Photo: Flickr/The Pug Father
Barclays’ Antonio Garcia Pascual tells it like it is:Even if the final figure for bank recapitalisation is less than 10% of GDP, as seems likely in our opinion, and Spain remains solvent, as seemed to be the case, the negative market dynamics in the periphery are unlikely to be fully resolved, as we have argued in the past. While the completion of bank recapitalisation processes is welcome, the solution to the crisis also requires the euro area/core to make explicit decisions and strong commitments to the periphery, especially after the PSI exercise and the open discussion of a Greek exit. In fact, should market events accelerate the ongoing capital reversal (and a Greek exit remains a material contagion risk), given the contagion to other weak economies (eg, Italy has been trading at a spread versus Spain of c.30-70bp for 10y bonds), it would be unlikely that the financial assistance could be circumscribed to the banks only or even to Spain alone. And for that, there are no sufficient rescue funds readily available (ie, for multi-year full-fledged programmes for Spain and, depending on contagion dynamics, for Italy as well).
So long as the euro area does not remove the tail risk of potential FX redenomination for periphery countries, medium- and long-term investment commitments by foreign capital (or even domestic) are unlikely and that creates a growth disadvantage in the periphery. And without growth prospects, there is little hope to emerge out of the crisis.
In other words, absent a comprehensive structural fix to Europe, the run on the periphery shall continue.
And based on our early read, this seems to be the conventional wisdom on Wall Street. The Spain bailout helps, but there’s a lot more work to go.