Retail: Watch Inventories. We Are.


Keep an eye on inventories coming out of Q1. We’re seeing a directional bifurcation between components of the mid tier (TGT/KSS bad, GPS, BONT good). That alone is notable. But tack on the fact that the off-price channel is ripping (TJX, ROST), and this is not a bullish event.



April sales were light as reflected by the beat-to-miss ratio coming in at only 9 companies coming in better than expectations with 11 misses. As expected, companies pointed to the holiday shift, weather, and even a later Mother’s Day to explain away sales underperformance, which would be more acceptable if March sales had come in that much better, but they didn’t. We expected some surprises after March sales demand didn’t come in stronger, but admittedly the surprise was in fact the resilience in Q1 earnings expectations with the final month now in the books. This was the key callout of the morning with five companies taking expectations higher, or towards the higher end of prior ranges, implying stronger margins due to favorable inventory positioning despite some posting weaker top-line results.

Heading into Q2, we think inventory management will prove more critical than any quarter in perhaps the last 4-years due to competitive pricing environment disruptions. This in turn will drive a clear bifurcation between the companies that have inventories in check versus those that don’t.


Here are some additional callouts from this morning:

Off-Price/Discounter Outperformance: ROST and TJX continue to outperform the rest of retail coming in +7% vs. +3.5%E and +6% vs. +3.3%E respectively representing the biggest beats to the upside. These results mirror outperformance throughout Q1, which reflects a strong sequential acceleration in sales growth both on a 1yr and 2yr basis for both retailers. Both increased their respective earnings outlooks reflecting early bullishness.


ROST posted sales up +14% on a -3% decline in inventories in Q1 resulting in an 8pt sequential improvement in the sales/inventory spread to +16%. Moreover, the increase in Q1 EPS outlook ($0.92-$0.93 vs. $0.89-$0.91E) suggests the company avoided gross margin contraction as was expected in what is the toughest margin compare of the year. Very positive.

TJX traffic continues to be a key driver of comp with stronger earnings suggesting similar margin implications as highlighted at ROST given TJX’s recent sales/inventory position as seen in the chart below. While TJX does not disclose where inventories at quarter end, we suspect this metric improved given stronger sales growth and ROST’s results. Improvement in the European business appears on track as well.

It’s worth noting that the comp spread between the off-price and total comps expanded for the fourth consecutive month (see chart below).


Mid-Tier Weakness: Mid-tier sales came in light with TGT, KSS, GPS, M, and BONT all missing comp expectations – SSI was the only one to come in ahead of expectations posting a less bad -1% decline vs. -4%E.


As noted, while this does not come as a surprise given the disjointed nature of the current department stores  environment, inventory positioning was critical in Q1 and will be again in Q2. GPS and KSS were good in this regard leading to GPS guiding EPS higher while enabling KSS to maintain expectations despite missing top-line expectations.


BONT sales were dismal coming in 2pts below expectations for the quarter reflecting a sequential deceleration in sales against substantially easier comparisons suggesting a turn in the business is still not likely near-term.


At GPS, with earnings higher on lighter sales, relative margin strength supports the prospect for $2+ in earnings this year that’s needed to drive the stock higher from current levels. More importantly, with inventories in check, earnings will
be less reliant on sales performance over the near-term.


High/Low-End Bifurcation: The High/Low comp spread expanded in April and Mar/Apr levels remained consistent with Feb +6pts wide.  JWN (+7.1% vs. +6.3%E) and Neimans +4.3% posted good numbers, while M (+1.2% vs. +2.0%E) and SKS (+2% vs. +5.6%E) came in light at the high-end, yet positive. On the low end, KSS (-3.5% vs. -1.2%E) and BONT (-5% vs. +0.3%E) missed handidly with SSI (-1% vs. -4.3%E) coming in less bad.


Inventories: GPS, TGT, and ROST were the retailers to callout favorable inventory positioning in April. Not surprisingly, two of the three increased guidance.


COST: Uncharacteristically missed expectations for the second consecutive month (+4% vs. +5.5%E). Gas had no impact on comps while Fx impacted total comps by -100bps. Categories performed equally well with all up +MSD with the exception of Majors down slightly due to weakness in electronics.


Outlook Updates:


ROST: ($0.92-$0.93 vs. $0.89-$0.91E)

TJX: (Q1: $0.54 vs. $0.51-$0.52E & FY: a penny higher on both ends of the range to $2.26-$2.36)

KSS: Maintaining $0.60 in EPS despite lighter sales

GPS: $0.44-$0.46 vs. $0.40E

LTD: $0.38-$0.40 vs. $0.35-$0.40 prior

HOTT: $0.07-$0.08 vs. $0.02-$0.05 prior; Q2 ($0.06)-($0.04) vs. ($0.03E)

ARO: $0.12-$0.13 vs. $0.08-$0.10 prior

AEO: Full-year $1.06-$1.12 vs. $1.08E


Retail: Watch Inventories. We Are. - mid tier off price SIGMA


Retail: Watch Inventories. We Are. - high low spread


Retail: Watch Inventories. We Are. - TGT monthly sales grid


Casey Flavin



Adidas (ADDYY): 1Q12 Report Card

Conclusion:  Grade = B+  Adidas’ +14% currency neutral global growth in Q1 as well as the company’s increase to both top and bottom line full year guidance continues to demonstrate strong global demand for innovative Athletic Footwear, Apparel & Accessories.  



What Drove the Beat?

Adidas’ Q1 outperformance came primarily through upside in top line expectations +17% driven by double digit growth across all business segments with North America & Asia the biggest contributors to the top line. Although Gross margins were down 70 bps in Q1, higher sourcing costs had a (-470bps) impact on the bottom line (directionally, like Nike) but was mostly offset by increased retail penetration & a more favorable product/regional sales mix. All in, Operating margins expanded +113bps as Adidas leveraged opex for the 5th consecutive quarter reaching a trailing 12 month ~8% margin relative to the “Route 2015” goal of 11%. The only real sore spot remains Reebok.



Deltas in Forward Looking Commentary?


Adidas gives no quarterly guidance. Here is a table given at the end of last fiscal year, as well as changes that it’s already made to the outlook.


Adidas (ADDYY): 1Q12 Report Card - ADI outlook



Highlights from the Call:



Revenues: +17% (+14% currency neutral)

5th consecutive quarter of double digit top line growth

  • Wholesale: +10% cc Driven by all regions except North America; Other Asia+29%, China +27%
  • Same Store Sales: +9% cc, North America +17%, Latin America +14%
  • Other: +32% cc



Geographic Callouts:


Greater China: +26% currency neutral

No Doubt Adidas is gaining share in the market

  • Disciplined business rebuild since 2009
  • Maintained sharp focus on distribution quality &  store optimization
  • Refined product offering, brand marketing & merchandising to cater to a more mature/sophisticated Chinese consumer
  • Feedback from partners indicate Adidas has the greatest momentum, traffic remains high


Western Europe: +7%

Continue to secure and build on strong market share gains

  • Focusing on consumer analytics and channel right product placement
  • Examples: UK & Poland +19% & 35% respectively (sporting events this summer)


North America:

Adidas: +10% currency neutral

  • Footwear market share now at DD, sales +22% in Q1

TaylorMade-Adidas golf: +33% currency neutral

Reebok (ex licenses/Toning): +5% currency neutral



Brand & Category Callouts:


Adidas: +16% currency neutral

8th consecutive quarter of DD top line growth with DD growth in all regions

  • Football: +23% in Q1
  • Current strength still ahead of Summer events
  • Running: +16%
    • Clima franchise up over 80%
  • Basketball: +23%


Reebok: -7% currency neutral

Excluding NHL sales shift to CCM, the end of NFL license and ex toning, sales +10% cc

  • Continue to see good progress in Western Europe despite economic uncertainty
  • North America +5% ex tonight and profitability improving due to better price mix/product offering
  • Starting to see traction with global classic sales +7% cc
  • India- no additional color, taking the opportunity to improve underperforming area of the business
  • Estimating 1 time charges from idea to be a maximum of 70mm euro


TaylorMade-Adidas Golf: Sales +DD in all product categories

  • Apparel: +28%
  • Footwear: +64%
  • EBIT Doubled
  • Expecting Adam's golf deal to cost 53mm euro and close later this year



Margin Improvements:


Gross Margins: -74bps

  • Higher sourcing costs ate 4.7 points of margins alone
  •  offset much of sourcing impact through retail penetration, favorable product/regional sales mix


EBIT Margins: +113bps

  • Leveraged operating expenses for the 5th consecutive quarter down -160bps as % of sales 
  • Retail OM +110bps (marketing 11.1% of sales and should be similar to 2011 levels for the full year at 12.7%)



Retail Footprint at Quarter End:

2422 stores, +21 stores or 1% vs. LY

  • Opened 110 new stores, closed 89, 30 remodels



+13% cc (17% in Euro Terms)- believe to be best positioned in the industry



Net Debt 640mm euro at Quarter end

  • Down 274mm or 30% YoY

Equity Ratio +2.9 points to 48.1%


Guidance Increased (See attached Table):


Sales Growth to approach 10% (vs prior MSD-HSD)

  • Increased expectations in wholesale and other business


Continue to expect OM to approach 8% with net income growing 12%-17%


EPS projected to be 3.58-3.75 euro vs original guidance of 3.52-3.68






Market Share:

  • North America still a lot of potential, concentrating on building the business on a sustainable product platform will pillars in basketball, football, running and training
  • Same plan for Europe, though there are some economic challenged but growth should continue with championships coming down the pike



  • Do not publish the size of the business but India is not within the 3 biggest countries in Asia
  • Believe in 3 months on second quarter call there will be more details on India



  • Very successful in driving the style business primarily through originals


Reebok GM:

  • Has been helped by the shift from Hockey into CCM
  • Retail segment carrying in higher margin



  • Market leader in Japan
  • Strong business will continue into the next quarter and full year


Input costs:

  • Believe the costs have peaked in Q1


Reebok Marketing plans:

  • Launched the sport of fitness campaign a few weeks ago
  • Marketing concepts seem to be working
  • Compares are difficult over easy tones last year but the business is growing
  • Expecting new merchandise in the Spring of 2013


Royalty Income Growth:

  • Largely due to increase in Adidas products



  • Grew considerably up 60%
  • Do not publish figures for the e-commerce business



  • +10% ex license changes & toning, only accounting for NHL/NFL shift, down 5%


China Performance:

  • Much more sustainable and healthy business model
  • New IT systems that allow for quick response time
  • Inventory is cleaner and can be monitored closer
  • Will continue to see strong growth moving forward in China



  • Getting more leverage from operating expenses which is expected to continue throughout the year



  • Want to be in a position to service the consumer fast while managing working capital
  • Quality is inventory should be as clean as possible
  • No 1 offs in 1Q contributing to inventory position improvement


Retail NEO

  • Opened 8-10 stores in Germany with 2 to follow in the coming weeks
  • Early indications are quite exciting


Reebok US:

  • Difficult comparisons from easy tone in the first 6 months but business is headed in the right direction



  • Improving but no additional color given on the call


Latin America joint venture:

  • Business grew in Q1, working closely with joint venture partner
  • Have seen some hurdles with terrorists and import duties


Marketing Spend:

  • Will remain around 13%
  • Will not necessarily cross the boundary in event years



  • Don’t see toning as completely over
  • Feel they can rebuild the business 


Adidas (ADDYY): 1Q12 Report Card - ADDDY SIGMA



Miss a little deeper than just low hold




  • January and February were very strong months in LV.  March was very challenging - poor table hold coupled with a tough convention calendar comp.
  • Growth in RevPAR will be at least in the mid-single digits for the rest of the year with potential upside from in the year for the year bookings
  • They find the opportunities in Toronto very exciting.  They are also highly focused on Western MA.  Also looking in S. Korea, Taiwan, among other markets
  • YoY volume improvement in national and international table game play. $25MM of incremental EBITDA would have been generated at their wholly owned resorts and their share of Aria's EBITDA would have been $7MM higher had they held at the mid-point of their expected hold range
  • Convention mix was down slightly YoY.  Luxury resorts were able to fill in demand with in house bookings.  While lower end results had a harder time in-filling that demand
  • CityCenter facility was undrawn at March 31
  • Looking at redoing their MGM China facility as plans for MGM Cotai solidifies
  • The MGM Grand room remodel program continues to progress nicely with roughly 2,300 rooms completed and that project is on budget and on time to be completed by September of this year

  • 2Q12 ghuidance:
    • Stock comp:  $9-10MM
    • D&A:  $230-235MM
    • Interest expense:  $275-285MM ($6MM for MGM Chian and $23MM of Amoritization cost
  • City Center:
    • March occupancy at Aria was 92%
    • Record occupancy expected in 2Q at Aria
    • Convention booking are Robust for 2013 at Aria
    • Welcoming Zharkana to Aria and think that it will help revenues
    • 86% of Crytstals space is under lease
  • MGM China:
    • Continued efforts to better yeild their floor has been bearing fruit
    • Customer acceptance of Supreme and Platinum areas drove increases in their slot volume
    • Just opened a butterfly exhibit 
    • 40 gaming tables are going to come online when the 2nd floor renovations are complte
    • Believe that they will get government approval for their land grant imminently
  • Fundamentals of the business are getting stronger and that's good new for LV and MGM
  • Golden week in Macau is off to a great start
  • Opened their first hotel in China.  Expect their hospitality to grow
  • Seeing tangible benefits of capturing increased customers spend from M Life.  Very actively marketing in their regional properties to drive business to LV and their partnership with ASCA is helping
  • They are launching a social gaming site which will exclusively use MGM brands and will aim to recreate the Strip experience



  • Think's that Wynn's announcement bodes well for them.  They are confident that they have the product that the government wants built in Cotai
  • Las Vegas: the absence of ConExpo had a big impact on their numbers for one week in Macau, especially on their lower end properties. Think that RevPAR would have been 3% higher in the quarter if not from the difficult comp of that one week. 
  • The imminent release that they are looking for from the Macau gov't is the draft release of the gazette concession. Then they want to parallel getting all the necessary permits to start construction
  • Seeing big strength in tech, HC, and automotive segments. Expect convention mix to be similar YoY
  • At CC they are have a 70k increase in convention nights on the books YoY
  • First 2 months of the year, when mix was good, flow through was over 50%.  March impact was mainly the shift of Conexpo leaving. Think that the week's comp was an anomoly
  • Will look to do a $2-2.5BN financing package at MGM China to help finance MGM Cotai. Hope to get that financing done by YE
  • Convention calendar for the rest of the year looks solid - there are no more abberations. In 2Q the convention mix will be 1% better. Their 4Q calendar is the strongest
  • More occupancy and improved mix and pricing are driving some of the cost increases. They were up 0.4% on FTE's even though they had 66,000 more room nights YoY in the Q. 
  • Bellagio, Mirage and Mandalay - had the negative hold impact. Margins would have been up 40-50bps if hold was better. - What they didn't say was that increase is based off of an even worse hold comparison.
  • Tax benefit was $4MM (at City Center?) 
  • Margins should be about 25% at Aria going forward.  Last year they had their big CNY party at Aria and this year it was at Bellagio. Hold was primarily due to bacarrat
  • 7% increase in table game drop and a [3%] increase in baraccat at their wholly owned Strip properties
  • In Macau they are seeing the hold % move up to 3%
    • Of course they want you to use 3% to adjust downward. The properties average hold rate has been 2.91% since opening
  • Think that they can accomodate 1 or 2 more junket operators at MGM China
  • 1.8MM convention room nights 2007 (ex Treasure Island) and had 1.6MM (ex Aria) convention room nights in 2011. There is a lot more room inventory on the Strip since 2008 - especially on the high end, so its harder to just raise rates
  • 2012 forecast including Aria they expect to exceed 2007 convention room nights. Excluding Aria they would be about flat to 2011. However, they have some rooms out of service for renovations so the mix is up
  • When you look at the first quarter - the high end hotels have an easier time backfilling citywide events that were missing. Their "value" properties had a harder time. 
  • At Aria they had the same length of play as they had last year. Even their craps hold was poor - not just bacarrat
  • The Penninsula still generated 60% of teh GGR for Macau



  • "The positive trends we experienced throughout 2011 continued into the first quarter. However, our financial results were negatively impacted by our table games hold percentage.  Had we held at the midpoint of our normal range at our wholly owned resorts and at Aria our total Adjusted Property EBITDA would have increased by approximately $32 million"
    • We would point out that hold was actually 1% better than 1Q11 across their consolidated portfolio and really only 30bps below the low end of their "normal" range
    • Of course MGM makes no mention that MGM' China's higher than historical hold helped EBITDA by roughly $25-27MM.  MGM China's historical hold rate since opening has been 2.91% 
    • Consolidated Adj Property EBITDA of $321MM missed expectations, largely due to a miss at MGM's Strip 
      • "Total table games volume increased 5% compared to the prior year period."
        • "The overall table games hold percentage in the first quarter of 2012 was 18.7% compared to 17.7% for the first quarter of 2011, in each case below the low end of the Company's normal range of 19% to 23%."
      • "Slots revenue increased 7% compared to the prior year quarter."
    • Consolidated Las Vegas:
      • RevPAR: +4% and room revenues were up 3%
      • Adj Property EBITDA of $251MM missed our estimate and the Street's by 3% and 7%, respectively
      • Net revenues were in line with our numbers, but operating expenses were higher
    • MGM China reported net revenue of $702MM and  Adjusted EBITDA of $165MM which included $12MM of branding fees
      • "The increase was driven by year-over-year increases in volume measures for VIP table games, main floor table games, and slots of 6%, 13% and 27%, respectively. VIP table games hold percentage was 3.2% in the current year quarter and 2.9% in the prior year quarter"
    • CityCenter Adjusted Property EBITDA of "$32 million and was negatively affected by a significantly lower than normal current quarter table games hold percentage."
      • Net revenues declined to $234MM from $263MM in the prior year Q
      • "Table games hold percentage for the first quarter of 2012 was 16.0% compared to 27.4% for the prior year quarter.  The effect of the change in hold percentage compared to the prior year quarter to net revenue and Adjusted Property EBITDA was approximately $33 million and $26 million, respectively"
    • Financial Position notes:
      • Cash: $1.6BN (including $575MM at MGM China)
      • Debt: $13.4BN (including $552MM at MGM China)
        • $1.3BN under Sr Credit Facility (approx $360MM of which was not extended and matures 2/2014)
        • $820MM of T/L
      • In Feb MGM amended and extended $1.8BN of its Sr. Credit facility to Feb 2015.  The interest on the extended piece had a LIBOR floor of 1% and carried total interest of 6% at March 31rst which has subsequently dropped to 5%.  The non-extended piece of the R/C carries an interest rate of 7%
      • MGM China paid a $400MM dividend in March 2012, of which $204MM remained at MGM and $196MM was distributed to non-controlling interests
  • "The Company recognized a loss on retirement of debt of $59 million in the current year first quarter related to the amendment and restatement of the Company's senior credit facility and the repayment of non-extending term loans" 

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As the dollar strengthened last week, most of the commodity prices relevant to the restaurant space declined.  Continuing our callout from last week, beef prices are coming down meaningfully and yesterday’s headline on the USDA quarantining two farms over last month’s discovery of mad cow disease at a California dairy farm.  The publicity around Lean Fine-Textured Beef and BSE is not bullish for demand but, from what we have heard from companies, steak is still holding strong appeal for consumers.  Chili’s has been reaping strong rewards from its steak promotion.  As we wrote this morning in an email to clients and in our CASUAL DINING CAUTION note ahead of earnings season, we think the outperformance of casual dining versus the market is slowing and may even reverse if the employment outlook continues to deteriorate.  Tomorrow’s employment data for April will be important for our thesis.





Dairy costs continue to drop which is positive for CAKE, TXRH, DPZ, and PZZA. 


Domino’s called out diesel prices as being the most important factor for its commodity basket, not from a store level perspective, but in terms of the impact on its supply chain business:


“The biggest potential impact from gas prices is the effect it can have longer term on commodity prices. At the store level, franchisees may have to pay delivery drivers an increase in mileage reimbursement, but it's usually not a big impact in overall store costs. In our supply chain, we experienced the impact of diesel prices, but we also have fuel surcharges that help offset some of those costs. So while we do care about higher fuel costs, the direct impact to us and our system is smaller than many people assume.”

Wing prices were down -1.4% week-over-week but yesterday’s USDA Broiler Hatchery data did not tell us that the supply contraction is coming to an end today or tomorrow.  Although prices will peak later this quarter, it is important to realize that the year-over-year impact of wing prices is what matters for BWLD’s EPS.  We think the Street is underestimating this impact and overstating FY12 EPS growth by 6-8%.  Egg sets for the week ended 4/28 came in at 197k, which implied a slight sequential tick-down in the moving six-week average to ~198k and down 5% versus last year.  Egg sets are a leading indicator of supply.  Once the upswing comes, it likely will be another two months before supply and price are meaningfully impacted.  The chart below illustrates that over the last five years.







Gas prices declined -4.1% and we would call out (from our correlation table, below) that the 30-day correlation between gas prices and the USD is 0.9.  That correlation tends to fluctuate over time.






















WEEKLY COMMODITY CHARTBOOK - chicken whole breast









Howard Penney

Managing Director


Rory Green


URBN: Buying

Keith once again added URBN, one of our top TREND and TAIL long ideas, to the portfolio this morning as it fit his quantitative TRADE framework.


URBN: Buying - URBN levels

May ECB Presser YouTubed

Hedgeye Comments:

Draghi was once again tight-lipped on the progress of individual countries, stressing a balance between fiscal consolidation and growth policy as a way forward. Yet when faced with such questions as extremely high unemployment rates across states, especially among the youth, Draghi’s only response is there’s the need to rebalance a distorted labor market. Well how is that going to change over the longer term, or even improve over the intermediate term given the existing structure of the Eurozone?   Draghi is quick to point to states giving up their fiscal sovereignty to Brussels, yet this is easier said than done. We see foot power (strikes and riots) and the job security of Eurocrats prevailing at the country level. Finally, again there is at best hope the LTROs will be a successful program, yet no evidence that loans are hitting the real economy.


We expect broader European data to turn further lower, which may put more pressure on the ECB to act on some of its non-standard measures next month. Remember, the SMP has been on hold for the last seven weeks.



Prepared Remarks:


At the Governing Council of the ECB meeting today, held in Barcelona, the ECB kept the interest rate on the main refinancing operations, and the interest rates on the marginal lending facility and the deposit facility unchanged at 1.00%, 1.75%, and 0.25%, respectively, which is in-line with consensus expectations.


Draghi did not drift far from last month’s statement. On the growth outlook he added that the “latest signals from euro area survey data highlight prevailing uncertainty.” And followed with “at the same time, there are indications that the global recovery is proceeding”.  The ECB’s inflation forecast was in-line, namely that it would stay above 2% in 2012 and should fall below 2% in early 2013. Draghi was quick to cover both ends, saying “risks to the outlook for HICP inflation rates in the coming years are still seen to be broadly balanced. Upside risks pertain to higher than expected commodity prices and indirect tax increases, while downside risks relate to weaker than expected developments in economic activity.”


On the money supply he reiterated that the underlying pace is subdued, with the M3 annual growth rate at 3.2% in March vs 2.8% in February. Draghi noted the annual growth rate of loans to non-financial corporations stood at 0.5% in March while 1.7% to households, both slightly lower than in February.


You can find Mario Draghi’s Introductory Statement to the press conference here:



Highlights from the Q&A:


-Was there any discussion to cut interest rates?   MD: No, found accommodative, despite uncertain background.


-Unemployment is high, austerity is not working. There has been a shift towards a growth strategy. Is this camp right?   MD: I have no comment on specific statements. There is a need for a growth compact. There is no contraction between having both a fiscal compact and growth compact. We need to see fiscal stability. We have to have a fiscal union. We have to accept the transfer of national sovereignty to a central union, a transfer union.

-Is there another LTRO in the works?   MD: No comment, we never pre-commit. With regard to the effects of LTRO, it’s too early to say they are vanishing. What we are really seeing is five things. 1.) We avoided a credit crunch, or one bigger than we see today. 2.) The supply of credit is much less tight than before the LTROs. 3.) A strengthening of the deposit base in several banks across countries, especially those experiencing most difficulty, which is also positive. 4.) The M3 growth pace has recovered from year-end. 5.)  A significant drop in key indicators of financial markets: including a drop in volatility and repo rates.


-How do we weigh fiscal consolidation versus a growth strategy?  MD: The 1970s were years of high deficits, high inflation, and recession, or stagflation. To get out of that, we learned you need to have structural reforms.


-With elections in France, Greece, and Germany this weekend, are you concerned on the rise of parties that are euro-critical?  If Hollande wins, will fiscal compact be put into question?   MD: No comment on any of this.


-There are calls for the ESM to directly support Spanish banks? What are your thoughts?   MD: Such mechanisms like the ESM are useful but cannot replace fiscal consolidation or reforms. We didn’t have a successful experience with the EFSF; it fell short on expectations and needs, because it was created in a way that can hardly work. We think ESM can work better, but we want to make sure the ESM can be used if need be.


-What do you say to the Spanish who say they see no reward after all this austerity?   MD: The government of Spain has made significant efforts in policy reform, all taken in a very short time. We view that that measures taken, namely the LTROs, have been successful in avoiding a major credit crunch. We need time to see this money proliferate to the real economy; we can already see we avoided a much larger credit crunch.  There has been much progress on fiscal front, and this is true for a variety of countries; now, perseverance is very important to reap gains.



Matthew Hedrick

Senior Analyst