When the European Central Bank revealed its program to help the economic crisis, many strategists have made confident guesses that soon enough, Madrid, Spain would need to ask for help. The outlook for the economy was very dreary, and the fate of needing help, like Greece, Ireland, and Portugal, was very great. The predictions made by those strategists have been proven wrong. The thought of having help from the ECB has been plenty to keep Spain's borrowing cost under control so that Madrid can have access to markets.
The head of European fixed income at BlackRock, Michael Krautzberger, said "People assumed it would just be a matter of time before Spain asked for help, but the market railed too hard for it to happen. I think Spain feels comfortable now, and I don't think they will want to ask for help, as long as they do."
Many analysts say that Spain could possibly avoid a program altogether. The possibility of ECB aid has been keeping Madrid's borrowing costs to a minimum for as long as it takes to get the Eurozone back on track, economically.
The two year bond yield went down from seven per cent to 2.59 per cent yesterday. For the past month, it has stayed at less than three per cent.
A strategist at Citigroup, Richard Crossley said "we are currently in a sweet spot where the OMT is inactive but is standing by reassuringly and everybody is benefiting from the status quo of low peripheral yields in some way."
This decline in Madrid also reflects a little better fundamentals. The banking sector is being reconstructed and recapitalized. International competitiveness and exports are improving greatly.
The banks in Spain have also been getting better from this look on the future. Many were locked out of funding markets for most of 2012. Since the beginning of 2013, the banks in Spain have sold more than $10bn of debt. Although, some people still say that Spain will have to rely on the ECB eventually.
The strategists say that although there has been improvement in Spain's banks, the outlook on the economy is very grim.
John Stopford, head of Investec Asset Management, said "You can paint a rosy scenario for Spain, but so far the evidence shows that it's very hard to get a budget deficit under control through austerity against a weak economic backdrop.
The scale of Spain need assistance, economically, will be a test of the investor appetite for Spanish debt. The Treasury expects to issue around 120bn euros on behalf of the regions and the government, this year, but some analysts say that this estimate is too optimistic.
Raising this much money will be a lot harder if Standard and Poor's or Moody's downgrade Spain's credit rating. Right now the rating is one notch above "junk." If a downgrade is made by one or both agencies, this could push Spain into a program.
Michael Krautzberger said that there is a higher chance of higher bonds causing agencies to take action, other than the other way around. Many investors are cautious of the downgrade.
Many cautious people are wondering whether Spain's financial sector is getting fixed. Even though banks have begun to access more markets, the whole sector needs to be fixed before the economy can be fixed.
An analyst at UBS, Alastair Ryan, said "We don't think the banking system will fix itself in time. If the banking system is fundamentally broken, the tightening of sovereign spreads is of limited use.
Spanish officials insist that a program is unnecessary, but have kept the idea of one to ensure the Eurozone. Even an implemented OMT program is not likely to lower Spanish bond yields because the eurozone may put pressure on Madrid. Some say that it would even backfire.
Mr. Stopford said "Our sense is that the OMT works better as a threat. If spain actually entered a program, then people might realize that it's not a panacea. It could be a matter of buy the rumor, sell the fact.
Analysis: This article is mainly about how even though the rest of the Eurozone is in need of help, Spain doesn't need help, yet. Spain has been doing all that it can to avoid joining a program, but soon enough Spain may need assistance. Many people say that Spain can survive, economically, on its own, while others have large doubts. The authors of this article, Robin Wigglesworth and Mary Watkins wrote this article to inform us about how Spain is doing, economically, compared to the rest of Europe. It tells us many opinions on whether Spain will eventually need help, financially. There was no sense of bias. There were many opinions from both sides.
I think it is great that Spain can survive on it's own for now. I don't think that Spain should avoid help, though. If Madrid doesn't need help, that is okay. If Madrid needs help, that is okay too. There is no reason to avoid the problem. If Spain joins the program, maybe things could be fixed faster. There is nothing wrong with relying on others to help yourself. Spain wouldn't just be helping themselves though. They would be helping much more. I just hope that this crisis is resolved soon.
Source: http://edition.cnn.com/2013/01/21/business/spain-aid-doubts/index.html?hpt=ieu_c2
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