Swiss & Global Asset Management says Spain has already moved swiftly to “restore confidence and boost the country’s defences against contagion from the debt crisis in Portugal” that led Lisbon to request Brussels' support yesterday.
Swiss & Global Asset Management says Spain has already moved swiftly to “restore confidence and boost the country’s defences against contagion from the debt crisis in Portugal” that led Lisbon to request Brussels’ support yesterday.
Stefan Angele, Swiss & Global’s head of investment management, said Spain already ordered a “drastic clean-up” and imposed “radical rules” on its savings banks, or ‘cajas’, in a bid to avert bond markets turning their attention next to Madrid.
Markets have forced interest rates on sovereign debt in Ireland and Greece so high that those governments requested outside help.
Analysts say Portugal could need up to €80bn.
Madrid said overnight it will not suffer the same fate. It has already forced weaker banks to raise Tier 1 core capital to 10% by September if they depend on wholesale capital markets for more than 20% of their funding, or if less than 20% of their shares are privately held.
“If they fail to do so, the government will seize control through the state bailout fund,” Angele explained.
But Spanish households will still suffer if, as widely expected, the European Central Bank raises interest rates today, says Darren Williams, senior European economist for global economic research at Alliance Bernstein.
Spain and Portugal have two of Europe’s lowest average interest rates on outstanding mortgages – 2.76% and 2.19% respectively – but Williams said once official rates go up, the mortgaga rates would rise faster in peripheral nations than in core Europe.
“Households in the periphery are therefore likely to be hit disproportionately when the ECB starts to raise interest rates, but this is
not a valid reason for the ECB to postpone rate hikes.”
Williams says the possibility of hikes is poorly timed for the indebted periphery, “but the ECB’s role is not to set policy for countries that account for less than 20% of euro area output”.
He adds the negative impact from rising rates should be balanced against the positive impact from stronger export growth.