That is the question that still lingers across the market following a steady decline in Spain’s 10 year borrowing costs over the past few weeks after the ECB announced in September that they are prepared to engage in unlimited bond buying of short term sovereign debt if a euro area country seeks a sovereign bailout and agrees to accept the attached strict conditions with a restructured austerity reform package.
Last July ECB President Mario Draghi said that he is willing to do “whatever it takes” to save the Euro. The bond markets responded positively to Draghi’s bullish statement and were soothed even further in July after EU lawmakers approved up to €100 billion ($129 billion) to help directly bailout Spanish banks which bypassed Madrid’s stressed balance sheet and saved Spanish PM Rajoy’s popularity across Spain by not requesting a sovereign bailout with its unpopular austerity package.
The recent demonstrations in Madrid last week followed by the sudden request for snap elections over succession demands in the province of Catalonia revealed the high degree of antipathy that many Spaniards hold towards imposed EU austerity measures that come on the heels of full blown Spanish recession that is underway while the country is also struggling to find a bottom in its ravaged real estate market and come to terms with its high unemployment level.
Last Friday Spain took a key step by releasing a banking audit of its 14 major banks. Half of their banks failed a “severe stress test” and it was later revealed that they would need €53.7 billion in new capital.
The €53.7 billion figure includes adjusted account mergers underway and deferred tax assets which lowers it from the €59.3 billion shortfall level, the Bank of Spain and Economy Ministry said in a Sept. 28 statement and reported in Bloomberg.
On Sunday September 30th credit agency Moody’s announced that Spain’s banks face a capital shortfall that could climb as high as €105 billion ($135 billion), nearly double the amount that Spain’s government released last week.
However, the higher recapitalisation level is viewed overall as a net positive development which carries the potential to help boost the solvency of Spain’s banking institutions.
“Recapitalisation will materially enhance the solvency of affected institutions and help restore market confidence in Spain’s banking system as a whole,” said Moody’s.
Meanwhile, Spain’s sovereign debt problems continue to linger.
The cost of recapitalizing Spain’s cash strapped banks is expected to send Spain’s public debt to 85.3 percent of gross domestic product in 2012 and 90.5 percent in 2013.
It also raises the public deficit to 7.4 percent of output this year, Budget Minister Cristobal Montoro said on Saturday, easily above the 6.3 percent target that he agreed to meet last week.
There is speculation that Moody’s may decide to downgrade Spain’s sovereign debt as early as this week-end.
While Spain waits to take the leap towards a sovereign bailout their 10 yr. bond rates have moved up close to 6 percent.
Euro-area finance ministers will discuss the debt problems of Spain on October 8th and again during a European Union summit scheduled for October 18-19.
Reuters is reporting that Spain is ready to ask for a sovereign bailout as early as next weekend but Germany has signalled that it should hold off.
According to Reuters, “Euro area officials are considering a so-called Enhanced Conditions Credit Line that would keep Spain in the credit markets with support from the euro zone rescue funds in the primary bond market and from the ECB in the secondary market.”
There is also some speculation that Spain’s PM Mariano Rajoy is buying more time to ask for a sovereign bailout until the October 21 regional elections are completed in his home state of Galicia and the Basque region.
Asking for an unpopular bailout package with even more austerity measures carries added political costs that could take a punishing turn at the upcoming elections.