Weekly Market Review for Week Ending 8th of June 2012
So Spain has its bailout. This may have cheered markets – at least in the short-term – but there are a number of worrying aspects to the sequence of events that has ended up with the Spanish government requesting €100bn (£81bn) from its European partners.
For a start, the sheer magnitude of the bailout request is a surprise. It may be Spain is being prudent and simply ensuring it does not have to return with a begging bowl again. However, most analysts had put the figure to bail out the banking sector at under €80bn and some as low as €40bn. At €100bn, together with the bailouts for Greece, Portugal and Ireland, it is bumping up against the limits of the €440bn European Financial Stability Facility and €60bn European Financial Stabilisation Mechanism. It is even ahead of recent estimates by the International Monetary Fund.
The ultimate figure will be decided by the European Commission and other international experts, but the €100bn has been determined in consultation with leading actuaries and economists. If they think Spanish banks need it, they are almost certainly right.
Some have gone further. JP Morgan analyst David Mackle, for example, suggests the ultimate bill for Spain will be in the order of €350bn. He believes the banking stabilisation will be only a fraction of the final cost because the real problem is the Spanish government’s lack of solvency. Any bailout may require the eurozone to fund Spain’s debt for a period of months or years.
Equally worrying is how oblivious the Spanish politicians seem to the crisis. Until a few days ago, they were claiming there was no need for a bailout and they were still maintaining that position when they announced a €19bn bailout for Bankia. Even now, they are claiming this is not so much a bailout for Spain as a loan for its banks. While this may be true in theory it does suggest politicians dangerously out of touch with reality.
The ‘sugar-rush’ rally the bailout prompted in stockmarkets was already starting to fade by the end of the first day’s trading. The usual pattern of crisis followed by policy response followed by market rally followed by disappointment seems to be happening again – just more quickly.
Investors would be well-advised not to draw too much solace from this latest bailout. The eurozone crisis is developing an unsettling habit of constantly lurching to the worst-case scenario. Spain is still in a hole. The bailout buys time but little else.