Despite the program announced for its banks, Spain would still have to formally request external support through a ‘Memorandum of Understanding', warned today Bank of America Merrill Lynch.
Despite the program announced for its banks, Spain would still have to formally request external support through a ‘Memorandum of Understanding’, warned today Bank of America Merrill Lynch.
This is unlikely to occur before mid-October when the country has a demanding market funding schedule.
In a report signed by Bill O’Neill, the bank’s chief investment officer for Europe, Middle East and Africa, Bank of America said that at the moment Spanish bonds would not be eligible for purchases under the “Outright Monetary Transactions” (OMT) mechanism revealed last week by European Central Bank president Mario Draghi, designed to purchase peripheral sovereign debt from the secondary market.
“The ECB has firmly put the ball back in Spain’s court as it is up to a country to request support before the ECB begins its bond purchases. There is an outside possibility that the country formally requests aid at the September 14/15 Eurogroup meeting but it is unclear how strict the conditionality requirements are going to be,” the bank said.
The stricter the conditions, the more unwilling will Spain be to request support. Still, according to the bank, it is almost inevitable that Spain will eventually have to relent and request aid.
Meanwhile, with almost all of the details already been reported by the press, markets appear comforted by the credibility of the ECB.
“This has been reflected in Friday’s strong gains in eurozone equities and a further narrowing in peripheral European sovereign bond spreads. We believe that Mr. Draghi’s comments justify the recent re-rating of global equity markets, despite the weaker earnings outlook, and the reduction in risk premia for those assets that were discounting a dire outcome for the eurozone,” O’Neill said.
In terms of future market moves, the officer believes that markets will still wait to see the next steps Spain takes in regards to requesting support officially, rather than expecting much immediate upside from here.
“Once there is clarity on Spain’s decision to enter a program formally, this could mark the next leg higher for global equity markets, especially if it coincides with greater clarity on the US election outcome and year-end fiscal cliff,” he said.
Overall, this will see an important step in enhancing the eurozone’s crisis management tools as the ECB adds weight to Mr. Draghi’s previous comments that the eurozone project is “irreversible”, he added.