Spain’s Temporary Calm

As discussed in the June outlook, an announcement about a Spanish bailout came during the month. It was later followed by an official request from the euro-zone’s fourth largest country. More details are expected in the Eurogroup meeting on July 9^th, but this will definitely not be the end of the story.

The bailout currently focuses on the troubled banking sector. However, Spanish yields show that not only the banks are in trouble. Also the sovereign is paying ever rising prices for recycling its debt. This was seen in long term auctions as well as short term ones.

According to the fresh decisions in the EU Summit, the European bailout mechanisms will be able to directly buy bonds and recapitalize banks. Similar to a potential bailout of Italy, there are quite a few issues that may complicate the situation, even though Spain tried to provide some clarifications to the initial bailout announcement that was full of holes.

With Italy in bigger trouble and after Spain already “secured” a bailout, the focus could drift away from the country during the month. During this summer month, Spain enjoys a better economic environment thanks to tourism. This is seasonal, but has a greater impact since the Arab Spring began – more tourists flock into Spain and avoid visiting North Africa.

Also he political change in France changed is in Spain’s favor, as the atmosphere in Europe, and this certainly helps France’s southern neighbor.

However, problems remain on the table.

1. Sum still not clarified: An initial assessment discussed a maximum sum of 61 billion euros for the banks in the most adverse scenario. However, this assessment falls short in the eyes of many experts that see at least 150 billion euros needed by Spanish banks. Another assessment of Spain’s needs is scheduled for July 31^st, and this will probably be higher.
2. Backlash against bank recapitalization: With the banks being in the center, the option to fund them directly is very appealing to the markets. However, it is not appealing to the public. In Spain, the public recently received an announcement about more austerity steps by the government. In Germany, the idea of funding foreign banks from taxpayers’ money will not go down very well.
3. ESM Ratification: As with the potential Italian bailout, the deployment of this mechanism requires a ratification in all euro-zone countries, and the process is slow.
4. Spain will not contribute to itself: Like with Italy, the shift of Spain from the contributor side of the bailouts to the receiving side weighs on other countries.

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As discussed in the June outlook, an announcement about a Spanish bailout came during the month. It was later followed by an official request from the euro-zone's fourth largest country. More details are expected in the Eurogroup meeting on July 9th, but this will definitely not be the end of the story. The bailout currently focuses on the troubled banking sector. However, Spanish yields show that not only the banks are in trouble. Also the sovereign is paying ever rising prices for recycling its debt. This was seen in long term auctions as well as short term ones. According to…