Kames Capital fixed income manager Sandra Holdsworth says: ‘As always with policy actions in the European Union, more questions are raised whilst others are answered. In this case , the question whether Spain would go to the EU for aid in recapitalising its beleaguered banking system, the answer has been an emphatic ‘YES' to the tune of around Euro 100bn.
The immediate implications for the banks in Spain are that this is good news as finally the problems of undercapitalisation, whilst loan losses are mounting are addressed. But the situation for the sovereign and holders of Spanish government bonds it is less clear.
‘The questions that arise are numerous.
‘Firstly is it enough? The Spanish government has asked consultants Roland Berger and Oliver Wyman plus enlisted the help of the International Monetary Fund, the European Central Bank and the European Banking Authority to assess this, the results will only be known later this year.
‘Secondly, on what terms is the loan made and who is making the loan? The rate of interest and the term of the loan are needed to assess firstly the sustainability of this extra debt on top of what the Spain owes already, and secondly the level of ‘subordination' that this loan will have over existing holders of Spanish government debt. Similarly, there are seniority implications as to which EU institution will be making the loan and therefore where it ranks in the Spain's debt structure.
‘Lastly, there are implications from the actions of the rating agencies. This bailout will not be taken positively as it adds nearly 10% to Spain's government debt to GDP ratio and the pressure will be for a downgrade. It will be more of a question of how many notches. The closer Spain gets to sub investment grade the harder it will become to fund the existing debt and the closer a full bailout for the sovereign and not just the banks becomes. Then, the ‘Men in Black' (the nickname for the Troika of EU, IMF and ECB) will be adding a new destination to their travel schedules and the Eurozone crisis will enter a new phase.'
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