Picking your moment

June 11, 2012

Watching how the mildly positive market reaction to this weekend’s 100 billion euro Spanish bank bailout evaporated within a morning’s trading, it’s curious to look at the timing of the move and what policymakers thought might happen. On one hand, it showed they’d learned something from the previous three sovereign rescues in Greece, Ireland and Portugal by pre-emptively seeking backstop funds for Spain’s banks rather than waiting for the sovereign to be pushed completely out of bond markets before grudgingly seeking help.

But getting a positive market reaction to any euro bailout just six days before the Greek election of June 17 was always going to be nigh-on impossible. If the problem for private creditors is certainty and visibility, then how on earth was that supposed to happen in a week like this? In view of that, it was surprising there was even 6 hours of upside in the first place. In the end, Spanish and broad market prices remain broadly where they were before the bailout was mooted last Thursday — and that probably makes sense given what’s in the diary for the remainder of the month.

So, ok, there was likely a precautionary element to the timing in that the proposed funds for Spanish bank recapitalisation are made available before any threat of post-election chaos in Greece forces their hand anyhow. It may also be that there were oblique political signals being sent by Berlin and Brussels to the Greek electorate that the rest of Europe is prepared for any outcome from Sunday’s vote and won’t be forced into concessions on its existing bailout programme. On the other hand, Greeks may well read the novel structure of the bailout – in that it explicitly targets the banking sector without broader budgetary conditions on the government – as a sign that everything euro is flexible and negotiable.

However, if the answer to the two-year-old euro sovereign crisis lies in convincing long-term private creditors to lend to euro governments again at sustainable rates for 5-10 years,  then nothing was ever likely to change on that score until after Sunday’s vote across Greece anyway. And, even if there is a result in favour of the bailout, the shape of the euro zone and its future is still in the mix until we see outcome of the June 28-29 EU summit.  It’s not that the Spanish bank rescue is not a good move for Spain,  it’s just that we won’t really know for another three weeks or so.

At some point, it seems, there has to be a credible plan and agreement that removes the threat of a euro unravelling, an outcome that every creditor now fears could leave sovereign borrowers with the hopeless task of paying back euro debts in new pesetas, drachmas, escudos, punts and lire. As Barclays economists said on Sunday, the Spanish plan in itself doesn’t remove that risk:

So long as the euro area does not remove the tail risk of potential FX redenomination for periphery countries, medium- and long-term investment commitments by foreign capital (or even domestic) are unlikely and that creates a growth disadvantage in the periphery. And without growth prospects, there is little hope to emerge out of the crisis.



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