The interconnectedness between the sovereign and the banks appears to have negatively affected Spain government funding – with the debate on direct vs. indirect bank recaps far from resolved, but apparently leaning towards the latter, while only the former is a true circuit-breaker.
Should markets push Spain to seek some form of external support in the summer, we believe it may initially be a partial support mechanism via the EFSF (which is the only operational rescue fund) rather than a full bailout from the onset.
The provision of official funding for Spain would certainly be a positive, compared to an alternative where Spain might be unable to fund. As such, the initial market reaction could be positive. But we are concerned that such positive reaction might be short-lived.
In the absence of moves towards fuller fiscal integration, therefore, it’s not clear that official intervention in the Spanish bond markets would provide anything more than a temporary respite from sovereign market stresses. This note also looks at the implications across asset classes and banks.
Morgan Stanley Research Europe