Oh dear. How quickly the market moves.
Andrew Garthwaite, Credit Suisse strategist, has called time on this Greece crisis. Instead, he’s now focused on “the end game” — the European Central Bank buying bonds, and possibly, bailing out Spain, after contagion fears hit stocks on Tuesday.
Remember that just a fortnight ago Garthwaite thought that Spain was relatively safe from European peripheral contagion, noting that Spanish bond-German bund spreads were at about 90 basis points.
Here’s what he says on Wednesday:
. . . The way out of this mess is: (a) a much weaker Euro; (b) a booming Germany- a one size fits all monetary policy has to be set at a level to help peripheral Europe, and that is going to end up being too loose for Germany (Germany has the least leveraged balance sheet in the developed world, the most undervalued property market and unit labour costs that are 10% too low – remember German GDP is 50% larger than that of peripheral Europe.); (c) the ECB buying peripheral European debt and (d) if necessary, EU/ IMF providing package to support Spain.
. . . We think that the ECB will be forced into the end game (buying peripheral European debt) and, if necessary, to ring-fence Greece by announcing a huge support package for Spain. We believe that the ECB has no other option. European banks hold, we believe, about $75bn of Greek, $46bn of Portuguese and $85bn of Spanish government debt (with around 80% of total Greek government debt being held by foreigners). In total, European banks hold $190bn of Greek assets, as well as $850bn of assets in Spain and $241bn in Portugal. (This is public and private and includes minority holdings) . . .
Yikes. What a difference two weeks and one day’s horrendous Iberian trading makes.
The Spanish bond-bund spread, incidentally, is currently hovering around 118bps.
Full Credit Suisse note in the Long Room, plus some bonus research.
Related links:
Going nuclear at the ECB – FT Alphaville
Greece and the sovereign issue of TBTF – FT Alphaville
Spain and Portugal: the story so far – FT Alphaville