The pain in Spain continues to reign, says Newton's Brain
11 Months ago at 16:56
Paul Brain, manager of the Newton Global Dynamic Bond Fund, responds to the Spanish bank bailout over the weekend, and looks at the potential impact on the rest of the Eurozone.
News broke over the weekend that Spain's banks are to receive in the region of €100 billion in an attempt to ease pressure on the country's banking sector, making it the fourth Eurozone country to seek outside assistance to help deal with the debt crisis. The money will come from either the European Financial Stability Facility (EFSF) or its successor, the European Stability Mechanism (ESM), which comes into force in July - although the exact source of the funds (EFSF or ESM) has quite significant ramifications for the make-up of the bailout. If it came from the ESM, existing and future private holders of Spanish government debt would rank behind Eurozone government in terms of repayment should Spain be unable to repay all its debts. This would lower the perceived quality of private-sector loans to the Spanish government and perversely make it harder for Spain to borrow from conventional sources. Conversely, if the money came from the EFSF, Spain would cease to contribute to the fund and some countries, such as Finland, have already stated that the money would be at too much risk of loss and that it would want some sort of security or collateral for its share of the loan.
"Markets rallied upon opening on Monday morning but soon fell back," says Brain. "There is just too much uncertainty about for a market rally to be sustained, despite short-term good news. Regardless of a potential improvement in the finances of Spain's banking sector, Eurozone economic growth remains weak and nothing in the most recent data releases suggests improvements are around the corner. In essence, this bailout is the administration of another sticking plaster, not significant enough to cover what is a gaping wound," he adds.
At the other end of the Mediterranean, Greece goes to the polls again at the weekend after a failure to get an outright winner in last month's elections. "We believe the best outcome would be a victory for New Democracy, Greece's main conservative party, which is committed to the austerity measure imposed on the country by the terms of its Eurozone bailout," Brain explains. "However, it looks set to be very close once again, and a repeat of last month's ‘no outcome' or a significant showing for the radical leftist party, Syriza, could prompt a possible attempt at a renegotiation of the fiscal compact and a possible exit from the euro by Greece sooner rather than later. Even if there is a clear winner in the elections, we maintain that a Greek exit is only a matter of time," he says.
"France, meanwhile, is also going to the polls once again, this time to vote in the parliamentary elections. After the first round of voting, President Francois Hollande's Socialist party looks set to take a majority, a result that would enable the President to press ahead with his ‘pro-growth' agenda." He continues, "While unlikely to make an immediate impact, this is likely to prompt a welcome shift from austerity to growth across the region. It is also significant to have a ‘pro-growth' government elected in one of Europe's core nations."
"We are witnessing one of the most publicised and slowest train crashes ever seen but how many passengers are still aboard? By all accounts, most investors have already priced in a Greek exit amid worsening numbers and little sign of progress," says Brain. "That said, we believe that any genuine and substantial good news is still some way off, but when it comes, it will be very well received by market participants, and prompt a significant rally in risk assets," he adds.
"What has also been clear over the past few weeks is that the Eurozone has begun the process of edging closer to fiscal union; there has been more talk of joint bond issuance and this is likely to be well received by markets going forward," he explains. "On this front, there has been understandable reluctance from the ‘core' Eurozone countries likely to bear the brunt of such a move but discussions at least go some way to pacifying financial markets and offering hope for the longer term future," he concludes.
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