Weekly Market Review for Week Ending 1st of June 2012
It was rumoured the prospect of a bank holiday might finally see the end of Greece’s participation in the eurozone. The theory ran that it would be an ideal time to ‘bury’ the bad news of a Greek exit while giving participants in London markets a little breathing space before the resumption of trading. As it is, Greece remains a member of the single currency – at least for the time being.
However, the long weekend did throw up other significant eurozone news – most notably Spain’s admission it may not after all be able to handle the recapitalisation of its banks single-handedly. Cristóbal Montoro, budget minister in the centre-right government, admitted Spain “does not have the door to the markets open” as fears around its potential for default heighten. This is a speedy turnaround from the government’s recent assurances the country would not need any external funding to shore up its banks.
Spain’s El Mundo newspaper recently suggested Spain may need as much as €30bn (£24bn) to clean up its banking system – which is in addition to the €19bn required by Bankia. This sounds unsustainable but Spain has a relatively low debt-to-GDP ratio. Its main problem has been its fiscal deficit, which has left it dependant on foreign investors to support its borrowing requirements and they are increasingly unwilling to buy its government bonds.
As its interest rates head above 6%, Spain’s ability to repay its debts looks increasingly fragile and its long-awaited admission it needs external help may start to bring about an endgame for the eurozone crisis. Any bailout of Spain is likely to nearly wipe out the European Union’s rescue funds.
As Daniel Morris, European strategist at J.P. Morgan Asset Management, points out: “With Portugal and Italy still vulnerable, investor worries about the ability of the currency bloc to address its myriad problems would only increase. The proposals for greater fiscal control or bank guarantee schemes, while feasible, run up against the barrier that they would take time to implement, to say nothing of the willingness of voters to accept the implicit liabilities and loss of sovereignty this would require.”
Morris suggests the only real solution to restore confidence would be a resumption by the European Central Bank of its purchases of sovereign debt but the Germans have resisted these moves. It seems the eurozone crisis may be nearing its apex. This may make for a painful summer for investors but, ultimately, the restoration of some certainty – however uncomfortable – may also be welcomed by markets.