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