MARKET MOVER - BNP PARIBAS - Investment Services India

Spain: Inching Closer to a Request for Aid
• Spain is inching closer to asking for financial
aid, but it is still only inching.
• In the latter half of next week, Spain will have
an action-packed agenda. It will present its 2013
budget, announce its planned structural reforms
and publish the result of the bottom-up bank audit.
• Any subsequent bailout could be marketed as
a reward for reform and potentially remove part of
the stigma attached to a bailout.
• The country’s regional elections on 21 October
could be the last obstacle to a request.
• Any unused funds from the bank bailout could
be used to lower the final cost of a sovereign
bailout, something that should please Germany.
The timetable seems clearer
After last weekend’s Ecofin meeting and confirmation
of the publication date of the bottom-up review of the
Spanish banks, the timeline of and next steps
towards a Spanish aid request seem to be clearer.
After the Eurogroup meeting, Spanish Economic
Minister Luis de Guindos said Spain would present
its 2013 budget on 27 September. The day after, the
Spanish government will present its planned
structural reforms and, more importantly, the results
of the bottom-up audit of the Spanish banks.
The next Ecofin meeting on 8 October will assess the
reforms and the budget, as well as the details of the
bank reforms to be undertaken as soon the first
tranches of the bank bailout funds are released.
Comments over the weekend suggest that the
reforms and budget have been drafted with some
knowledge or help from the IMF and the European
Commission. Indeed, IMF chief Christine Lagarde
confirmed that an IMF team has been in Madrid
since early last week, helping on the 2013 budget.
First the reforms, then the support
So, as things currently stand, Spain seems to be
already negotiating the conditions under which it
might receive financial aid. Spain will only request
help after it has put in place the reforms required by
the Troika, as it would be easier to sell domestically.
ESM and ECB support will be seen more as a
reward for the government’s efforts and less as a
punishment for fiscal laxity.
The big question is the exact timing. As Spain will
face its biggest liquidity squeeze at the end of
October, when EUR 20bn of bonds mature, Spain
still has some time to play. But it is not unlimited and
there are several factors that could influence the
timing of a request.
France and Italy are among those countries with the
bigger interest in Spain asking for aid before the EU
summit on 18-19 October. Germany, in contrast,
would prefer, for domestic reasons, to postpone any
Spanish bailout, especially as Spain will first receive
the initial tranches of its bank recapitalisation funds.
And Spanish Prime Minister Mariano Rajoy seems
more inclined to wait until after the 21 October
regional elections in Galicia and the Basque country.
The latter is not an issue, as his Partido Popular has
little chance of winning there anyway. But Galicia is
Mr Rajoy’s home region and according to the latest
polls, the PP could lose its control. A request before
that vote would be a bitter blow to the campaign and
would be seen as a personal defeat for Mr Rajoy.
Recent comments by members of his party suggest
that Mr Rajoy may be increasingly isolated in his
position, though. So, Spain could end up asking for
support before the elections on 21 October, but after
the Ecofin meeting on 8 October.
Bank bailout funds to soften German resistance
The EU has already set aside EUR 100bn for a
programme to recapitalise the Spanish banks and,
according to the latest reports, their capital needs
may be just EUR 60bn, leaving EUR 40bn over.
Media reports suggest that one possibility could be
for Spain to transfer its unused bank bailout money
to the government. This would please Germany, as it
could be done by changing the MoU for the bank
bailout and would not require parliamentary approval.
However, beyond any possible legal objections, for
ECB intervention to occur, a country either has to be
under a “full programme” or have requested a
precautionary one. So, even if Spain were to go
down this route and the other European countries
were to agree, a new MoU would have to be signed,
with all of the conditions that go with it. And this
might not be enough. Spain’s funding needs for the
next 12 months are close to EUR 180bn. If an ESM
programme were to fund only 50% of Spanish
issuance, this would mean it would need a capacity
of close to EUR 90bn, far more than the EUR 40bn
that might be left over from the bank bailout.
So, the most likely scenario, in our view, is that Spain
will still have to request further financing, even if the
unused bank-bailout funds can be transferred. And
despite having some time left, we think Spain will
request support in October.
Ricardo Santos 20 September 2012
Market Mover
9
www.GlobalMarkets.bnpparibas.com