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The month of September is jam-packed with event risk in Europe.September 6 is the next ECB meeting, and investors are pinning all their hopes on the central bank unveiling a bond-buying plan to aid countries like Italy and Spain who are facing high borrowing costs to fund government budgets.
Spain is viewed by many as the next country in line for a sovereign bailout in the eurozone, but its government has already said it will wait for the details of the ECB’s forthcoming plan before making such a request.
Then, Spain will have to go to the EU to ask for bailout money from the EFSF and ESM, the eurozone’s rescue funds.
SocGen’s head of fixed income strategy Vincent Chaigneau says the eventual negotiations between Spain and the EU over the bailout will be “the main event in September,” because before the ECB will actually intervene in the Spanish bond market, it has said Spain must go through the EFSF/ESM.
The negotiations will be fierce, according to Chaigneau, who writes in a note to clients:
– Expect fierce negotiations on the conditionality of the aid to Spain. Concerns about fiscal developments in Spain are not being appeased. If the government hopes it can get a mild rescue (not a full menu of loans but commitment to EFSF/ECB buying) with little in return, it is fooling itself.
A minima, expect a tougher monitoring of reform implementation. The press suggests that if FROB hasn’t seen the first tranche of the bank rescue plan (€30bn out of €100bn), it’s because EU partners want details about what the money will be used for. Thankfully, the lessons may have been learnt through the Greek rescue: tough conditionality and monitoring is a condition for success, if we want to avoid haircuts again. Officials may now better realise that the taxpayer’s money put in rescue loans is very much at risk, as haircuts on official holdings of Greek debt are still considered.
If anything, the Spanish regional government of Catalonia’s request today for a €5 billion bailout from the central government backs Chaigneau’s views. In a statement, the Catalonian government warned that it would not accept political conditionality with the requested funds because “it is money from the Catalans themselves, that we pay with our taxes.“
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