Spanish banks rapidly seem to be becoming the ‘new Greece’, or rather, a key focus of eurozone concern, as their shares slide and credit default swaps (CDS) rise amid growing funding fears.
As FT Alphaville noted earlier on Friday, there is a growing list of credit analysts concerned about the health of the Spanish banks.
However, while sovereign spreads in the peripheral eurozone economies are still at historically wide levels, the “hysteria has resided somewhat” this week, as FT Alphaville’s CDS report noted on Thursday.
In the view of CLSA strategist Christopher Wood, this rare period of relative calm is the appropriate time to recommend a “Spanish flu trade” – that is, to bet on rising Spanish CDS.
Wood, a keen observer of the eurozone crisis as well as his core Asia patch, lays out his rather grim rationale in his latest Greed & Fear client newsletter (our emphasis):
The massive private sector debt accumulation in Spain is the mirror image of the gargantuan current account deficit Spain has run in recent years. It is the sheer level of private sector debt which makes Spain so vulnerable to deleveraging and the related phenomenon of debt deflation.
The ECB is a long way from committing itself to full-scale quantitative easing. Such a policy will only occur after a further collapse in stock markets and a further rise in credit spreads…
For now at least the financial markets are far more concerned about fiscal policy in Europe than politics. And for now this region remains the most likely trigger of macro shocks for world markets since the risk of an Asian Crisis-style crisis of contagion in Euroland cannot be ruled out completely.
The main risk here, Wood cautions, “is that the authorities ban the trading of CDS”.
Well, as Germany has already shown, stranger things have happened.
Related links:
The slow death of the cajas – FT Alphaville
The tipping point for Europe’s banks – FT Alphaville
Scrutiny of Spain’s potential banking pain increases – FT Alphaville