Rajoy’s treatment of Draghi is disgraceful

One never ceases to be amazed at the number of popinjays that strut about the euro zone.

Jose Manuel Gonzalez-Paramo is a former ECB executive board member and, so one would assume, an individual blessed with a certain degree of economic comprehension. However, he has stated an opinion that seriously leaves one shaking one�s head in disbelief.

He implied that the Kingdom of Spain may well be able to escape a bailout, as the country has already confounded expectations by continuing to raise its own financing this year.

Let's just back track a little here. We know that even before ECB President Mario Monti announced in a full ECB session the potential of OMT, he had alluded to the idea of "something big" being in the works.

However, just look at where the yield on the Spanish 2- and 10-year government papers was at the end of August and then see the level at last night�s close to establish the impact of the OMT idea.

Aug 31st: Spain 2-year 3.75% Spain 10-year 6.86%

Nov 29th: Spain 2-year 2.80% Spain 10-year 5.34%

Changes; 2-year - 95bps 10-year -152bps

Does Mr. Gonzalez-Paramo seriously believe that any investor is going to swallow the proposition that without the notion of OMT from the ECB that Spain would still have been able to access the free and open international capital market? Spain has been able to ride on the ECB's back and enjoyed life as if the euro zone were a utopian Cockaigne.

Just look at the latest analysis from the OECD, which forecast that Spain is likely to remain in deep recession until the end of 2013 as "...painfully high..." unemployment and the need to shore up its banks weigh heavily on the economy.

"The prospect of an immediate recovery remains remote as deleveraging of the private sector still has a long way to go while the feedback loop between government finances and the banking sector remains strong, notwithstanding the loan of up to 100 billion euros from the euro area governments to recapitalize the banks...This feedback loop must be broken�"

Of course, Spain has done the right thing whilst the yields have remained so low by raising all the capital required via the bond market for 2012 and it has been able to make a start on 2013's prefunding. However, to float the notion that Spain has done all this on its own is an insult to the ECB and to the intelligence of the investment community.

What has been the reality is that Mario Monti created a "free ride" for Spain and the market. Spotlight has frequently advocated a strategy for playing the ranges in Spanish debt by almost "gaming" the ECB and Mariano Rajoy. This has been done by selling part of one's exposure to Spain to book a little profit, and then, if there is a push back, reverse the order and become a net buyer again. (More detailed analysis is available)

Of course, Spain has done well to fund itself, but the raw fact is that the economy is still exigent. The level of youth unemployment at over 52% is simply shocking, and Spain's risks losing it brightest and best-educated generation in either a depth of despair or to the expat market.

We at Spotlight have been appalled by the cavalier attitude with which Prime Minister Rajoy has treated President Draghi. To demand pre-knowledge what conditions would be imposed is outrageous and by allowing OMT to be an open-ended, timeless proposition has allowed euro-zone beggars to be choosers. Financial aid doesn't come from an a la carte menu of choices...it is humble fare. (Mind you it appears Greece has a good selection of triple helpings).

Such usufruct is disgraceful and surely in a world where economic reality prevailed the ECB would be right to impose a hard line on OMT and in Spain's case apply a deadline. Then we would see an intriguing ramp on the yields. But this is the euro zone...a territory where economic reality left the departure lounge a long time ago.

Mr. Gonzalez-Paramo shocks us at Spotlight when he pays scant reference to the OMT effect and claims that it is "...obvious a country with Spain's fundamentals shouldn't be paying 6% for 10 years.�"

Spain is essentially bust. It could not afford to solve its banking crisis, many regions are crippled under a mountain of debt and the economy as the OECD has said it is still in the ICU. Spain was paying 6.86% for 10-year paper on August 31 because that is how the market judged its worth. One thing that always escapes the euro zone intelligencia is that:

• THE MARKET IS THE MARKET, AND IT IS ALWAYS RIGHT!

He points to the issue of nonresidents returning to the market. Well, of course they would because as we said above, Draghi offered them a free ride; without OMT no one would want Spanish paper.

He claims "it is an expectations game, the same game we have seen since July: the expectation that you could request a bailout and the ECB could intervene has kept funding costs down...Ideally we should see no intervention.�"

On that he is partially correct, but the truth is that the prospect of a timeless offer on conducting OMT, if so required, has given us the chance to observe an exercise in behavioral finance. The market knows a good deal when it sees it, and if Draghi wanted to hand out Christmas presents in September, then good luck to one and all.

September 6 was an invitation to "fill your boots", but only on the credibility of the ECB and on the good fortune, not on the confidence or trust, we hold in Spain.