Spain In The Spotlight
Spanish ten year yields touched 6% again and the euro traded on a soft note on Wednesday, after a series of negative developments in the Eurozone. Financial Times reported that the Eurozone’s current deal over the bank bailout deal ruled out the ESM being allowed to provide recapitalization for ‘legacy assets’. According to a joint release of German, Dutch and Finnish finance ministers, ESM bank recapitalizations should ‘only apply to new cases’ and called for banks to use the ESM only as a last resort. If implemented, there will be speculation over the ultimate burden of recapitalization for Spain’s current financial system which could ultimately end with the sovereign. With Spain due to release recapitalization needs for its banking system later this week, tension will likely rise over the matter. However, if a silver lining is to be sought, any subsequent rally in bond yields for Spain may cause the government to become more proactive in requesting EFSF support and allow the ECB to activate its OMT, with the usual conditionality laid out in this month’s Governing Council decision. After the strong rally seen in the front-end of the Spanish sovereign curve, any signs of further stalling from the Spanish side will likely see this part of the curve come under pressure, taking the euro with it. Political developments inside Spain have not been positive for risk assets either – Catalan president Mas announced Catalunya will have early elections on the 25 of November, in order to effectively give Catalans a referendum on independence. While the likelihood of any secession is fairly low at this stage (judging by opinion polls), it is a clear indication of the internal pressures which Mariano Rajoy is under. More generally, risk appetite is very weak overnight and all key European and Asian indices are trading significantly in negative territory. Clearly, the afterglow of QE3 has already worn off and in addition to growth worries, markets are now acknowledging that Eurozone-driven risks can only escalate from here, but the lack of positioning to the upside in the euro and the prospect of the key parties falling into line quickly has helped limit additional damage.
Click here to read the full report: UBS Morning Adviser America
UBS Investment Bank