Yes, Spanish banks have been bailed out. Yes, markets are rallying. Yes, risk is suddenly back on. Yes, JPMorgan thinks that this has stabilised the Spanish banking sector. Yes, Goldman Sachs thinks €100bn is absolutely more than enough to cover the Spanish banking problem.
But is it enough to stabilise the situation in Europe, to reassure investors enough so that they keep taking risk, and to revive banks’ revenues sufficiently to encourage a resumption in hiring (and an end to firing)?
No. The Spanish bailout will do nothing to make it any easier to find a job in financial services. This is because:
Although Goldman Sachs’ analysts cheerfully point out that, “The EFSF/ESM support of €100 bn therefore covers the IMF stressed capital gap by a factor of >2.5x – or – allows for five “Bankia-type” clean-ups,” there are still issues.
The biggest issue stems from the fact that the new bailout loans will be senior to existing debt issued by the Spanish government and Spanish banks. In the event of a default, holders of the EFSF/ESM debt would be compensated first. All other lenders may therefore demand an even larger premium to lend to Spanish banks and the Spanish government. So far, all is fine: Spanish bond yields are down.
But if doubts of Spanish government solvency linger, the situation may quickly worsen. The new funds have been provided to Spain rather than to Spanish banks. Spanish government debt will therefore increase further. “This marks a missed opportunity to cut the bank/sovereign circularity and establish a pillar of a bank union," note Goldman analysts. "Regardless of the amount of capital, a vulnerable sovereign will continue to translate into vulnerable banks.”
UBS analysts are equally sceptical. “The terms of this bailout do not really advance the Euro any further towards integration than did the terms of the Greek bailout,” they note. “A credible lender of last resort (or what is now called a “banking union” in some quarters) remains as remote as ever.”
Greece goes to the polls on June 17th. If the left wing Syriza coalition wins, it has pledged to scrap €11bn of Greek budget cuts, to stop paying interest on the €174bn emergency loan Greece received from the EU and the International Monetary Fund, and to renegotiate the loan’s terms.
Syriza wants Greece to remain in the Eurozone, but could precipitate a messy exit by insisting upon a renegotiation of loan terms. In light of the lenient Spanish bailout, which the Spanish Finance Minister insists imposes no austere macro conditions on Spain (although JPMorgan analysts challenge this), Syriza politicians are already feeling more emboldened about asking for the relaxation of austerity in Greece.
Ireland’s politicians are also miffed: their bailout deal seems unduly harsh compared to Spain’s.
Financial News notes this morning that the combined $47bn value of Italy’s listed banks is now comparable to Colgate Palmolive, best known for making toothpaste.
Predictably, Bloomberg suggests that the Spanish bailout will lead investors to think harder before buying Italian government debt. It also notes that the Italian government has to raise more than £85bn in financing every single month…
The likely failure of the Spanish bailout to make any real difference to the European situation is a shame. European uncertainty is hitting banks’ revenues. And with revenues down, banks aren’t doing much hiring.
Last Friday, recruitment firm S3 said financial services recruitment is presently in a “dreadful” state.
So what are you to do? Wait? Hope?
In the meantime, US banks look like the best place to be. As research company Creditsights notes in the graph below, many US banks’ share prices have risen quite dramatically over the past five days.