By Nieves Amigo
Date: Monday 11 Jun 2012
Equity markets opened strongly on Monday morning after Spain requested a credit line of up to 100bn euros that will be channelled through the Fund for Orderly Bank Restructuring (FROB), though those gains were quickly pared as the markets digested what this would mean in the longer term.
The Spanish government insisted that the agreement will not entail further conditions on the country, only on banking institutions. The official request is not to be made until consultancy firms Roland Berger and Oliver Wyman publish their evaluations on June 21st.
Analysts have contrasting views on the announcement - while some are satisfied by the decision, others remain highly sceptical.
€100bn is deemed sufficient to eliminate doubts, according to Goldman Sachs, while Jefferies strategist David Zervos said that it will eliminate market tension. He explained that it is a banking sector bailout, not a government bailout; it will not eliminate risk but the structure for bank bailouts have improved, he said.
CNBC commentator Jim Cramer sees the plan as a necessary step towards something bigger and that the €100bn credit line should be more than enough for banks to recapitalise.
"They have basically addressed the three key weaknesses: banks, regions, and structural weaknesses", said Unicredit chief economist Erik Nielsen.
However, analysts at Deutsche Bank appear cautious. They say that a bailout above €120bn euros would suppose the added risk that the country may be forced to adopt a complete rescue package because the loan must be in line with a solid fiscal position. Further ratings downgrades would be another risk, say these analysts.
Some analysts see the agreement as an opportunity. "What a wonderful opportunity Spain has to sort all this out," said Simon Maughan, a financial industry analyst at Olivetree Securities in London. "But I’m afraid they’re going to squander it."
"The money is there but the question is now how are you going to use it," Maughan said. "If this money actually goes into the banks and allows for proper write-downs, then great - but if just sits on their balance sheets, the uncertainty will continue."
Royal Bank of Scotland labelled the agreement as a positive step that remains far from a solution while Lloyds questioned the €100bn price tag.
The opinions of Javier Flores, an analyst at Asinver, and Luis Garicano, a London School of Economics professor, appear to be completely divided.
Flores said that Spain still remains “vulnerable” after the bank rescue. "Although banks should now be able to begin a recapitalisation process that would enable them to resist potential problems such as a Greek exit from the euro, the fact is that will increase debt by around 10% of GDP. This is in an economy that is contracting with a government that has lost its credibility abroad.
“If the government would have taken control of the situation in December, this bailout could have marked the end-solution to the banking sector’s and government’s own financing problems. Six months later, Spain has lost access to international credit and the manner in which the rescue was addressed does not lead us to believe that things will change," says Flores.
However, Gariano seems much more optimistic: "Now that they have this money, it will hopefully finally be possible to recognise all the hidden losses and clean up the system." He explained that this will boost home sales as prices converge to their market value and will allow entities to carry out their main function, to facilitate financing to businesses.
He said that all this is good news because it helps to reduce the uncertainty surrounding the Spanish economy and marks a change from previous policies that systematically hid past problems.
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