Fisher Investments Editorial Staff
Developed Markets, Deficits

Just You Wait, Henry Higgins

By, 05/21/2012

The pain in Spain stayed mainly on the brain Friday, as investors awoke to headlines like these:

Spanish Bank Crisis Deepens

Could Spain Be the Next Domino to Fall?

Spain Banking Sector Shaken by Report of Bank Run

The news boiled down to two developments, one being rising yields at Thursday’s debt auction. Spain successfully auctioned its planned €2.5 billion, but yields rose between 0.8 and 1.74 percentage points. Higher rates aren’t surprising, considering the anxiety Greece’s political uncertainty is causing. But their impact on Spain’s total debt-service burden should be rather small since Spain was able to take advantage of lower rates earlier in the year. In fact, Spain has now addressed all of its bonds maturing in 2012 and completed 55.8% of its planned total debt issuance for the year. With demand staying firm even as yields rise and banking uncertainties mount, there’s reason to believe Spain’s auctions can continue going all right. Higher yields aren’t great for Spain, but as we’ve written, Spanish auctions likely need only be just ok for the nation to meet its 2012 funding needs.

The other issue, mounting troubles in Spain’s banks, seemed more acute at first blush. One newspaper reported depositors withdrew €1 billion from recently nationalized Bankia over the past week, prompting jitters over a bank run. Meanwhile, Spanish loans behind payment rose €148 billion (33% year over year) in March, to 8.4% of total loans. Compounding fears (but adding little, if any, substance), Moody’s downgraded 16 Spanish banks.

Yet a proper assessment of Spain’s banking system should account for a few key mitigating factors, like the fact Moody’s rationale was decidedly backward looking. For one, it’s not certain there was a run on Bankia. Bank and government officials say depositor activity wasn’t unusual, though we’d pardon readers for taking that with a grain of salt. More importantly, the bank’s explicit state backing provides a backstop should depositors flee—Bankia’s not wholly dependent on open-market funding.

The larger question is whether Spain’s banks are sufficiently buffered against weakening loan portfolios. Treasury Minister Inigo Fernandez de Mesa says they are, citing the liquidity infused during the ECB’s recent LTROs: “They are funded for the next two years,” he claimed. Should banks need additional capital, the ECB is still providing unlimited, cheap liquidity to any bank in need, with relaxed collateral requirements. Officials have spent two years backstopping the financial system to guard against developments like this.

Another Spanish backstop came to light Friday, when Instituto de Credito Official (ICO) funding head Antonio Cordero revealed the institution can also tap ECB funding. Conceived as a state-owned development bank in the 1970s, ICO is now the government’s primary tool for aiding Spain’s regional governments, which are responsible for a large share of the nation’s debt burden. To date, ICO has issued debt to secure funding. It’s raised about €12 billion of its planned €20 billion for 2012 without much trouble, but tapping the ECB lets it access funds at 1%, rather than the 5% demanded by investors. This likely helps keep the federal government off the hook should regional governments need more aid than anticipated—an incremental positive for ongoing debt-reduction efforts.

Spain undoubtedly has issues to work though. But with debt auctions still successful for now, and banking backstops seemingly working as intended thus far, there’s likely time for the government to continue implementing needed reforms and the private sector to find solutions.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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