The news that Spain's banks will receive a bail-out of around €100bn to ease pressure on the country's banking sector has been met with mixed reactions from the markets.
Newton & BNY Mellon's Paul Brain has spoken out on the potential impact this latest aid package will have on the rest of the Eurozone. He starts by questioning where the €100bn is coming from.
“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.”
While the news first found favour with the markets, they soon fell back and Brain does not believe there is enough certainty over Spain’s banking sector and the overall economy for any such rally to be sustained. "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 suggest 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 warns.
Brain is of the opinion that there is clarity over the prediction 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.”
Tracking real performance
Diversified return team
The equivalent of £1.7m every day
Janus Henderson Global Dividend index