With Ireland now locking down the deal for its bailout, and Portugal assumed to be next, Spain lurks as the real debt threat ready to take down the eurozone.
But all of the assumptions about Spain may be wrong.
Societe Generale’s assessment of the country suggests the market’s rating on Spain, that it has a 23% chance of default in the next 5-years, is untrue.
Instead, SocGen see Spain as having made sound, solid steps to get their finances back under control.
Note Spain’s deficit, now looking much better than the markets’ latest target, Portugal. (2010 in pink)
Photo: Societe Generale
And in direct comparison to Ireland, Societe Generale say Spain has three good things going for it:
- Spain’s housing market valuations have slowed their declines, and while those declines will continue, it is likely they will be much slower.
- Spain has spent very little supporting its banking sector thus far, €16 billion according to SocGen. And while costs may rise to €200 billion in the worst case scenario that’s still less, by percentage of GDP, than the U.S., UK, or eurozone spent on their banking sector bailouts.
- Even if the property sector tanks, with CRE valuations falling 35% in 2010 and 30% in 2011, and residential collapsing 8.8% in 2010 and 15.2% in 2011, banks would only need €1.8 billion (data from the recent stress tests).
So, some good news on the Spanish front. But where does it get really sticky?
With the stress tests of course, from Societe Generale (emphasis ours):
For now the focus should be on the elevated level of private debt and how that feeds into bank losses, as the quality of the debt deteriorates in a weak economic environment. Spanish officials claim their national stress test was both severe and broad. Yet investors have lost confidence in the whole test, which none of the Irish banks failed!
Spain’s problem is that if there is to be another slowdown in its domestic economy that further hits home prices than predicted in the stress tests, government support will be needed in a much larger way for the banking sector than earlier projected.
It is then that Spain may start to look like Ireland, with the government dumping money into the country’s banks and calling on the eurozone bailout provisions to provide it funding support, if the funds exist.