Investors Predict Spain Will Benefit from Stress Tests
July 23rd, 2010
Investors are betting that Spain’s government will benefit more than its troubled euro-zone peers from the results of Europe’s “stress tests” of big banks Friday.
Despite growing concern about the rigor of the European tests, Spain’s government bond market has rallied in recent days, effectively lowering the country’s cost of borrowing from the capital markets.
A key indicator: The extra interest that Spain has to pay investors to buy its debt instead of that of Germany, considered Europe’s safest borrower. This so-called “risk premium” is 1.64 percentage points Wednesday compared with 2.1 percentage points just a week ago. Other troubled countries in the euro bloc such as Ireland, Portugal and Greece haven’t seen that kind of improvement.
Traders in the derivatives market are less gloomy, too. The cost to insure Spain’s government bonds against default using financial contracts called credit-default swaps has dropped dramatically this month: It now costs $205,000 a year to insure $10 million of Spanish government debt compared with $274,000 on June 29 – a 25% drop.
Even shares of one of Spain’s biggest banks, BBVA, have been on the upswing lately, rising to €9.50 from about €7.50 in mid-June.
So what’s going on?
Wilson Chin, an analyst at Dutch bank ING, points to several reasons for the improving view of Spain in the bond market -– other than the emergency rescue-mechanisms that European leaders and the European Central Bank have launched.
One possibility is that Spain is simply experiencing a positive bounce as investors start to dial back their excessive bearishness about its banking system.
Until fairly recently, Spain, the euro’s fourth biggest economy, was touted as the heir to Greece on the European debt crisis throne because of its ailing regional lenders, or cajas, which were sideswiped by Spain’s property market bust.
Now, despite Spain’s weak economy, Spanish newspapers are proclaiming that the country’s banks, including the cajas, will pass the stress tests with flying colors. That boosted Spanish government bonds on Tuesday. Spain also took the lead on the stress-test project in the first place, nudging less willing European countries to do the same, which gave it some credibility. And there have been moves to consolidate the banking sector to deal with weak cajas.
Economists and analysts remain skeptical. As David Enrich of the WSJ points out in an article on Tuesday, economists at the Royal Bank of Scotland Group did their own “stress” study and found that Spain’s banking sector faces a roughly €50 billion capital shortfall in the event of a downturn.
But Mr. Chin says investors may be heartened by a second factor: Spain has repeatedly raised cash from the capital markets in recent weeks without a hitch. There were reports of strong interest from foreign investors, including China. The government’s borrowing costs actually fell during a debt sale on Tuesday. Spain was scheduled to repay some €16 billion of debt at the end of this month. Nobody’s worried about that anymore.
Of course, the coast is far from clear for Spain. But given how gloomy things got just a few weeks ago and the easing stress in Europe’s financial system, there’s a chance we’ll see more sun in Spain than some market bears expect.
Story from Wall Street Journal
Related Posts
- EU Leaders Under Pressure Over Bank Stress Tests
- Spanish Bonds Attract Global Investors
- Good News for Property Investors in Spain
A reassuring article. As an Real Estate Agency hear Spain, we are forever experiencing, frontline comments, all conflicting, I might add. It seems the buyers of today are different breed of people from the early part of this decade. Two expensive, the buyers are shouting, sadly the opposite is said for the sellers. Marbella, for now is packed to the gills. The Hotels are busy, you cant get a table at the good restaurants without a decent size prior booking. All seems rosy. It is really, thanks to the weather and a huge flurry for family size long term rentals prior to the September school term starts. Meaning , I guess , It makes sense, for some, to rent for the duration of Childs education. Does this mean, the general consensus is that, we haven’t hit the bottom yet or that , its best not to get lumbered with a property that may take years to sell. I have to keep telling our vendors that properties are selling, but those properties, tend to be priced to sell and the motivation is their in the first place to help move negotiations along nicely. There is without doubt an increase on the enquiries, side of things, but just for the life of me cant put a finger on why? Were now three years in now to bust, so maybe just maybe a new wave has starting.