From: puerta@mcs-next-10.stanford.edu (Angel Puerta)
Subject: Spanish Economy hanging on French Vote
Reply-To: puerta@camis.stanford.edu
Organization: Stanford University, California, USA
Date: Thu, 3 Sep 1992 22:16:02 GMT



On the 20th of September, the French will hold  a referendum on the Maastrich  
treaty that defines the monetary and political union of Europe. Polls are  
indicating that the Yes/No choice are running even which is significant because  
only 45 days ago the Yes vote was ahead 69 to 31%. A no vote will kill the  
Maastrich Treaty.

Although I find hard to visualize what a No vote would mean in the long term,  
it is clear the in the short-term a No vote would be a disaster for Spain. I  
can see the following scenarios:

(1) The stock market in Madrid will sink. It is already as low as it was after  
the worldwide 'crash' of October 1987. There is no confidence of foreign and  
institutional investors on the Spanish Economy. Inflation is too high and the  
Public deficit is out of control.  This weak confidence will turn into panic  
with a No vote.

(2) The peseta will have to be devaluated. It is already too high, pushing  
imports (which contribute to inflation), and making tourism and exports too  
expensive. I believe that a No vote will push the Peseta at least 10% down.

(3) The 'economic adjustments' of Felipe Gonzalez will lose all credibility   
because they are based on the so-called 'requirements for Monetary Union'  
outlined in the Maastrich treaty. A No vote will compromise Gonzalez who will  
have to throw away his adjustments and work out others with a general election  
looming in the horizon. The economy, already expected to be in dire straits (1%  
growth) for next year will be put on hold until a new economic policy is  
defined.

Regardless, it is always said that there are opportunities in every down market  
and this one is no exception. For Spain, this opportunity comes in the shape of  
closed-end mutual funds. A closed-end mutual fund pools money from investors to  
invest in a specific market. It differs from regular, open-end funds in that  
the number of shares is fixed and for a new investor to buy shares in the fund,  
some other investor must be selling them.

There are three closed-end mutual funds that concentrate on Spain:
(1) Growth Fund of Spain (GBF in the New York Stock Exchange)
(2) First Iberian Fund (IBF in the Amex Stock Exchange)
(3) Spain Fund (SNF - in the NYSE)

All of this funds are trading nowadaya at a tremendous discount from  
net-asset-value (NAV). The NAV is the value of all investments on Spanish  
companies that the fund holds divided by the number of outstanding shares.

For example, IBF's NAV is $8.25/share but it is selling nowadyas for $6.75, an  
18% discount. SNF is trading around $9 when 30 months ago it was trading at  
$33.

A no vote on Maastrich will pull down these stocks even more, making them even  
a better bargain since the underlying securities that the funds hold have a  
much higher value per share. Possibly making fo a gret investment opportunity.

--
Angel Puerta
puerta@camis.stanford.edu

Disclaimer: I do not have any connection to these funds other than owning  
shares of them. 

Newsgroups: soc.culture.spain