So far we have yet to read even one analyst commentary on the Spanish bailout that sees it as favorable on the margin. The following note from SocGen's Ciaran O'Hagan is no exception: "Will this be good enough to immunise Spain over the Greek elections and fend off more rating downgrades, on the back of greater subordination and moral hazard? Probably not."
Are the EU loans for Spanish banks sufficient to guaranty market access for SPGB funding at attractive levels? We don’t think so. The initial reaction today will be one of relief. However like with previous EU loans programmes, we doubt that relief will last.
That said, the weekend decisions will be seen as bearish Bunds and OATs, in asw, as Aaa credits become ever more exposed to peripheral troubles. All the more so as the weekend press in Germany is saying that the euro high level working group is advancing on plans for euro area collective debt issuance (even if would only apply to new borrowing)
For SPGBs, on the plus side, we see some willingness on behalf of the Spanish authorities to protect Spain before the Greek elections; there is also no issuance pressure coming from bank recapitalisation. .
On the negative side, there is zero conditionality for now (vague talk of some to come for banks, with a Memorandum of Understanding). The loans for Spanish banks raises the sovereign debt/GDP by up to €100bn (if and when the loans are paid to FROB). It is not clear yet who the creditors will be and whether there will be any bond issuance.
- If it is EFSF, we can look forward to national approbation in EA parliaments. Given that the loans are paid to FROB, we expect that Spain’s obligation to the EFSF will continue (almost €95bn), but that is the kind of irksome detail that needs to be ironed out.
- If the loans are paid by the ESM, the loans given to FROB will be more clearly senior to SPGBs, though we expect de facto seniority in any case.
The IMF’s role for now is purely advisory; it will not provide cash (a small plus on seniority worries).
Spain has now set out a 'Roadmap' for the evaluation of its key banks, and hired four accounting firms for a second round of bank audits. The IMF audit just out, the 21 June stress tests will also be scenario-based. Given the long time-line still (out to 31 July for the second audit).
Will this be good enough to immunise Spain over the Greek elections and fend off more rating downgrades, on the back of greater subordination and moral hazard? Probably not.
Oh well, it was worth a try.