Next Steps For Spain

Spanish Budget Announcement Crib Sheet – How/what/when/why?

With the ESM passing through the German high court, and the ECB formally announcing their OMT bond-buying programme, the next headache for European asset classes to digest comes from the will-they-won’t-they speculation regarding a Spanish sovereign bailout. With Spain’s withering finances, elevated borrowing costs and rapidly shrinking tax revenues, the need for governmental assistance is known by all. As such, this report has been compiled to run through each possible bailout scenario and the possible impact across the asset classes.

Timeline:

Thursday 27th September

Spain are expected to release their economic reforms as speculated over the past week. The release could pave the way for a Spanish bailout request.

Friday 28th September

Spanish banking audit results. Expectations currently stand for Spanish banks to require EUR 60bln, with a majority going to towards the recapitalization of Bankia.

End-September

Moody’s review on Spain’s Baa3 credit rating is due.

Sunday 21st October

Galicia regional elections, PM Rajoy’s region. Reports have suggested that Spain could hold on until after these regional elections before requesting sovereign aid.

Monday 12th November

Eurogroup meeting. Other analysts have suggested that PM Rajoy could delay a formal request until after this meeting.

Late November/Early December

Catalonia could bring forward their regional elections, according to the Catalan leader. Catalonia is one of the wealthier regions and is the largest contributor to Spanish GDP. One topic of discussion for these regional elections will likely be the increasingly popular notion of tax autonomy for the region, as civilians believe Catalonia suffers a net loss from the central government’s regional funding strategies.

Scenarios:

1. Spain makes a formal request for aid this week from the Eurozone bailout mechanisms and conditions attached to the aid are not too harsh.

This would be the most risk-on possibility as Spain will be going a long way to receiving the cash it needs, however, it must be noted that this is likely to be the scenario that is already been priced into the global markets and as such, any upside move in the EUR or stocks may in fact be short lived. The Spanish IBEX is currently trading firmly above the 8,000 point mark, even though it is down 5% year-to-date, despite rallying by nearly 40% from it’s lows in July. Any relief rally will be beneficial to the Spanish banking sector and Spanish 10y yields could head towards the 5.5% mark to the downside, last seen in early April.

2. Spain makes a formal request for aid this week but the conditions attached are deemed very strict and possibly unattainable.

Anything other than scenario 1 is likely to be taken negatively by the markets with Spanish bonds in particular bearing the brunt and the 200DMA for the 10y yield could come into play at 5.931% and the 6% mark above. The EUR will also come under pressure but not perhaps as violently as some would expect given that the funds will still be available to Spain and agreements can always be changed as seen by the Spanish deficit target for 2012 which had already been revised higher twice this year.

3. Spain says the bailout request is delayed until after the regional elections or even further.

Similar to scenario 2 but any sell-off will be rather more aggressive in nature as this will be seen as Spain just kicking the can down the road. Again the Spanish bonds and EUR will be assets to watch with Bunds also seeing safe-haven flows. There are likely to be spill-over effects into other asset classes with oil markets moving lower in-line with other riskier asset classes. Spot Gold could be supported as it remains one the few safe places to park cash.

List of Spanish Banks to watch:

BBVA (BBVA SM)
Banco Santander (SAN SM)
Bankia (BKIA SM)
Caixabank (CABK SM)
Banco Sabadell (SAB SM)
Bankinter (BKT SM)
Banco Popolar (POP SM)

Lenders with high exposure to Spain:

German lenders have a particularly large exposure to Spain at USD 139.9bln, of which USD 45.9bln is banking exposure. Specifically, Deutsche Bank (DBK GY) and Commerzbank (CBK GY), who have EUR 29.7bln and EUR 13.5bln in exposure respectively.