Costa del Sol's Property Specialists

Predictions: Bank Stress Test Could Benefit Spain

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Bank Stress Test

With growing concerns about the strength of the European Stress Tests, the bond market of the Spanish Government has rallied in recent days, reducing the country’s cost of borrowing on the capital markets. With the results of the European Stress Test of big banks due to be revealed on Friday, many investors predict that the Spanish Government will benefit more then its troubled Euro neighbours.

Due to the fact that Spain has an extra interest it has to pay investors to buy its debt, puts Spain in the enviable situation of edging out Germany, which is widely consider the safest borrower. This “risk premium” was 1.64 percentage points on Wednesday compared with 2.1 percentage points just a week ago. Fellow troubled Euro Zone countries such as Ireland, Portugal and Greece have not seen that kind of improvement.

With light at the end of the tunnel being clearly seen, even traders in the derivatives have seen a dramatic drop in the cost for Spain to insure its government bonds against default. It now costs $205,000 a year to insure $10 million of Spanish government debt compared with $274,000 on June 29 – a 25% drop. In the banking sector, one of Spain’s largest banks, BBVA has seen an increase in their shares, rising to €9.50 from about €7.50 in mid-June.

With investors now starting to experience positive feelings about Spain’s banking system, the Euro Zones fourth largest economy, which was recently proclaimed as the next Greece, experts have several reasons why there is an improvement in the bond market in Spain. Together with the emergency rescue plans that European leaders and the ECB have launched, the positive influence that Spain’s banks will pass the Stress Test with honours and the fact that Spain has been allowed to raise money from the capital markets without a problem, have given investors an increased optimistic view of Spain.

Even though Spain’s economy is still week, the country is in the process of consolidating the week Caja’s to increase banking stability. There have also been reports that government costs have also been reduced together with further reports of strong interests in foreign investment, including China.

With the looming €16 billion debt that is due to be paid by the end of July, those who were worried once are not worried any more. Even though its not going to be plain sailing for Spain, given how gloomy things got just a few weeks ago and the easing stress in Europe’s financial system, there’s a chance we’ll see more sun in Spain than some market bears expect.