Eurozone survival to be fought in Madrid, not in Athens, HSBC says

The Greek election has left more questions than answers to the debt crisis and the “battle for the survival of the eurozone” is more likely to be fought in Madrid than in Athens, according to Willem Sels, UK head of investment strategy at HSBC private bank.

Two days after the June election in Greece, the winning New Democracy party led by Antonis Samaris is likely to form a coalition government with the Pasok party in order to secure a majority in the Greek parliament.

But, according to Sels, the Greek election has not provided the clarity to the markets that some had hoped for in particular because factors outside of Greece are increasingly likely to determine whether or not the single currency survives.

“Rise in borrowing costs for Spain, the continent’s fourth largest economy, are not something that should be taken lightly. The reaction to the Spanish banking bailout plan, which saw yields on its sovereign debt move to new euro-area highs, illustrates the markets’ increasing weariness for short-term fixes to the Eurozone’s deep rooted problems,” he said.

At over 7%, Spain’s borrowing costs are too high to sustain in the long-term, and a more co-ordinated policy action is expected to follow the first bailout.
According to HSBC, markets questioned the size of the €100bn bailout, with the threat that existing bond holders would become subordinated in the event that Spain defaults.

“A Spanish default is not something that we think is likely, if anything, the bailout should go some way to stabilising the economy. Nevertheless, the recent bailouts increases the Spanish debt to- GDP ratio to 90%, and while this not as high as some other countries in the Euro-area, the trend is going in the wrong direction. A further concern is that this bailout money does not reach the real economy via increased bank lending, something that is highly probable in our view,” he said.

A recent report from the International Monetary Fund suggests that the three largest banks in Spain (BBVA, Santander, CaxiaBank) which account for 47% of assets, should be able to survive without aid if the market deteriorates, but the remainder of the sector, which has experienced significant consolidation recently wouldn’t be able to face the same uncertainty.

Moving to Italy, Sels noted that although Spain is likely to be at the top of the agenda for the markets for now, Italy is increasingly coming into the crosshairs.

“We don’t believe that the problems in Italy are of a similar scale to those in Spain, as, although their outstanding debt is high, the growth outlook is more supportive and unemployment is significantly lower. Moreover, Italy remains a very wealthy country with high levels of private sector savings. With regards to the banks, although the Italian institutions have suffered as much as any during the financial crisis, looking forward, the absence of a house price boom and bust in Italy may mean that the outlook for the sector is relatively more stable from here,” he said.

 

Photo: 10 year bond yield Spain/Italy

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