolvent. Italy is not insolvent,” he said.

According to El-Erian, the Spanish government’s job is to convince investors that they are doing a good job of cleaning up the banking sector. If the government succeed in convincing investors, there won’t be a need for a bailout. He also suggested that a good solution for Europe would be to divide itself into different zones, separating the northern and southern countries to facilitate fiscal reforms.

But famous hedge fund manager John Paulson doesn’t buy it. Fearful of what might happen with the European country and its creditors, he is short European bonds. The information was provided by a source who participated in an investors conference call with Paulson. According to this person, Paulson is buying credit-default swaps (CDS) on european debt. Paulson has good eye to identify opportunities. In 2007, he took a hefty bet against the subprime crisis in the United States… and won.

What scares investors about Spain is the risk that the country could default on its debt. According to a rank published by CMA Datavision, the chance of a Spain default to occur within the next five years is 32.10%. The country has the tenth riskiest debt in the world. The default rate of bank loans in Spain rose again in February to the highest level since 1994.

Delinquent loans as % of all loans in Spain

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