Well, FT Alphaville’s been there, done that. Here’s the best of our recent coverage on the Iberian sovereigns and their banking systems.
Until recently, Lisbon had been a bit of a dark horse in the Greek contagion game.
However, FT Alphaville considered the economic factors behind Portugal’s sovereign risk in late March.
While we found Lisbon far more mixed in its fundamentals and credibility compared to Greece, we noted doubts over whether fiscal adjustment could proceed fast enough.
Indeed, similar doubts led Fitch to cut Portugal’s debt from AA to AA- on March 24, with a negative outlook:
Fitch considers the government’s recently-announced consolidation plans to be broadly credible, incorporating a high level of detail underpinning a largely expenditure-based adjustment and reasonable macroeconomic assumptions. It builds on a track record of public wage bill reduction over 2005-2008 and significant achievements in public pension reform.
However, the planned deficit adjustment is back-loaded and the risk of macroeconomic disappointment (with knock-on effects to the deficit) is significant, particularly in the latter years of the government’s projections (2012-13). Further fiscal and/or economic underperformance in 2010 and 2011 could lead to another downgrade…
At the same time, Portuguese banks look relatively healthy compared to their peers in other parts of the eurozone — as we noted of another Fitch report.
That may change if their government debt holdings deteriorate, however — for which the pricing of Portugal credit default swaps may offer some guidance.
In contrast to Portugal, FT Alphaville and Spain are old friends.
We’ve often considered the fundamentals underlying Spanish sovereign risk — most recently as focus has turned to fiscal austerity in Madrid, as in Lisbon and Athens.
While Spain’s debt load may not be anything like as large as Greece’s, potholes do lie ahead for adjusting its fiscal position.
In particular, we’ve probed the financial side-effects of Madrid’s fiscal stimulus plans, including infrastructure lending and the role of the Instituto de Crédito Oficial, a state investment bank.
ICO, a key sub-sovereign issuer, has increasingly lent to struggling small businesses as the recession continues. We’ve noted once or twice how ICO’s risk has diverged from the sovereign. There may be more risk ahead.
Perhaps most important, however, is the continued unwinding of the construction and credit booms in Spain’s pre-recessionary economy. The key is how effectively Spanish banks can restructure their balance sheets and control non-performing loans.
Spain’s small savings banks, the cajas de ahorros, have done much worse in this task than large lenders like BBVA or Santander. Indeed, S&P dwelt on the increased loans that a government fund for bank restructuring will likely have to make, as part of its sovereign downgrade.
But S&P believes the financial system as a whole faces serious risks — as we’ve noted. Analysts often share that opinion. And much will depend on whether shadow banking losses remain a threat to Spain’s financial system.
In short, as Tolstoy would have said — happy sovereigns are all alike, but every unhappy sovereign is unhappy in its own way.
Spain and Portugal are clearly no different.