Photo: theilr, Flickr
Add SocGen analyst Dirk Hoffmann-Becking to those who are mostly unimpressed by the Spanish bank bailout.He still sees numerous things to be concerned about, and still sees good reason for Spanish bank deposits to continue their flight towards the core.
The 100bn recapitalisation goes some way in avoiding the Spanish banking system turning into Japanese style zombie banks. However, as an indirect recapitalisation does not transfer the state guarantee for the Spanish banking system from Spain to the eurozone. Consequently, Spanish bank funding cost remains tied to Spanish government debt and a step change in bank funding cost remains elusive.
We also do not see the eurozone deposit insurance being part of the plan (yet). Depositors in Spain are worried about two things: (i) will my bank be able to give me the cash on deposit and (ii) will they give me Euros or Pesetas. The bank recapitalisation only addresses issue (i), not issue (ii). As a result, we are likely to see deposit outflows slower than what we would otherwise expect but still outflows. These still force Spanish banks into sharp deleveraging (see European banks report Coup de Grèce)
We also do not yet know whether this intervention is enough to make the ECB take a more proactive stance, i.e., resume bond purchases and offer another LTRO. We think this is likely, but given the 645bn of existing Bundesbank target 2 exposure, this is not yet a given. In conclusion, this looks a lot more like a classic eurozone fudge than a solution to the problem.
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