THE MARKET warning lights are flashing red. Spain is approaching the point that saw Greece, Ireland and Portugal inexorably slip towards international bailouts.
Athens, Dublin and Lisbon lasted just 12, 24 and 34 days after the premium they pay to borrow over Germany reached 500 basis points before seeking international help. Spain hit 500 basis points on Monday.
Spanish 10-year bond yields, which move inversely to prices, rose to 6.5 per cent, drifting closer to the 7 per cent level seen by many as unsustainable. The move has left many in the markets thinking that some kind of international bailout is inevitable.
“It is hard to know what they can do without some kind of international body coming in and giving help,” says Keith Wade, chief economist at Schroders, the UK fund manager. “Once it gets to a certain point there doesn’t seem to be a point of return.”
In a further worrying sign, while Spanish yields fell slightly yesterday, two-year yields shot up. The difference between the two maturities hit its low point of the year at just 185 basis points, down from 299 points two months ago. That is disturbing because domestic banks, fuelled by cheap loans from the European Central Bank, were at least managing to keep the short end of the yield curve under control.
“It does feel like things are coming to a crunch,” says Jim Leaviss, head of retail fixed income at MG, one of Europe’s largest fund managers. But he adds that there are no immediate signs of capitulation, noting the spread between two- and 10-year bonds is still positive and at a similar level to Italy’s: “You are still getting a term premium for risk.”
The latest escalation in Spain’s troubles has been provoked by Bankia, the lender that needed a €19 billion government rescue.
Any thought that markets would welcome the bank’s nationalisation were scotched when Spain suggested over the weekend it could sidestep the rising cost of borrowing in the bond markets by swapping government bonds directly for equity in BFA, Bankia’s parent. The bank could then deposit the bonds with the ECB in exchange for cash. That led many investors to believe that Spain was running out of ideas to solve the problem by itself.
Mariano Rajoy, Spain’s prime minister, insisted on Monday that the country did not need an international bailout. But investors see it very differently.
“Spain’s funding costs are becoming penal: something needs to get done. We need something from the European Union, but they have some time to decide exactly what,” says Shahid Ikram, chief investment officer in the UK for Aviva Investors. He suggests that a European Union-wide guarantee scheme for bank deposits could help in the short term.
International assistance could take a variety of forms in addition to the deposit scheme. Greece, Ireland and Portugal were all bailed out at the government level, not least because of the weight of their debt burdens. But Spain’s public debt-to-GDP ratio is lower than in those countries. Moreover, it has already issued debt for more than half its financing needs for this year.
Some investors, though, point out that Spain has shied away from issuing long-term debt or indeed any bonds in great size in recent months, and fret that the average maturity of its bonds is decreasing. “Some kind of restructuring on the government debt side looks like it will be needed,” says Mr Wade.
A different form of international help would be for Spain to receive money to recapitalise its banks. Analyst estimates for the amount needed range from about €50 billion to €100 billion. Mr Rajoy, while resisting an international bailout, has called for the region’s upcoming rescue vehicle – the European Stability Mechanism – to be able to recapitalise banks directly. That would avoid the debt going on government books.
Even with the banks, some in the market argue that while things look bad for Spain, it does still have weapons in its armoury to stop the need for a bailout. Mr Leaviss says that banks could wipe out their shareholders and convert their debt into equity but that is resisted by policymakers across the euro zone.
He also underlines how the ECB could lessen the need for a bailout, at least in the short term, by doing one of three forms of policy it has used in previous stages of the crisis: buying bonds directly, giving banks cheap loans, or cutting interest rates.
Many in the market, however, remain deeply pessimistic. “It is increasingly clear that Spain needs international assistance,” says Marc Chandler, global currency strategist at Brown Brothers Harriman. He refers to Mr Rajoy’s three “nevers”: on allowing a bank or region to fail, and on seeking international help. Mr Chandler adds: “Something has to give and the international assistance seems to be the most likely to yield in the face of political and economic reality.” – (Copyright The Financial Times Limited 2012)
INDITEX IN FRONT:
ZARA OWNER OVERTAKES TELEFONICA
INDITEX, OWNER of the Zara clothes brand, has overtaken Telefónica to become Spain’s most valuable listed company as market turmoil shaves billions from the capitalisations of the more established corporations.
The Galicia-based retailer, 59 per cent owned by founder Amancio Ortega, Spain’s richest man, overtook the telecoms operator yesterday. The retailer closed with a market capitalisation of €43.1 billion, almost €1 billion more than Telefónica.
The news came as Spain reported its worst monthly retail data, with April sales down 9.8 per cent on the year before. Last month was the 22nd consecutive fall in retail sales.
Listed on the Madrid stock exchange in 2001 at €14.70, Inditex shares yesterday closed at €69.08. It is one of the few large Spanish listed companies to continue to increase in value, rising 10 per cent in a year.
Telefónica shares have lost 44 per cent in a year as it has struggled with difficult trading conditions and net financial debt of €57.1 billion, prompting credit rating downgrades and a dividend reduction.
Banco Santander, Spain’s largest lender by assets, is third in the Ibex 35 with a value of €40.3 billion, having fallen 42 per cent in a year.
Inditex, which is now the world’s largest clothes retailer by value, last year opened 411 new stores globally as net profits rose from €1.73 billion to €1.93 billion and net sales rose 10 per cent.
Companies have been rushing to emphasise their international operations as profits at home collapse. Telefónica and Santander generate the bulk of their revenue away from Spain. – (Copyright The Financial Times Limited 2012)
