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CNN features Stephen Pope's opinion

Monday May 28th 2012



http://edition.cnn.com/video/#/video/business/2012/05/28/qmb-intv-stephen-pope-on-spain-economy.cnn?iref=allsearch

NINA DOS SANTOS: As hopes grow tonight that Greece will keep its place within the Eurozone, well, attention is turning to Spain, where borrowing costs are currently hovering just below the danger zone. Stephen Pope is an independent market strategist. He joins us now live in our London studio to discuss all of this.

So first off, Stephen, if we come to Spain, what they're doing, is it dangerous? Presumably it is, because it's just kicking the can down the road.

STEPHEN POPE, INDEPENDENT MARKET STRATEGIST: Well, it is certainly dangerous when the prime minister tries to persuade the public and the markets that Spain will not have to seek any outside assistance to recapitalize all of the banks because they're looking at putting this $23 billion, 19 billion euros into Bankia.

Here is a banking group whose entire asset base developed (inaudible) Spain's GDP. And with the 10-year yield now well over 6 percent, heading over 6.5, indeed, it's just (inaudible) Spain can't afford to raise money in the open markets. So --

DOS SANTOS: So it's basically pouring good money after bad?

POPE: Yes, I think there really has to be a sense that if they could find the money to create a bad bank, relieve some of these struggling lenders, all their distressed assets so they're well below par value and just put them into a contained case, and then maybe start to create some better banks, it might be a way forward. But not this Band-Aid solution again.

DOS SANTOS: Let me be blunt: will Spain need a bailout? Presumably we can't afford one.

POPE: Well, this is always the danger, isn't it, that the fire that was created is not sufficient because I think Spain will have to go and seek assistance.

DOS SANTOS: What kind of assistance? Are we talking from the IMF? Are we talking some kind of assistance from the ECB that means the ECB could loosen its mandate? That's what Spain's trying to get them to do.

POPE: Well, indeed. And so a game of brinkmanship. Now if the ECB was to come out and say we will reliquefy (ph) every single bank in Eurozone where the money is needed, that would solve one of the problems. If they said we'll be a backstop to all governments within the Eurozone, again, you would see these yields come screaming lower.

But until the ECB is persuaded to do that, or unless the leaders at their next summit give them the mandate to do that, you're just going to carry on with this situation where yields will be creeping higher in the periphery. Spain will be the next one to take on aid from the Troika. But we know they probably would apply the discipline a little bit more rigidly than we've seen in other countries.

DOS SANTOS: Now speaking of applying the discipline rigidly, we have had some interesting comments coming out of the head of the International Monetary Fund, (inaudible) Christine Lagarde, not particularly charitable when it comes to the people in Athens. Presumably that's just pouring oil on the fire, isn't it, ahead of these elections?

POPE: I think it's a question of maybe Madame Lagarde said what other people think that are not there to say in public, and perhaps her words were less than fortunate in their choice and selection, because it certainly inflames not just the people of Greece but the politicians who, in a few weeks' time, somebody from the IMF is going to have to deal with quite seriously.

So I think we know that there's been a history of tax evasion in Greece, but there is a better way of suggesting they rectify the problem rather than being very blunt and, you know, front forward about it.

DOS SANTOS: Well, we see this impasse when it comes to a potential solution -- Eurobonds -- so jointly issuing pooled debt here where all of the countries in the Eurozone would guarantee each other's debt. That has been taboo territory for Germany for so long that Germany's benefited from having an artificially low currency.

POPE: Well, certainly Germany has benefited greatly because although their exports have gone into the Eurozone, I think the Germans are seeing it from a different perspective. Recently, after years of wage discipline, which was quite a strange thing for someone like Ikey Mattel (ph) to adhere to, they've allowed wages to rise above inflation.

So Germany deliberately making its labor force less competitive than it has been in the past and allowing others to have a margin for improvement in the labor pool activity. You don't need other unions in other countries saying we must have the same wage rate. But certainly to try and collectivize debt, Germany don't want to give up this yield advantage they have now.

DOS SANTOS: And so one-word answer: Eurobond, yes or no?

POPE: For me, no.

DOS SANTOS: You're one of I would say about 50 percent of people I've been polling this week, says the same thing, and last week. So there you go. You're in a camp, but it's still opinion divided.

Thank you very much for joining us, Stephen Pope there, joining us from Spotlight Ideas.

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