ECB will face heat till EU political situation eases: BGC

"The desperate news about Spain was no surprise," says David Buick, partner, BGC as he opens his analysis on CNBC-TV18. Buick explains that the Spanish banking system was bearing the brunt and the sector could be witness to intense M&A activity in the near future.

He adds that the issue of fiscal austerity had the potential to split Europe and measures would have to be eased to prevent any threat to democracy in the region.
Buick concludes that until the political situation across Europe settled down, the economy would be put on the back-burner and the ECB would have to buy bonds to save the day. Below is an edited transcript of the interview. Also watch the accompanying video. Q: The Spanish downgrade didn't impact the Asian markets at first, but they began paring gains towards the later half of the session. How much of the downgrade has the market factored in? Are you expecting any follow-up to on Spain in the days to come?
A: The desperate news that was confirmed about an hour ago was no surprise to anybody in Europe at all. The unemployment figure of 24.4% and the increase in the borrowing costs with 10-year bond yields posting 6% gains were hoped to be problems that had been resolved.
Now it's just very difficult to see how Spain in the current climate can possibly take itself out of this incredible deep recession. The Spanish banking system is bearing the brunt of the recession. I think there is a huge amount of toxic debt on its books.
The banks are going to have to raise in excess of USD 50 billion euros as fresh capital and it could be quite a lot more in order to bolster itself in the next two-to-three years.
There are obviously a number of very vulnerable banks and I imagine there are going to be some forced mergers there. The finance minster and Prime Minister Mariano Rajoy have announced that nobody is under any illusions and its going to take an awfully long time to bring the economy back to good health.
_PAGEBREAK_ Q: For the moment the Spanish economy minister has said that they have not been asked to go for a bailout and that their banks can cope without another round of three-year funding from the ECB. How long can this bravado last? Do you think 'bailout' is the word we will have to use eventually for Spain?
A: Eventually, yes. I find it very hard to think of any other way that it could possibly be dealt with. The only thing is that there was some real transparency and clarification as regards to state of the Spanish banks and if the Prime Minister was in a position to say he does need a billion euros to bolster the economy up and they have the ability to muster that capital.
It is going to be very difficult indeed within this very difficult climate but then maybe a bailout isn't necessary. On the whole, there are signs of the economy creeping back in France but not so much with Germany and in many of the other countries now with the UK temporarily in recession. The outlook for the immediate future doesn't look that bright.
So avoiding a bailout is going to be very difficult and I think the ECB is going to have to lower interest rates sufficiently below current levels to be in a position to buy more bonds and therefore create higher degree of quantitative easing. Q: Whether it is Hollande or the Dutch parliament or the street fighters in Greece, there is an overall cry to bring down the bar on fiscal discipline required under the current compact. Will that be something that the ECB will give into, after all the ECB did give in to buying bonds? Will the belt of fiscal discipline be loosened a notch?
A: I would be personally absolutely horrified if there would be any news in the level of austerity in repayment of debt. That’s the greatest threat to democracy in the world in my opinion and if people have to go through the levels of austerity that they currently have to go through, in order to arrive at the right answer, the social ramifications are absolutely horrific.
But unless the European Union, in my opinion, is realistic, it could have a huge price tag on it as it could become a very strong case for splitting north and south Europe. It would be extremely divisive, very unpopular and I don’t think it would have the support. Q: When do you expect the core problems to crop up, do you see any kind of risk in liquidity to the markets? Will the central bank intervene soon? By when do you think these things will come to the fore in the near term?
A: There is a risk of liquidity to the markets but I don't think the problems will come to the fore as the European Union is immersed in so many elections- the French election in the next couple of weeks, the polls in Germany in 2013 and the Dutch general elections.
Unfortunately, the general good seems to go to the bottom of the tray and the individual needs of each country to win their general elections probably takes priority.
The European Union will eventually stagger from one crisis to another which will put huge pressure on ECB president Mario Draghi to provide the necessary liquidity to buy bonds. Until there is some political stability in Europe, it seems there is no other way to meet the economic problems.