With the front-end of the Spanish (and Italian) credit spread curves having compressed to what Goldman believes is 'fair-value' given rates and current fundamentals, it seems the consensus expectation ahead of tomorrow's ECB call is that Draghi will promise, deliver, and implement instantaneously. In a recent client survey a stunning 88% of investors expect Spain to officially request activation of EFSF/ESM support - subject to an MoU - by the end of the year (with 70% expecting it by the end of October - the heavy redemption month). A full 50% expect the Italians to follow suit by the end of Q1 2013. The paradox of course is that with the spread cost of funding so 'low', Spain has no need to ask for the help that is implicitly priced into the low yields - and with that huge maturity looming, it seems they have two options: 1) pre-empt the redemption by issuing short-dated debt now to fund it (piggy-backing on the ECB's confidence inspiration) but of course this will signal no need for a short-term MoU and therefore no ECB support and therefore bonds will sell-off; or 2) admit defeat, beg for help, lose face and get the bailout... (as we await tomorrow's 'details' on the seniority issue). The promise (or threat) of support implies it has to get worse before it can get better.
Goldman Sachs: Italy/Spain fair-value spread curves...
Front-end is now back to 'fair'...
[5]
When do you expect Spain to formally ask for the activation of EFSF/ESM support, subject to a Memorandum of Understanding?
[6]
When do you expect Italy to formally ask for the activation of EFSF/ESM support, subject to a Memorandum of Understanding?
[7]
Source: Goldman Sachs