Spain May Be Forced Into MOU & ESM/ECB Intervention

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The Spanish government claims that all its announcements are in line with the recommendations from European Union (EU). For Madrid, which is trying to get back in EU, the MOU will just be a formality, as it only has to re-collect what exists currently. Even the European Union backed this approach, with Olli Rehn heaping praise on the budget bill and national reform plan.

As per the EU, a mere “re-bundling” from Madrid will be good enough in the current conditions. A report from Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB) feels “Rajoy would probably be ready to formally request ESM/ECB support”. As per the report, the backing of the EU is not the only thing that is needed, as there are other affected parties also. The report feels Paris could side with the Commission, and the stance from “hawkland”, which comprises Germany, The Netherlands, and Finland, is also uncertain. The recent praises of Spain by While W. Schaueble, including that Spain might not require an MOU, may be “German government’s weariness at requesting from the Bundestag, yet another transfer to Spain, on top of the bank recapitalization loan”. Some of the recent announcements from Spain today may highlight the above ‘weariness’, as parliaments may have reservations about “light conditionality”. As per the report, the majority of the planned spending cuts will have to be from the regions, but Madrid, which is struggling with Catalonia, may not be able to ensure such cuts. On the decision to pay for the retro-active price indexation of the pensions with the reserve fund, the report feels it may spur concerns. A joint statement from Germany, the Netherlands, and Finland, on recapitalization, highlights the fact that moral hazard issues are still visible in core Europe.

The report from Deutsche Bank AG (ETR:DBK) (FRA:DBK) (NYSE:DB) feels that in the present arrangement ‘a clear leader, who would precipitate the decision’ is missing. The ECB does not want to lead “for fear of a subsequent political backlash”. Spain could assume the role of the leader, but it will have to be guaranteed “nothing more will be requested from them”.

If Spain, accepts a low recapitalization loan later today, the report expects “the intrinsic macro weakness of Spain will not be properly addressed”, and a further downgrade from Moodys could reveal the “overly optimistic growth forecast for 2013 (-0.5%)”. Spain will eventually be forced into a MOU and joint ESM/ECB intervention, but the actual intervention will take weeks to crystallize. The report feels “The absolute limit in our view is the end of October, with EUR 20bn of redemptions coming due. In the meantime, pressure could gradually be building around the bond auction on 4 October, and the European Council, on 8 and 9 October”.

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