Investors Distinguish Between Spain and the PIG(S)

Chart courtesy of http://www.ritholtz.com/blog/2011/03/have-you-seen-the-little-piigs/

Looking at the above chart showing the 5yr Credit Default Swaps (CDS) of the so called PIGS nations, it would appear that bond investors have begun to distinguish between Spain and [Portugal, Ireland and Greece].


If you look at the 5yr CDS of Spain, which surged to around 4% back in November is now at much more stable 2% today. This is despite the escalation in the Eurozone sovereign debt crisis this week that culminated in the resignation of the Portuguese premier Jose Socrates after the government lost the latest austerity bill. This is widely expected to result in Portugal requesting a bailout from the European Union European Financial Stability Fund (EFSF).


The Wall Street Journal Reports:


Now that it has become apparent that Portugal will need access to the EFSF, the question now moves to, is Spain next?


If the so called 'bond vigilantes' begin to show concern over the ability of Spain to re-finance its debt this could create an intolerable stain on the Eurozone's finances. 


The estimated costs to bailout the Spanish economy would be approximately 1.1trn euros ($1.56trn). The size of this bailout would dwarf the combined bailout costs of Greece, Portugal and Ireland. This but into the context that the entire EFSF stands at 770bn euros shows the significant problems this would create.


Concerns over the health of the Spanish financial sector were raised again on Thursday as Moody's the credit rating service downgraded 30 Spanish lenders or cajas (savings banks). However on a positive note the two largest Spanish based banks Banco Santander and BBVA avoided the downgrade.


Barclays analyst Antonio Garcia Pascual said "investors increasingly have come to distinguish these countries [Greece, Ireland & Portugal] and Spain. Spain's economic reforms have been praised from as far a field as America when Dallas Fed President Richard Fisher said "Spain's 'financial surgery' is praiseworthy"


Additional points include:

Positives

• Fitch states that Spain's banks property risks are significantly smaller in proportion to its overall economy in comparison to Ireland.
• In the extreme scenario, similar to that seen in Ireland, Spain would be required to raise approximately 100bn euros in additional capital. If this was the case Spain's public debt would jump 10% of GDP to 70%
• Even-though this would be challenging it would not undermine the states solvency.
• Spain's strict and unforgiving home ownership laws that require home owners to accept all liabilities for all their mortgage debt even those that are repossessed, as well as the Spaniards strong attachment to homeownership is a positive for Spanish property market. This results in home owners doing everything they can to keep their homes.
• Spanish economy grew by 0.9% in contrast to that of Greece, Ireland and Portugal
• Spanish exports are also doing better then expected, growing around 16% annually.

Negatives

• Spain's public debt which stands at 9.2% of GDP remains to high for comfort.
• Spain's deficit target of 6% is achievable but might require extra fiscal measures.

Only time will tell whether or not Spain goes the same why as Greece, Ireland and most recently Portugal.