Impressions from Madrid

Anders SvendsenI have been in Madrid looking for the other side of the story on Spain. Is the situation really as bad as we and the markets think and if not, why? I met three large banks, a rating agency, a journalist and a housing market specialist.


I will do a more thorough update on the situation early next week, but here are the immediate impressions:

  • I am surprised that the people I met were not more negative. There was a clear sense that if bond yields continued to increase then the politicians would have to step up to their responsibility and come up with a solution. Not that anyone sounded very optimistic regarding Spanish or European politicians, but more like Spain is too big to fail and hence someone will do something right eventually.


  • The Spanish problems are a combination of lack of growth, recapitalisation needs in the banking sector and a large fiscal deficit. These problems are linked and exacerbate each other. Spain has done a lot of reforms on all areas, BUT this is not recognised abroad and by the markets due to lack of credibility of the political leadership! The general impression is that the Prime Minister has made a number of unfortunate remarks and has lost a lot of credibility both abroad and with the people. The unresolved situation around Bankia and the lack of details on the 100bn bailout underscores this credibility issue. Rajoy needs to step up to the job and show that he has a plan and knows what he is doing.


  • Banks have been forced to provision massively on real estate loans. This was proven by yesterday’s reports by external consultants Berger and Wyman which concluded that in a baseline scenario the recapitalisation needs will be EUR 16-21bn. In a stressed scenario 52-62bn additional capital may be needed, but the three biggest banks will not need more capital. Thus, the 100bn rescue from the Eurosystem should be enough even in the case of more stress than what is already the case. The concern in the markets is that other loan portfolios (mortgages in particular) will turn worse as well. That is not at all a concern in Madrid. The banks said that only mortgages taken in 2007 and 2008 are in the danger zone and that the high share of unemployment is related mostly to young people and to construction workers with temporary contracts – two groups that do not have a lot of mortgages. The main concern in Madrid is that part of loans to small and medium sized enterprises are actually real-estate related, which means that the banks will have to increase provisions. Berger and Wyman have not looked at specific loans, but “only” stressed the portfolios with different scenarios. Four external auditors have until 31 July, or maybe to September, to go through a large share of the specific loans in all banks and see if they are classified correctly. This exercise could easily lead to more real estate-related loans and hence larger capital needs, according to the people I met.


As I said, I will dig into the details and come up with more next week.

Have a nice weekend when the time comes!
Anders Svendsen

Latest research

FI Eye-Opener: Some easing in Euro-zone deflation threat

German yields rebound – US Treasuries end with a small rally. Core bond to remain supported today. Equities with clear gains. EU continues to advance with small steps with Russian sanctions. US inflation pressures remain limited for now. At least some easing in the Euro-zone deflation threat. New 30-year benchmark from the EFSF. BoE minutes and French business confidence ahead.

US: Core consumer prices rise less than expected

The overall trend of inflation remained subdued in June

Euro Rates Update

The latest Euro Rates Update is now available

Morning Briefing - Tuesday July 22

Japanese government cuts GDP forecast Pro-Russian separatists hand over black boxes to Malaysia

FI Eye-Opener: Searching for inflation

Core bond yields edge further down – geopolitical tensions continue to support bonds. Equity markets feeling pressure. More sanctions on Russia in the pipeline. US inflation pressures finally picking up? Belgium to sell longer bonds.

Morning Briefing - Monday July 21

Growing pressure for further sanctions against Russia Israel steps up ground offensive in Gaza

While you were busy...

If you are just back from holiday, here are a few bullets on what happened while you were busy…

Euro Rates Update

The latest Euro Rates Update is now available

FI Eye-Opener: Markets too upbeat on Europe?

Bond yields end a bit higher, but near-term upside still limited. US equities with a clear rebound – resistance in sight. Money market rates rise on higher LTRO repayments. More warnings on markets being too optimistic. US inflation numbers and Euro-zone PMIs ahead. Supply action easing – more coupon and redemption payments ahead.

FX: the EUR trap

Is Europe next Japan? Hopefully not. ECB and releveraging implications for EUR.

Week Ahead: 19 - 25 July 2014

US CPI inflation will be out on Tuesday . China and the Euro-zone will present PMI figures. On Friday the German Ifo indexes is released. The BoE will deliver minutes from the July meeting and UK GDP figures will be out on Friday

Swedish Morning Briefing - Friday 18 July

Passenger plane downed over eastern Ukraine Israel launches ground offensive in Gaza

FI Eye-Opener: Increasing tensions to push German yields to new lows

Bonds continue to rally – yields in several semi-core countries hit record lows. Equities suffer a beating. Chinese home prices continue to fall. Geopolitical concerns take centre stage ahead of the weekend. German 10-year yield about to fall to new lows. Mixed US data – Bullard sees early rate hikes. No ABS purchases from the ECB for a long while. US consumer confidence and euro debate ahead.

Bulgaria: Two bank runs and a bankruptcy

Bulgaria experienced a run on two of its biggest banks in late June, leading the central bank to close the fourth-largest bank in early July and start criminal investigations against several people. Moreover, the bank runs may have been the final push for the government to call early elections and have pushed the country into talks with the ECB to take over supervision of its banks and with the EBA to review the central bank’s banking supervision. Banking sector risks are obviously elevated!

Bonds: This bubble will keep growing

It seems everywhere you look nowadays, you see a bubble. That is not true of course, but based on many headlines, you could be fooled. The bond market is no exception, and it has received its fair share of bubble talk. If it is a bubble, it will keep growing in the near future.

Turkey: 50 bp cut this time

A 50 bp rate cut this time. More could come if risk sentiment remains decent and the TRY does not weaken further.

RUB: again under pressure after US and EU sanctions

RUB is again under pressure after US imposed sanctions on Russian companies.

Swedish Morning Briefing - Thursday 17 July

No new foreign policy chief after EU summit US and EU boost sanctions against Russia

FI Eye-Opener: Another round of sanctions

Bonds continue to see strong demand. Portuguese bonds rally hard. Core bonds to continue to perform today. European equities with considerable gains yesterday. Fresh sanctions on Russia taking a toll on already weak economies. EU leaders fail to agree on top posts. Final Euro-zone inflation and US construction data ahead. Spanish and French supply.

Sweden: Riksbank’s minutes soft as expected

Today’s minutes did not add much new information regarding the reasons for the rate decision. As indicated by the rate path, the discussion confirmed that 0.25 is not a floor for the repo rate.