- The Rain in Spain is a Hurricane

Of Spain's four regional stock exchanges including Barcelona, Valencia, and Bilbao, the Bolsa de Madrid (Madrid Stock Exchange) is the largest and most international. Operating since 1831, Bolsa de Madrid is owned by Bolsas y Mercados Españoles and as required by Spanish law it is managed and operated by the Sociedad Rectora de la Bolsa de Valores de Madrid S.A.. As of December 31, 2001, approximately 1,477 domestic and foreign companies had their equity securities listed on the Bolsa de Madrid. And in May, 2007 the total market capitalization of the equity securities listed on the Madrid exchange was €1,276.26 billion.

The Madrid Stock Exchange General Index (IGBM) is the exchange's principal index and represents the construction, consumer, energy, financial services, communications, capital/intermediate goods, and market services sectors. The index was developed with a base value of 100 as of December 31, 1985.

90 Day realized volatility of major Spanish equity indexes generated using the RiskAPI Add-In.

How has the IGBM performed? Back in the faraway days of September 2002, the index sat at 595. Then began an impressive climb that took it to 1,713 in December 2007. But things got rocky and by May 2009 the IGBM had slumped to 730, wiping out the gains realized since August 2003. By January of 2010 it had bounced back to 1,267, only to falter to 1,127 a month later.

Looking Ahead

In June 2009 Spain's Prime Minister Jose Luis Rodriguez Zapatero said in an interview with Spanish television channel Telecinco, "The economy will begin to grow again in 2010….We will move towards recovery as long as the global economy accompanies us." But the European Commission expects Spain to be the last EU country to recover from recession, probably in 2011. The slow recovery is expected to be due to the collapse of Spain's decade-long housing boom as well as the global economic crisis.

90 day realized volatility of Spanish, major European, and US 10 Year bond futures generated using the RiskAPI Add-In.

Spain had a huge housing bubble, accounting for 30% of all new homes built since 2000 in the EU. Now Spain has as many unsold homes as the US (even though the US market is about six times bigger). Unlike the US, Spanish banks are holding many properties to sell when the market improves. But the Bank of Spain recently doubled the amount of cash that local banks must set aside to cushion repossessed property losses. To maintain liquidity the banks must sell their properties, triggering continued weakness in housing prices.

Spain's unemployment rate has hit 18.8% and there are now over four million unemployed Spaniards. Analysts predict that unemployment will continue rising, reaching 22% at the end of 2010. Employment in manufacturing has declined every month since September 2007. The Spanish manufacturing sector entered 2010 with new orders, output, and employment all continuing to decline. Firms are reluctant to invest in new stock until sales rise. In January, weak demand forced manufacturers to cut prices even in the face of higher raw material costs.

1-day Value at Risk of USD 1mm worth of Spanish, major European, and US 10 Year bond futures generated using the RiskAPI Add-In.

The value of outstanding loans to Spanish developers has gone from €33.5 billion in 2000 to €318 billion in 2008, a rise of 850% in eight years. Many of these loans are expected to go bad.

90-day realized volatility-over-time of the IBEX-35 index generated using the RiskAPI Add-In.

It is unclear if the Spanish government has the will or strategies to grapple with these issues. Even as it faces spending commitments taken on during the boom years, the government doesn't expect the economy to experience growth anytime soon. Despite the government's announced social and fiscal austerity program (which includes workers postponing retirement until age 67) there are few measures currently on the table which will be able to restore growth and employment in the short term. Investors can look to continued volatility and slow recovery, assuming there is no political revolution. Unlikely? It happened as recently as 1936, and if investors have learned anything in the past two years it's that almost anything is possible.

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