Photo: Bloomberg TV
Jefferies Chief Market Strategist David Zervos continues to support the Spanish bank bailout, despite criticism from the markets and other economists who argue that the move has backfired.In fact, Zervos even explains the skyrocketing bond yields in Spain and Italy that we’ve been seeing recently, arguing that borrowing costs for sovereigns will rise even as Europe establishes a watershed banking union.
The primary point that people are missing, he argues, is that money being pumped into Spain from Europe is going to the banking sector through the Fund for Orderly Bank Restructuring, a government-sponsored organisation that will now be overseen by the IMF, and not the Spanish government itself.
To say FROB debt is the same as Bonos is to say that TVAs, SBAs, REFCOs and Ginnies are all US Treasuries. THEY ARE NOT! Ask anyone that traded them in 2008, or in other times of stress. In a stressed Spanish situation, where they are flirting with EMU departure and bank nationalization, I would surely assume FROB debts would be seen as much more vulnerable than Kingdom of Spain debts. To that end, I think this bailout is MUCH different than the last three. It is an attempt to separate the banking system from the state. And that is good news from a systemic risk perspective!!
This banking union, he continues, will necessarily result in higher yields for troubled sovereigns from a pan-European banking system, where banks are not tied to the country in which they are headquartered. Further, regulations from Brussels will likely cause them to clean up their books.
Zervos argues that a healthier, more centralized banking system will reduce tail risk, making the problems of profligate sovereigns less damaging to the European whole.