18
2012-04-13 | THE PAIN IN SPAIN – LIKELY BAILOUT BUT UNLIKELY DEFAULT 2
Tensions rising in SpainLikely to need a bailout but unlikely to default
Over the last two months Spanish CDS prices have surpassed the all time highs from November 2011
The growth outlook for Spain has deteriorated and latest consensus estimate predicts a recession (-1.4%
of GDP) for 2012. Further downward revisions are likely
The government has been forced to revise its budget deficit forecast for 2012 higher (5.3% of GDP) and
growth forecast lower (-1.7%). Risks are for an even larger deficit
The CDS market is currently pricing a 70% risk of a 20% haircut on Spanish government debt within the
next five years
Conclusions
It is likely that Spain will need some form of bail out arrangement this year possibly alongside with
continued partial funding in the private market. For this to be possible the market needs to see steady
progress on deficit reduction and structural reforms
Given that the Spanish debt level is still not alarmingly high (69% of GDP in 2011) the country still has
some time to fix its problems on its own. The relatively low debt level is the best insurance that a Greek-style default can be avoided
The biggest risks are 1) problems for Spanish banks and falling property prices, 2) difficulties to control excessive spending in its autonomous regions, 3) a poor growth outlook with rising unemployment
2012-04-13 | THE PAIN IN SPAIN – LIKELY BAILOUT BUT UNLIKELY DEFAULT 3
CDS market is already pricing a high probability of sovereign default within the next 5 years
The CDS current pricing* indicates a default probability within the next five years of:
70% when assuming a 20% haircut (same as original proposal for Greece)
38% when assuming a 50% haircut (same as 2nd proposal for Greece)
29% when assuming a 70% haircut (same as the likely final deal for Greece)
Above calculations are based on a 5 year CDS. By comparison the equivalent probabilities for France are:20% haircut: 36%, 50% haircut: 16%, 70% haircut: 12%
Contrary to the CDS market the Spanish government yield curve shows no tendencies of becoming inverted which is the classical sign of default expectations
Spain
CDS 10Y Government 10Y
08 09 10 11 123.0
4.0
5.0
6.0
7.0
8.0
0
100
200
300
400
500
2012-04-13 | THE PAIN IN SPAIN – LIKELY BAILOUT BUT UNLIKELY DEFAULT 4
The LTRO’s did great things for Spain and Italy but the positive effects are fading
10 year government yields
Spain Italy Germany
jan
11
mar maj jul sep nov jan
12
mar
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
LTRO 1 & 2
Yield level where Greece, Ireland & Portugal
were cut off from private funding
Net purchases of Gov bonds by the banking system (EUR bn)
Dec 2011 – Jan 2012 (BIS)
Spanish and Italian banks were large net buyers of government bonds after LTRO:s
2012-04-13 | THE PAIN IN SPAIN – LIKELY BAILOUT BUT UNLIKELY DEFAULT 5
The case for a soft bailout in Spain
It Spain is unsuccessful in regaining enough market confidence for its deficit reduction plans to bring down borrowing costs it will need assistance
The help could come from either the ECB through its currently dormant Securities Market Program (SMP) or through the introduction of new LTROs
Neither of these measures are likely to provide a long term solution and thus a formal bailout arrangement would be the next logical step to calm markets
There are several reasons to why a bailout for Spain is likely to be less extensive than the ones in Greece, Ireland and Portugal
1) The current bailout funds EFSF/ESM/IMF are not large enough to fully fund Spain for several years and also (if necessary) take care of Italy. Thus offering Spain a full bailout may destabilize the situation rather than calm things down
2) If Spain is fully funded by official creditors (EU/IMF) that view themselves as prioritized over private creditors the risk of a future default on privately held bonds increases as the EU/IMF take on a growing share of the total Spanish government debt
3) A full bailout would mean that Spain would drop out as a guarantor for outstanding EFSF bonds thus increasing the burden of the other EU countries
2012-04-13 | THE PAIN IN SPAIN – LIKELY BAILOUT BUT UNLIKELY DEFAULT 6
Spain public finances outlook
� The budget deficit for 2011 came in at 8.4%
of GDP (vs a target of 6%)
� The Government plans to cut the budget
deficit to 5.3% of GDP 2012 (vs. original
target of 4.4% of GDP)
� Despite further austerity measures recently
announced to save another €27bn (2.5% of
GDP) the risk is still for a larger deficit 2012
� The goal is still to cut the budget deficit to
3% of GDP in 2013 a task which would
require additional austerity measures or a
rapid improvement in economic growth
� While deficits are not likely to fall as quickly
as predicted the debt level is nevertheless
unlikely to spiral out of control
General government gross debts% of GDP (OECD estimates)
211%
165%
127%
113%112%
98% 98%90%
84%74%
61% 56% 56%46%
Japa
n
Gre
ece
Italy
Irel
and
Por
tuga
l
Fra
nce
US
A
UK
Ger
man
y
Spa
in
Fin
land
Nor
way
Den
ma
rkS
wed
en
Consensus (March) expects a budget deficit
of 5.7% in 2012 and 3.9 % in 2013
Note: the deficits of Spain's autonomous regions and its
municipalities are included in the general government debt numbers
2012-04-13 | THE PAIN IN SPAIN – LIKELY BAILOUT BUT UNLIKELY DEFAULT 7
Spain still has a lower public debt than Germany (Each data point represents one year. 2011-13 are ECFIN forecasts)
Eurozone public finances outlook (ECFIN)
Government debt (% of GDP)
40 50 60 70 80 90 100 110 120 130 140 150 160 170 180 190
-35
-30
-25
-20
-15
-10
-5
0
Government budget balance (% of GDP)
-35
-30
-25
-20
-15
-10
-5
0Germany2009
Ireland2009
Portugal2009
Belgium2009France
2009
Italy2009
Greece2009
Spain2009
bad
good-3%
60%
2012 fc
2012-04-13 | THE PAIN IN SPAIN – LIKELY BAILOUT BUT UNLIKELY DEFAULT 8
€140bn of government debt matures in 2012
Spain faces large bond redemptions in April,
July and October
Total redemptions and coupon payments
amount to €140bn in 2012 (12% of GDP)
On the positive side
1) the average maturity of the central
government debt is still relatively long –
currently 6.40 years (down from 6.54 years
one year ago)
2) Spain has front loaded its financing for 2012 so far having secured almost half of its
full year medium to long term financing A M J J A S O N D
2012-04-13 | THE PAIN IN SPAIN – LIKELY BAILOUT BUT UNLIKELY DEFAULT 9
Risk 1 – Spanish banks
The Spanish banking system is relatively large
compared to other countries. Assets of about
340% of GDP vs an average of 200%
On the positive side Spain’s biggest banks are
among the best capitalized and well diversified
in Europe
The banking sectors problems are concentrated
to the remaining 17 regional savings banks (the
Cajas)
While the overall situation for the Spanish
banking system remains problematic it is still
unlikely that the government will face an Irish
style scenario with massive bank bail outs
2012-04-13 | THE PAIN IN SPAIN – LIKELY BAILOUT BUT UNLIKELY DEFAULT 10
Higher unemployment + falling house prices ���� rising NPL
The total stock of non performing
loans has risen sharply to €140bn in
January 2012 equivalent to 8% of total
loans
Continued house price declines and
unemployment increases will fuel a
further rise in non performing loans
(NPL)
Spain
NPL as % of total lendingReal Estate Market Index
02 04 06 08 10 120
1
2
3
4
5
6
7
8
30
40
50
60
70
80
90
100
110
2012-04-13 | THE PAIN IN SPAIN – LIKELY BAILOUT BUT UNLIKELY DEFAULT 11
Restructuring the banking sectorGovernment has gone from good to better
The government has taken several steps to solve the problems in the banking sector2009: Creation of the Fund for Orderly Bank Restructuring (FROB). Its initial capital of €9bn can be leveraged up to 10 times creating a total fire power of €99bn
2010: Initiated reforms for the savings banks (Cajas) reducing their numbers through shotgun marriages from 45 to currently 17
2011: Increased core capital ratio requirements to 10%
2012: Forcing banks to make additional provisions of €50bn for NPL of the banks total €323bn exposure to the real estate sector.
As growth continues to deteriorate and house prices falls the credit losses of banks will rise. The aim of the restructuring is to limit the burden for tax payers as much as possible. Banks will have to deal with credit losses through - Provisions and future profits to help plug the holes
- FROB (so far €15bn has been committed)
- Private sector involvement (PSI): private investors taking losses on bank debt
1) The general impression is that so far the government (current & previous) has done a good job in handling the banking crisis
2) Spain’s ability to consolidate and restructure its banking sector will ultimately decide if the Spanish government will remain solvent or not
2012-04-13 | THE PAIN IN SPAIN – LIKELY BAILOUT BUT UNLIKELY DEFAULT 12
Spanish banks financingA large deposit base make Spanish banks less dependent on issuing bank debt. Financing
through ECB via the Target 2 euro system has risen sharply
Spanish banks liabilities
Eurosystem borrowingOther
Equity & reservesDebt securities
Deposits
00 01 02 03 04 05 06 07 08 09 10 110
500
1000
1500
2000
2500
3000
3500
4000
4500
0
500
1000
1500
2000
2500
3000
3500
4000
4500
Target 2 funding
2012-04-13 | THE PAIN IN SPAIN – LIKELY BAILOUT BUT UNLIKELY DEFAULT 13
Risk 2 – Excessive regional spending
Spain has 17 autonomous regions (state
governments) which together account
for about 11% of the total public sector
debt
In addition local authorities have debt of
about 3% of GDP
The central government has had a
difficult time restricting spending at the
state level
The government has recently introduced
new legislation aimed at excerpt better
control over regional spending. We still
need to wait to see how effective this will
be
For markets confidence in Spain it is vital that the central government is able to regain control of regional spending/deficits
General government debt
Central governmentState governmentLocal government
00 02 04 06 08 10
billions
0
100
200
300
400
500
600
700
800
EUR (billions)
0
100
200
300
400
500
600
700
800
2012-04-13 | THE PAIN IN SPAIN – LIKELY BAILOUT BUT UNLIKELY DEFAULT 14
Risk 3 – Deteriorating growth outlookConsensus sees -1.4% GDP growth in 2012 and 0.1% in 2013. Further downward
revisions likely in coming months
Consensus GDP forecasts for 2012each point represents the month the forecast for 2012 was made
0.2
-1.4
-3.7
-5.6
0.6
-1.6
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
1.0
2.0
Jul Aug Sep Oct Nov Dec Jan Feb Mar
Germany
France
Spain
Italy
Portugal
Greece
2011 2012
2012-04-13 | THE PAIN IN SPAIN – LIKELY BAILOUT BUT UNLIKELY DEFAULT 15
The Spanish economy in briefSurging unemployment and plummeting consumer confidence
2012-04-13 | THE PAIN IN SPAIN – LIKELY BAILOUT BUT UNLIKELY DEFAULT 16
Spanish export sector may be a way out of crisis
Export, goods and services, % of GDP
Source: OECD
0
5
10
15
20
25
30
35
40
45
50
0
5
10
15
20
25
30
35
40
45
50
GreeceFranceItalySpain
PortugalGermanySweden
� Spanish exports relatively geographically
diversified with limited dependence on GIPS
� Spanish export sector is slightly larger than
France/Italy
Spain Exports 2010
Total ex EMUEMU ex Greece/Portugal
PortugalGreece
Source: IMF
0.9%9.1%
42.5%
47.4%
2012-04-13 | THE PAIN IN SPAIN – LIKELY BAILOUT BUT UNLIKELY DEFAULT 17
Sweden: 50% in early 1990sSweden: 50% in early 1990s
-13
43
-10
-59
-107
-100
-24
-100-100
-13 -17
5537
4
75
12
-120
-100
-80
-60
-40
-20
0
20
40
60
80
EU
-17
Ger
man
y
Fra
nce
GIIP
S
Po
rtu
gal
Irel
and
Ital
y
Gre
ece
Sp
ain
UK
US
Jap
an
Ch
ina
Sw
eden
No
rway
Den
mar
k
Fin
lan
d
75
10
Spain has a very large net debt to foreignersInternational net investment position. % of GDP. SEB estimates
2012-04-13 | THE PAIN IN SPAIN – LIKELY BAILOUT BUT UNLIKELY DEFAULT 18
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