Low yields, high deposits let Spain stave off aid pangs:UBS

UBS economist Matteo Cominetta explains to CNBC-TV18 that low ten-year bond yields and the recovery of bank deposits after the huge drop in July have reduced the pressure on Spanish Prime Minister Rajoy to sign the request for aid.

Cominetta adds that the situation in Greece continues to deteriorate as the plan to reduce deficit and induce growth fails to achieve its objectives. The economist concludes that the aid will be disbursed as the EU has no interest in forcing another default in the country. Below is an edited transcript of the analysis on CNBC-TV18 Q: How do you read the events in Spain? Are you expecting the Spanish government to seek aid once the elections are over? So the demand for aid should out be before the month is over?
A: I have my doubts. I think the Spanish government will wait longer as ten-year bond yields have come down considerably, currently ruling at levels lowest since April. Bank deposits also seem to have stabilised after the huge drop in July. So, the pressure for Rajoy to ink an aid plan is faded somewhat.
On the other hand, the costs of getting into the plan are on the increase for the Spanish government because data suggests that the deficit targets will be missed by a wide margin this year.
Therefore, Rajoy knows that if he signs a plan now with these deficit targets he will have to impose quite a fierce austerity programme in his country. But when you have the IMF in Madrid every three months, it means business and so I think that he will try to negotiate softer terms before asking for aid. Q: If Spain were to continue to postpone asking for aid because domestic deposits are in good shape, then is it possible that the yields will once again shift back to above-6 percent levels?
A: Yes. I think probably that will have to happen before Rajoy asks for help. Maybe a downgrade to 'junk' would have triggered this yield-increase. I think that’s exactly the reason why Spanish bonds are rallying today because Moody’s decided not to downgrade Spain and rank it just a notch above 'junk'.
If Moody's had downgraded Spain, there would have seen some automatic sell-in due to mandates and indexes, and that may have triggered a request for aid. Q: How do you expect the events in Greece to pan out? Will the process of receiving aid be smooth or is a tremor in the markets expected before the aid is finally coughed up?
A: Unfortunately, not much is going to be smooth in Greece. The plan is not working though it's a very optimistic plan in terms of deficit reduction and growth prospects.
Just to give an idea, while the initial plan projected a 4.5-percent contraction in GDP for this year, Greece recorded minus-7. For next year, the IMF plan projected zero growth, while in reality the Greek growth registered minus-4. Such a plan designed under very optimistic assumptions and is not going to be achieved by the country and therefore, there will be a lot of tension every time there is an IMF review.
I still think that the loan will be disbursed at the end because there is no interest whatsoever, to force another default in Greece at the moment.