Fidelity’s David Simner urges more informed assessment of Spain’s latest action
This past weekend’s action by Spain to seek financial support from outside the country for its banking sector has been generally positively received, but David Simner, portfolio manager on Fidelity’s Euro Bond Fund urges caution.
Although we remain cautious on the fixed income outlook for Spain, this weekend’s announcement is positive for several reasons. It will enforce the long-awaited external scrutiny of Spain’s banks. This will remove a significant element of economic uncertainty once a final clean-up cost is arrived at. The funding will be provided at below-market rates and, we assume, long maturities, which takes the heat off 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-June European Council meeting.
On the other hand, Spain’s banks are only one layer of the economy’s shaky foundations. It still has the highest unemployment and the third widest fiscal deficit in Europe in the context of a painful recession. The current government has a poor track record of crisis management and data quality has been poor. The funding provided by the EFSF/ESM will inflate the government’s debt and there is an open question of creditor subordination. More rating agency downgrades are likely. The broader European situation remains very tense, with potentially momentous Greek elections looming. And bond investors have been burned too many times in the past for giving European policy makers the benefit of the doubt. A more informed assessment of the weekend’s announcement awaits details of a final package.