Spain in pain? Look at Brazil, says Merrill Lynch Wealth Management
Signs are suggesting the application of some form of euro assistance for Spain, following provincial elections scheduled on October 21, which, according to research by Merrill Lynch Wealth Management, is likely to be a precautionary credit line but not a full bail-out package.
“The principle stumbling block will likely be the nature of the conditions that will be imposed to any form of financial assistance. Indications seem to point to structural reform commitments, such as deregulation of the Spanish professions rather than a new wave of austerity,” the firm said.
According to Merrill Lynch, the involvement of the International Monetary Fund will be required by the European Central Bank, the former being more pessimistic on growth prospects for 2013.
“We expect short term market volatility and stress but we feel the ECB will step in to support the Spanish bond market before year end,” the bank said.
While the outlook on Spain remains cautious, policy developments in Brazil have recently been favourable, Merrill Lynch said.
“Recent cuts to bank reserve requirement ratios and a Brazilian central bank committed to accommodative monetary policy will likely support domestic credit markets, a key focus over the past few months given last real wage data.”
These showed a 1.5% contraction since June, pressuring rising consumer non-performing loans. However, looser monetary policy may partly offset any tightening in domestic lending standards.
A 20.2% reduction in electricity tariffs earlier in September may also support consumer incomes, although these will likely only feed through in 2013.
“Central government’s decision to allow greater regional investment by local government should also lead to an additional 42billion Brazilian real for potential infrastructure projects,” BofA Merrill Lynch Global Emerging Markets Research team said.