Spain sovereign bailout could loom, warns Credit Suisse

Without stronger policies to tackle the Eurozone crisis, it is “a matter of time before the Spanish banking bailout will need to be extended to a full Spanish sovereign bailout”, says Credit Suisse, as the country’s long-dated debt rates today hit 7%.

The team at the Swiss bank say Spain is trading “on an auction-to-auction basis, supported by the domestic investor base”.

The fact Madrid has already financed 58% of its 2012 needs means it “at least has a buffer in the current stress”.

But the bank’s economics team calculates Spain’s sovereign funding needs this year, based on the nation’s present deficit targets, are actually more than double (€195bn) the €86bn currently forecast by Spain’s Treasury.

“Even without the banking sector needs, the amount is €95bn, compared to €36bn left to fund, based on the Spanish Treasury’s initial 2012 forecast.”

Credit Suisse adds it is unlikely Spain will hit the 5.3% budget deficit as planned, “and every slip of 1% in the deficit target implies around another €10bn in financing needs”.

Spot yields on long-term debt has actually fallen for Spain (and Italy) since the 2008 crisis, by 13 basis points for Italy and 40 basis points for Spain, using weighted average coupon rates.

But Credit Suisse says the problem now is that current levels, of over 6%, are “not equilibrium levels and while the domestic investor base has allowed the market to stay open for Spain (and Italy), this could quickly change.

“For Greece, Ireland and Portugal 7% was the important level in 10-year yields. It was not an automatic trigger, but very soon after breaking 7%, market access for these countries closed and yields increased dramatically.”

Spain’s sovereign debt rates this morning hit 7% in secondary market trading.

Watch for any further agency downgrades of Spain, Credit Suisse recommends. A one notch cut by Moody’s from A3 to Baa1, and a three-notch cut by DBRS from AH to BBBH, would see Spanish debt drop from Credit Quality Step 2 to Credit Quality Step 3 – which increases the haircuts banks must post.

Spanish banks would have to post an additional 5% in collateral – “problematic if their only source of funding is the ECB”, said Credit Suisse.

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