Is market happy with 100bn euro bailout for Spanish banks?

In an exclusive interview to CNBC-TV18, Legland says that “the amount of 100 billion support for Spanish banks is a good step, but the main question mark for the market is will it be enough.”

He further adds that markets will be very volatile going forward if EU leaders cannot deliver on growth during the European Summit later this month, if chances of a ‘Greexit’ increase and if there is uncertainty about financing of the 100 billion euro bailout.

Below is an edited transcript of his interview with Latha Venkatesh and Gautam Broker. Also watch the accompanying video.

Q: To what would you attribute this mild green that we are seeing in the European equity markets?

A: I think this is just a technical rebound. There are still too many uncertainties about Spain, Greece and growth in Europe to have a sustainable rebound in European markets.

Q: Could you take us through what let to this sharp correction from the initial euphoria that we had seen? Do you think there is a realization in the market that perhaps the state will have to bear the cost of Spain’s additional loans, and that since this is not fresh equity infusion it’s potentially negative over the longer term?

A: I think unfortunately you are right. The main question mark for the market is how will it be possible to restart growth in Spain to gradually reduce the level of debt. At this stage, also there is a beginning of a very strong support for Spanish bank. We know that potentially total bailout for Spain would be 450 billion euro. It is very unlikely we will go through this level, but on the other side without any growth, it will be extremely difficult to reduce debt in Spain and in the rest of the Europe.

The second point is that if we take the total amount of potential property losses for banks, it is in the region of 180 billion euro. The amount of 100 billion support for Spanish banks is a good step, but the main question mark for the market is will it be enough.

Q: So how do you expect things to pan out now? Will the market continue to recede because of fears of bigger bills having to be borne and more importantly how will it go to the Greek election?

A: We have three potential market drivers. One is Spain, where we wait for more details about financing of this 100 billion euro. The second is Greece, where our central scenario is that Greece will stay in the euro zone and that it will stick to the euro. There is obviously growing risk that maybe the vote will be negative and at the end of the day Greece exits euro.

Third point is the European Summit which will be on June 27-28, where the market expects the European leader to take steps to support growth in Europe. Without these three, it is very likely that markets will remain very volatile.