Specific aspects of Spain’s economic outlook
From an equities standpoint, three factors dictated
share price performance for Spanish stocks in 2012: (i)
questions regarding how long it will take to shake off
the recession; (ii) financial sector restructuring in Spain;
and (iii) the ECB’s decision to play a more active role in
championing the euro, and, more broadly, far-reaching
initiatives to strengthen EU integration (ESF, banking
union, etc.). The net result of these opposing forces
was a modest reduction in the sovereign risk premium,
which peaked at just over 600 basis points in July 2012
and is currently trading at 330-360bp.
On the first point, there is no consensus as to how long
it will take to overcome the crisis or address the public
deficit, with the government and third-party analysts
significantly divided on these matters (as are Spanish
versus international analysts). At the time of writing,
there is consensus that the Spanish economy will have
contracted by around -1.5% in 2012; however, for 2013,
the government’s numbers point to a contraction
of -0.5%, whereas external analysts put this figure at
around -1.5%. This gap is by no means anecdotal as the
two scenarios imply hugely different tax revenue perfor-
mances; and without additional spending cuts and/or
tax hikes, the fate of the deficit would also be up in the
air. These initial estimation discrepancies in respect of
2012 (deficit: 7.3% vs. 8%) widen over the projection
period (4.5% vs. 5%-6% in 2013 and 2.8% vs. 6% in 2014).
Assuming that, regardless of which scenario materi-
alises, unemployment will stay at around 25%, these
differences of opinion do nothing to shed light on one
of the unknowns that will be heavily influenced by the
outcome of the bank restructuring process and the effec-
tive willingness of the ECB and Spain’s European partners
to make concerted progress on establishing the author-
ities and mechanisms needed to combat the extraordi-
narily discriminatory financing conditions being borne
by certain countries such as Spain, which are out of sync
with the true spirit behind the European Union.
The recapitalisation and restructuring of the
Spanish bank sector: stress tests and a helping
hand from Europe
In 2012 the Spanish banking sector found itself at the
centre of the financial storm engulfing the eurozone. The
sovereign debt–banking crisis death spiral was evident in
all its glory in Spain, which was forced to ask the European
Union for financial support in order to recapitalise and
restructure some of its banks in light of the uncertainty
generated in the public debt markets by the weakness of
some of the already-nationalised banks and their massive
capital shortfalls.
Following on from the financial system reforms initi-
ated in 2008, in February 2012 the Spanish government
passed legislation that once again hiked the banks’ provi-
sioning requirements in respect of their exposure to real
estate assets. However, once again, these measures were
not sufficient to shake off the misgivings. In a definitive
attempt to clean up the Spanish banking system, the
Spanish finance and monetary authorities decided to
undertake a transparency exercise that was unprece-
dented in Europe, subjecting the Spanish banks to stress
tests performed by independent consultants (Oliver
Wyman and Roland Berger), the purpose of which was to
test the sector’s resilience in the event of highly adverse
economic scenarios and to reveal the capital shortfall
under these hypothetical scenarios. In parallel, on 25 June
2012, the Spanish government asked the European Union
for financial assistance in restructuring and recapitalising
its banks. In July, the Eurogroup agreed to lend Spain up to
€100 billion, conditional upon compliance with a Memo-
randum of Understanding (MoU) replete with 32 stipula-
tions which implied an overhaul of the more vulnerable
segments of the Spanish financial system. The aid granted
turned out to be more than sufficient to cover the capital
shortfall detected in the stress tests, which revealed a hole
of less than €60 billion for 14 entities representing 90% of
the Spanish financial system under the adverse scenario
(€26 billion under the base case scenario), without
factoring in mergers, tax shields or asset sales which
would eventually reduce this figure to €53 billion.
Report 2012
Market Environment
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