Spain worse-off post bailout; Italy also threat: Silverwind

The financial crisis in Greece has caught everyone’s eye the past few months. With the Greek elections due this Sunday, the situation has become even more tumultuous. However, Darren Sinden, trader at Silverwind Securities, says Greece is only a side-show. “People are nervous, but the main focus really is on Spain, the downgrades last night and the potential for contagion into the Italian bond market,” he said.

When it comes to Spain, Sinden says it may the EU might be able to contain the situation. “But Italy is far too big for the EU to really to do anything about,” he said. He goes on to say that the situation in Spain has become worse-off after the 100 billion euro bailout the debt laden country for last week. According to him, the Greece elections do throw up some risks, but there are some pro-bailout winds emerging from the region. He explains that contending party Syriza has indicated a flexible stance on exiting the eurozone, so there might be a bounce if a bailout does come. But, if the far Left party wins majority, Sinden sees trouble. “It will be problematic because there isn't a specific exit mechanism for the country to leave the euro,” he explains. He also says the European Central Bank will face a blow because it may not be able to continue protecting itself from losses on Greek debt. Below is an edited transcript of his interview with Latha Venkatesh and Gautam Broker. Also watch the accompanying video. Q: What are you making of how the markets might behave over the next 24 hours? Do they get more nervous getting into the Greek election? A: To some extent, the Greek election is a bit of a side show given what’s going on in Spain and now with the concern about the spillover in Italy. Obviously people will be hoping for pro-bailout winds in Greece, but given the terms or conditions offered to Spain for it’s recapitalization of banks, we would expect a pro-bailout government to be elected in Greece next week, which will come back to the table and try and renegotiate their own bailout. The renegotiations will be on two counts - one to try and make more favourable and two probably to try and make the amount of money that Greece is getting larger. Our understanding is that they have got cash to last till the end of July and not beyond so that they need even more help. So people are nervous, but the main focus really is on Spain, the downgrades last night and the potential for contagion into the Italian bond market, which is of course the third largest government bond-market in the world. Q: If Syriza comes to power or gets a majority there, do you think there will immediately be a correction or will people wait for negotiations to happen and wait for the final outcome of whether they are going to stay in the euro to take a call on the market? A: Syriza moderated their tone in the interviews yesterday. The leader there suggested that he would like to stay in the EU, but not necessarily within the euro, so there is certain hint of flexibility there. But I think could be a relief bounce if we saw a pro-bailout winds, but that would be very short-lived. If the Far Left does win and they do stick to the very tough line, it will be problematic because there isn't a specific exit mechanism for the country to leave the euro. Secondly, up to date the ECB has managed to ring fence itself from taking any losses on its Greek debt holdings. If Greece got to leave the euro, then that might not be possible any longer and would be a nasty blow to the ECB balance sheet. But again I got to stress that Greece is the side. Spain even now could be containable, but Italy is far too big for the EU to really to do anything about. Q: When yields in Spain went above 6% we saw some ECB action. This time around it’s a much sharper increase, so will they perhaps give some breathing time for politicians? A: I think they rather not. They said the ball is really in the politician’s court but they might have to act again. They could offer some more liquidity into the market and perhaps a new LTRO operation, but there is a school of thought that suggests that the LTRO has actually made the problems worse. Spanish banks buy more Spanish sovereign debt and now the Spanish bond yields rallies out and prices of the bond fall. So that could have put the Spanish banks in a worse position. Yes, the ECB may have to act, but not out of choice but necessity. Q: What exactly is the market expecting from that EU meet; that’s the next savior perhaps? A: A subordination of the existing debt would be an issue and my understanding is that if the money does come from the European Stability Mechanism (ESM) then that’s unavoidable. I guess given that the ESM isn’t actually up and running they might be able be able to pull it together to produce the funds from the EFSF. In that case that might not subordinate, but it wouldn’t necessarily subordinate existing Spanish bond holders. Nonetheless, the money will still have to go the Spanish bank bailout fund. It would still go onto Spain’s balance sheet as a sovereign nation and the damage would still be done. They have been downgraded by Egon Jones again and by Fitch, so to some extent the damage is done. Even though the money hasn’t been paid or some hasn’t been agreed, Spain is in a worse position now then it probably was before they ask for bailout last weekend.