Political risk has been on the rise again in Spain and Italy lately, serving as the latest reminder that the risks inherent in these countries have by no means gone away. As the Spanish corruption scandal is far from resolved, while Italy is headed for uncertain parliamentary elections, market tremors will likely continue in the near future.
Spain sold a total of EUR 5.8bn of bonds today, which was more than the indicated EUR 4 to 5bn target range for the auctions. This represents just shy of 5% of the estimated total long-term borrowing requirement for the year. Today’s news was certainly positive for Spain, but one should not get too carried away. Spanish issuance needs going forward are daunting.
Today I talked to to Maryam Nemazee on Bloomberg Television's "The Pulse" about the corporate bond situation in Spain, Italy and France.
The short-term funding outlook for Spain remains favourable, but big challenges are still ahead. Spain runs the widest primary deficit in the Euro zone, meaning the country needs to attract plenty of new money to fund the government. The market pressure for a bailout remains very limited – for now.
With GDP numbers showing contraction in Q3 the Euro area is in technical recession. The Q3 GDP numbers did surprise slightly on the upside posting a 0.1% drop during the quarter. we are comfortable with our current forecasts after today’s data, although risks are that the recovery will be slightly delayed.
The final Euro-area PMI numbers were revised slightly up to 45.4 from 45.3 in the flash reading and still significantly lower than the 46.1 in September.
Spanish bank deposits rose for the first time in six months in September, while foreign investors have reportedly been more active in Spanish bond auctions lately. Overall then, market pressure is not a particularly strong argument calling for a quick aid request by the Spanish government – political considerations currently play a bigger role.
Not too long ago, I had high expectations for this week’s EU Summit
Pressure on Spain is mounting again, with S&P downgrading the country to the lowest investment grade rating, Moody’s likely to go a step further soon, while calls for independence in Catalonia are not exactly calming. Higher yields will likely be needed to persuade Spain to make an official aid request.
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UPDATED: Spanish banks need EUR 59.3bn. Less than expected but markets have been disappointed before. We believe this is a step in the right direction.
Spain made important steps in presenting its 2013 budget yesterday, but a lot of work remains. More structural reforms need to be detailed, while the Spanish rating could be cut to junk by Moody’s as early as today. It still seems higher bond yields will be required to convince Spain to ask for more help.
Spain received a batch of bad news yesterday, which only underlines that the country still has a lot to do to bring confidence back for good. In light of yesterday’s news flow, it is certainly not hard to picture Spanish yields jumping again.
During the coming week's there are a number of major event risks on the Euro-area calendar. Here is a short presentation with my take on what to expect
Here is a presentation containing charts and comments supporting our general view on Spain
Spain received some good news today, as it was able to sell 3-month T-bills at a yield of less than 1%. Still, plenty of challenges remain, as illustrated by the continued outflow of Spanish bank deposits in July. Confidence towards Spain has not returned, and regaining it will take time.
As the holiday season sets into full swing, European leaders have their work cut out for them. And there are no easy solutions. Question is, can they stay the course? I fear they might not be able to.
An agreement has been reached on the collateral Finland was demanding as a prerequisite for participating in the aid package for Spanish banks. It is all but certain that the Finnish parliament will approve its participation in the aid package, which would enable agreement on the first EUR 30bn to be provided.
The Eurogroup made only small progress detailing decisions from the June summit. Spain will have more time to reach its deficit targets and recapitalisation plans are taking shape. But a lack of detail and differing interpretations will cause uncertainty.
Today’s Spanish auctions did not do much to change the overall picture. It was of course positive that the country sold the maximum amount intended, EUR 3bn, while the bid-to-cover ratios were healthy, but this was largely in line with what we have seen lately anyway.
The Euro area is moving ahead with the common banking supervisor, direct lending to banks and supportive buying in the markets. Positive but not a game changer.
I 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 am surprised that the people I met were not more negative.
According to a senior Euro-zone official via Reuters, the Spanish banks could be recapitalized using EFSF bonds to avoid the problem of the preferred creditor status of the ESM. The bailout could later be shifted to ESM, but the extended loans would not become senior to other debt.
The Spanish bailout will probably give some relief to the markets in the near term, but it is likely to be limited because it will not end the debt crisis, the Greek elections are still looming, and Spain may need more help eventually and risks downgrades following the bailout.
Apart from the continued talks around when Spain will make the official request for aid to its banks, the Greek elections are definitely the main thing to follow.
According to Reuters, citing EU and German sources, Spain would request an aid package for recapitalizing its banks as early as tomorrow. Still, ahead of the Greek elections, the materialization of the aid package would likely lead to only another short-lived rally in risk assets.
Spanish bonds were definitely helped by today’s positive auction results. However, this does not illustrate increasing confidence that Spain would be able to tackle its problems on its own, but increasing hopes that Spanish banks will be recapitalized with the help of the European rescue funds.
Can the Euro area survive a Greek exit? Will Spain ask for an EU/IMF bailout? What actions will be taken at the 28-29 June EU summit and will it be enough to secure the survival of the common currency in the longer term?
The fate of the Spanish banking sector is one of the major risks facing the Euro zone at the moment. Spanish banks will likely need much more state help than Bankia alone requires, and this will be too much for the Spanish government to stomach.
April data from the ECB revealed that Spanish banks actually decreased their government bond holdings by some EUR 3bn vs. average net purchases of some EUR 20bn in the prior three months. With a dark cloud hanging over the Euro zone at the moment, yields may need to rise notably to attract new investors to the markets.
Many have missed the upward move in short Spanish and Italian short yields lately. The rise in short rates is worrying both because it means that the country in question is facing high funding costs throughout the curve and since it signals increased shorter-term worries.
The cost for the Spanish government to aid its banking sector is mounting, while the weekend’s news of state aid to the troubled Bankia is unlikely to be the last piece of such news. In light of the development in many other countries, Spanish house prices still have a long way to fall, keeping the outlook for Spanish banks uncertain.
Fresh data showed Spanish house prices falling by 2.9% q/q in the first quarter of the year. Until the housing market stabilizes, uncertainty is likely to prevail.