Early hopes on Spain dashed as fear returns

Market and investors welcomed the €100bn EU Spanish bank bailout at the beginning of June, but the initial relief soon turned to concern again.

The news of the €100bn bailout for Spanish banks was widely expected, well received by financial markets and praised by asset managers.

It followed a one-month tussle which started with Madrid’s decision on June 9 to nationalise Bankia, a major domestic bank weighed down by toxic real estate assets.

After some wrangling over terms and face-saving measures, prime minister Mariano Rajoy confirmed the bailout request had been put to eurozone members to recapitalise the wider banking system.

Rajoy quickly hailed the rescue package as a victory which focused on rescuing the country’s banks, rather than supporting the sovereign debt market. The immediate reaction from markets was also positive, with small but welcome gains in key UK, French and German stock indices. Crucially, the yield on Spanish 10-year bonds dropped below 6%.

Easing pressure

David Simner (pictured), portfolio manager for Fidelity’s euro bond fund, was among those who praised the Spanish government’s decision.

“Although we remain cautious on the fixed income outlook for Spain,[the decision] will enforce the long-awaited external scrutiny of Spain’s banks and will remove a significant element of economic uncertainty once a final clean-up cost is arrived at,” Simner said.

The funding was expected to be provided at below-market rates (3%, according to Spanish newspaper El Pais) and assumed to have long maturities, easing pressure on Spain’s regular sovereign issuance.
“It is a signal of intent by eurozone powers that they want to stop the rot by pre-emptively deploying firewall resources. This raises hopes for progress at the end of June European Council meeting,” Simner said.

But Spain’s banks are only one component of the embattled economy.
The country still has the highest unemployment rate and the third-biggest fiscal deficit in Europe, and it soon became clear that the trumpeted ‘solution’ was very far from sufficient.

Critics pointed to the Spanish government’s poor track record of crisis management. The funding provided by the European Financial Stability Fund and the European Stability Mechanism were seen likely to inflate the government’s debt, and there remained the open question of creditor subordination.

Spain’s sovereign debt downgrade to BBB by ratings agency Fitch at the beginning of June was then followed by further downward revisions for all of the core Spanish banks.

Praise turns to scepticism

Very quickly, the initial praise turned to scepticism once more, as investors called for more details on the rescue package, and placed the Spanish crisis in the wider European context

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