Spanish test of ECB bailout still awaits, believes Algebris Investments

Alessandro Lasagna, chief operating officer at Algebris Investments, believes troubles with banks in Spain – and Italy – still pose a threat to the ECB’s resolve to sort out the region’s crisis.

From the Algebris Investments office in Clifford Street, London, the sovereign debt crisis affecting Southern Europe could be seen as somebody else’s problem.

Yet, as an asset manager with strong ties to Italy and Spain, Algebris is closely monitoring the daily political and financial updates coming from the region.

Founded in 2006 by Italian portfolio manager Davide Serra, Algebris is a boutique asset management company specialising in the global financial sector, with $1.1bn assets under management in both hedge funds and long-only funds in equity and credit.

According to Alessandro Lasagna, chief operating officer and head of investor relations at the firm, Spain’s banks, caixas, are being kept alive only thanks to continuous ‘oxygen therapy’, implemented by the central government over the past few months.

Bankia bail-outs

Bankia, the country’s third-largest lender, has been bailed out twice by the government since June, a key symbol of the current state of the Spanish banking sector.

“Without the financial oxygen they rely on, some of the weaker Spanish banks would be in a very difficult position,” Lasagna says. “But Spain, and Italy to a lesser extent, know they can rely on the support of the Bank of Spain and of the European Central Bank.

“In 2008, the Federal Reserve in the US let Lehman Brothers go. The ECB has always acted to support its weakest lenders and it will be there in the foreseeable future.”

According to Lasagna, Spain’s situation is unique because it is tightly related to the real estate bubble to which most Spanish lenders are heavily exposed. As a consequence, Algebris currently has no exposure to Spain’s banking sector.

So, will Italy have its own Bankia?

“Not in the short term,” he replies. “The outlook for the Italian financial sector is healthy. In Italy, many banks have a very strong capital base. As an example, Intesa Sanpaolo is fully funded by deposits. This is a quite unique feature in the European landscape.”

The focus in the country remains the access to credit by small and medium enterprises, which has been made more complicated by the current economic climate.

Looking ahead, the outlook for Southern European banks remains challenging. Both Italy and Spain received what Lasagna defines a “margin call”, when, in the summer of 2011, they had trouble in funding their deficit.

Again, ECB’s programmes have restored confidence in the single currency, and essentially removed the tail risk.

“We cannot predict what would have happened without ECB’s ‘securities markets programme’,” he says. “The Eurosystem [he monetary authority of the eurozone] interventions in public and private debt securities markets will ensure liquidity in those markets.”

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