Finance Ministers Discuss Spain
Eurozone finance ministers are scheduled to hold a conference call at 1000GMT today – to sign off on the terms of Spain’s banking sector bailout. Details on the approximate size of the loan and time scales involved have already been discussed publicly, and the first tranche is due to be released around the end of July. Although the finalization of the agreement will mark an important step towards addressing the capital adequacy of the Spanish banking system, the euro could still weaken if ratings agencies express misgivings on the implications for sovereign credit worthiness. We note that Moody’s has already placed Spain on review for a possible downgrade and that the sovereign is only a single notch away from junk status. Yesterday’s auction of Spanish debt saw lukewarm demand, although euro bulls were at least able to breathe a sigh of relief on the approval of the Spanish bailout plan in the Lower House of Germany’s parliament by a comfortable margin – 473 votes in favour, versus 97 votes against and 13 abstentions – well beyond the simple majority that Merkel needed. Fitch also affirmed Italy’s ‘A-‘ sovereign rating (negative outlook), given the agency’s approach of looking “beyond current economic and financial conditions and take into account recent and prospective structural reforms that would enhance the growth potential of the economy as well as its assessment that debt stabilisation and reduction is within reach”. Nonetheless, risks clearly remain. Indeed, we believe Spain will ultimately have to request a full-fledged Troika programme and that the ESM/EFSF and/or ECB will have to intervene. Earlier press reports that Spain may be allowed to tap any unused portion of the EUR100 bn bank bailout facility to purchase its own government bonds were subsequently dismissed by EU officials. Moreover, Finance Minister Schaeuble served reminder that Spain would still be liable for EFSF aid for its banks, and that the Bundestag would still need to approve any EU bank supervision plan. US data was generally soft, with the Philly Fed current activity index improving to only -12.9 in July and existing home sales defying expectations for a gain by falling 5.4% m/m in June. Initial claims rose 34k to leave the four-week average at 376k for the sample week of the July employment report – down only modestly from 388k in the June report sample week.
Click here to read the full report: UBS Morning Adviser Europe
UBS Investment Bank