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Now that Spain is rescued, how will the markets react?

By Francisco Miñana

Date: Monday 11 Jun 2012

Now that Spain is rescued, how will the markets react?

The rumours turned out to be true. Despite Spain’s government having denied them last Friday, the country has seen it necessary to make a formal petition to the Eurogroup for up to 100bn euros in assistance for its financial sector.

Spain’s minister of Economy Luis de Guindos made the announcement on Saturday and said that the aid would not affect the Spanish economy, adding that it would have conditions for the country’s banks.

That said, those conditions and the method of distributing the funds has yet to be determined though it appears that Spain’s FROB (the fund for orderly bank restructuring) would receive the money from the European Stability Mechanism (ESM). The FROB would then be able to distribute these funds to the Spanish financial institutions in need.

In this context, the question is obvious: how are the markets going to react this Monday morning? First and foremost, a glance at the euro/dollar has shown a clear upward bias as it moved from $1.25 to $1.27.

European stock markets, and especially the Spanish benchmark Ibex35, are poised to open with gains which should be based on a significant upward movement in banks. Furthermore, we expect the Spanish credit spread to continue dropping away from 500 basis points as it moves towards 400-450.

Once the doubts about Spain’s bailout begin to fade, attention will move back to Greece and its second attempt at elections next Sunday. For the moment, it looks like there will be a similar result but we could see a left-wing government formed with Pasok and Syriza forced into an agreement.

We expect this coalition government to attempt to ease the conditions imposed by the Troika (EU, IMF and ECB) as part of the second bailout. We’ll see if Germany allows its arm to be twisted, but, in any case, it’s clear that for now Greece is holding the rest of the Eurozone hostage.

FM

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