JPM Tries To Explain Why The Bailout Train In Spain Will Lead To Much More Pain
Reports citing European sources state that Eurozone finance ministry officials, followed by finance ministers themselves, will hold conference calls on Saturday. A formal request for Spanish EFSF/ESM/IMF support, solely for the purposes of bank recapitalization, could be announced after these calls, and appears to be the motivation for them. As JPMorgan notes, while the timing of such a request would come as something of a surprise, the substance does not.
JPMorgan goes on to note that:
Yesterday, Spanish PM Rajoy said that the authorities were awaiting reports from independent audits of the banks before assessing the overall recapitalization need, and then deciding how to proceed. One obvious possibility is that the region will agree to a Spanish request in principle, leaving the exact amount to be specified at a later date. To provide some guide posts, our banking analysts have suggested recapitalization needs may ultimately run to €150bn if Irish experience is a template for the losses that may ultimately accrue on the mortgage book. However, reports suggest that the IMF's assessment of recap needs is much lower at near €40bn.
Given that there have been no reports of Germany dropping its resistance to the EFSF/ESM investing directly in the banks, it appears very likely that support will be channelled through the sovereign. The conditionality alongside that support looks set to be relatively light – focused on the banks themselves, rather than requiring more monitoring of broader aspects of policy. But given that the Rajoy administration has already internalised objectives of fiscal consolidation and structural reform - and is seeking to bring its deficit to GDP ratio down by nearly 6 percentage points over two years - this sort of package should not come as a surprise.
A key question is whether this request for external support will serve to improve conditions in the Spanish bond market and raise Spain's chances of avoiding a broader support package. Our best guess is that it will not.
The request for support has at least three negative consequences:
- It implies some degree of subordination of other holders of Spanish sovereign debt.
- It provides a clear demonstration of the limits of the ability of the sovereign to raise funds on its behalf.
- And it crystallizes banking losses accruing to the State which it had hoped to avoid.
We suggest that a banking support package would be likely to turn out to be a stepping stone to a broader package of support for Spain, with that likely to be in place by the end of August. That remains our central view.