Spain’s bailout request could have to wait longer, Oanda

The market continues to hazard a guess when Spain will seek aid, said Dean Popplewell, chief currency analyst at foreign exchange broker Oanda.

He warned that suspicions remains that a bailout will be delayed due to regional elections on October 21 and November 25, or that Chancellor Angela Merkel will try to merge a Spanish bailout into one big crisis package that involves Cyprus and Greece.

“It seems that the Spanish themselves may be throwing a spanner into the works. Prudently and in its own best interest, Spain seems to be seeking a guarantee that when it requests a bailout the ECB will target a risk premia on Spain down to +200bps,” Popplewell said today in a note.

This would be a reasonable and acceptable level for domestic regulators.

“Levels exceeding this would most likely lead to contractions in lending to corporations. If this request is true, then expect more debated questions about the OMT and the explicit and implicit yields to the OMT. Will the ECB be adverse to such a request? Would there not be grounds of inconsistency (Ireland and Portugal)?” he added.

For the rest of the week, most of the focus will be on the Euro area leaders’ summit on Thursday and Friday, which according to a number of analysts could yield few policy decisions.

“Top of the summit agenda will be the presentation of the interim report prepared by the European authorities to strengthen further the functioning of the euro-area. Do not expect market-sensitive issues, like the ESM to recapitalize banks directly, to be clearly clarified. Expect investor positioning to want to stay close to home until then,” Oanda said.

Speculations on a bailout request follows the downgrade of Spain’s by Standard & Poor’s just above junk status on October 10.

The rating agency expressed concern about the possibility that the country’s creditworthiness could continue to decline and said Madrid’s hesitation over asking for an European rescue is “potentially raising the downside risks to Spain’s rating.” 

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