Spain bailout risk receding, says report

THE risk of Spain having to follow Greece and Ireland in seeking a bailout from the IMF has fallen considerably, a new report says.

Compiled by Bank of America Merrill Lynch, it says that Spain and Portugal may escape the humiliation of having to be rescued by an EU/IMF deal.

Greece was granted a €110m deal back in May of 2010, while Ireland was rescued in November with an €85bn financial package that opposition parties have condemned as being a bad deal for Ireland.

A report into the troubled peripheral euro region says the EU may be able to contain the fallout from the debt crisis, but it warns speedy action is required if they are to avoid suffering the same fate.

Focusing on Spain, the report said it is “working hard to convince investors that it has a credible fiscal austerity plan and the right strategy to recapitalise its banks”.

Overall the hard data on the economy remains weak and “Spain does not have the luxury of time,” warned the bank.

It now calculates the probability of financial assistance being required has fallen sharply to 36% on 25 January from 58% at the start of the year.

“Our baseline scenario is that Spain’s efforts will pay off and that it will manage to issue debt. We believe that this crisis will prompt the EU to adopt a more comprehensive solution covering both banks and weaker sovereigns.”

Spain is implementing the right policies, is solvent and is on track to hit its 6% budget deficit for 2011, and has overhauled its labour laws and is working on pension reform by February 11.

Using certain assumptions, including a bank bailout of €55bn, BofA Merrill Lynch suggest Spain’s public debt will peak at around 82% of GDP by 2014.

It is essential that the Spanish government shows “its determination to push ahead with the reform agenda” given the weak state of the economy, the analysis said.

The BofA said restoring competitiveness, that requires a radical overhaul of its labour market, must be high on the Spanish agenda.

The EU has been steadfast in expressing satisfaction about Spain’s efforts since the Government launched an austerity programme in the late spring of 2010.

The OECD’s verdict on fiscal consolidation is also relatively positive, it said.

“With a variety of backstops in place, and better market sentiment, we detect a more relaxed attitude in the main European capitals about what will happen next. But there is only so much that the European Central Bank can do in terms of direct support through government bond purchases.”

The report concludes Spain is unlikely to seek a bailout “unless the crisis intensifies significantly” in the meantime.

“Trigger points would include banks struggling to issue debt even with the backing of a state guarantee, an ever increasing cost of funding threatening the strategy of debt reduction, and anaemic growth in Q4 2010 and Q1 2011.”

Overall it says Europe has the tools to stop the rot.

In the current uncertain climate, with the lack of political will to fund a Eurobond programme, the bank said “the most likely response would be to enlarge the size and/or redeploy the European Financial Stability Facility for a pan-European bank recapitalisation scheme”.