The Spanish dream: let’s break the vicious circle of sovereigns and banks

By Julia Pastor, in Madrid | On Tuesday, financial analysts at Link Securities commented that

“Spain would be in the spotlight of present week political contacts”, of course, in a clear reference to the G-20 meeting at Mexico. “Discussions held there will largely focus on the country’s situation.” And that is exactly what has happened.

Spanish president Mariano Rajoy arrived in Mexico with the aim of putting on the table an essential point not only for Spain, but also for the rest of the European members: the need of breaking the vicious circle between sovereign and financial debt.

The first personality in taking Rajoy’s gauntlet was the European Comission president José Manuel Durao Barroso, who has talked about the importance of finding a mechanism to help Spanish banks in a direct way, precisely to

“break that link joining banking and state risk… and Spain is a good place to start.”

In the end, the G-20 leaders seem to have considered the idea as very much acceptable, since it has been included in the meeting’s final declaration. They, too, stated that it is necessary to break the feedback loop between sovereigns and banks. The G-20 has committed to safeguard stability and improve the markets, as well as clearly supported the new Greek government, welcomed Spanish plans to recapitalise its banking system, and expressed their hopes for a major European fiscal and economic integration addressed under further single financial supervision.

José Luis M. Campuzano, chief strategist of Citibak at Spain, labels US President Barack Obama’s statements after the meeting as very interesting. Indeed, Obama said that

“if people have a sense o

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f where they are going, that can provide confidence and break the fever.” He also affirmed that the measures taken were not going to be “a silver bullet that solves this thing entirely in the next week or two weeks or two months.” However, he admitted that each step points to the fact that “Europe is moving towards further integration rather than a break-up.”

Meanwhile, the main European leaders' reaction to the twenty-country meeting was varied. The Italian president Mario Monti proposed to use the future European Stabilility Mechanism to directly purchase troubled countries’ public debt in order to stabilise their financial costs, and consequently avoiding any rescue.

As Citi ‘s chief strategist comments, while Frech president welcomed the idea, Germany did not say anything. The truth is that early this morning, Europe woke up with rumours about a €750 billion mega-injection for a massive buying of Spanish and Italian debt, but at the moment there is no official confirmation from the European Commission.

If Merkel accepts Monti’s proposal or not, as well as if the massive debt purchase is performed or not are matters hanging on the balance, but Santander’s analysts remark that they both are “encouraging messages.”

As for Spain is concerned, good news come from the G-20 talks about the possibility that the credit line to the Spanish banking sector may be implemented via the EFSF and not the ESM, say experts at Santander.

“This would involve that the debt could be pari-passu, and therefore, not subordinated to current debt.”

The next chapter of this euro crisis resolution will be revealed next Friday four-side summit at Rome, which will gather the German Chancellor Angela Merkel, French president François Hollande, Mario Monti and Mariano Rajoy. For the better or for the worse, Spain’s prominence goes on.

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