JP MorganJP Morgan's European bank analysts Jaime Becerril and Axel Finsterbusch outline the major consequences of the 100bn euro Spanish bailout announced over the weekend.
Three points stood out:
- Structural reforms could have to accelerate following the bailout. A bailout will most likely mean Spain will have to bring forward measures expected for 2013, such as increasing VAT, reforming the labour market (again) or going further with regional integration. There’s no more room for error here and even if the EU doesn’t increase the pressure here we expect the markets will, especially considering the increase in sovereign debt resulting from the bailout.
- We see a material risk that Spain is eventually forced to see a full bailout. The impact of the higher sovereign debt as a result of a bank bailout will determine whether a full bailout for the economy can be avoided. Our credit colleagues consider the current bank bailout will eventually lead to a full aid program, especially if Syriza wins the 17 June Greek elections.
- There will be subordination for Spanish sovereign and bank debt. Given the money will be received via the FROB (a public entity) it will add onto the sovereign debt, subordinating the existing debt and increasing the Debt/GDP.