Is the Spanish Bailout About to Jeopardize the Credit Ratings of the Healthy Nations?

In a report following up on the Spanish bailout, Credit Suisse highlights the good, the bad, and the ugly of the Spanish bailout. It is true that the speed at which this decision was reached was rather speedy for the Europeans, however more is left to be done.

Credit Suisse highlights three positives in the bailout proposals. First, the 100 billion euro is a realistic number and the 3% interest rate is muted and helpful; the IMF was talking 40 billion last week, so this is a large improvement. Second, they highlight that the bailout shows that the policy makers are able to react to quickly deteriorating circumstances and this allows the ECB to be more flexible. Lastly, they see indicators in Europe at capitulation of levels, meaning that the downside is almost done.

For all of the good of the bailout plan, the analysts also highlight the bad. As I have written about here and here, there are issues over subordination. Also, the analysts are worried that the Spanish government is reaching insolvency, as they see a transfer of leverage from the private sector onto the public sector resulting in debt-to-GDP increasing to 106% by 2014. Lastly, they see more downside to Spanish GDP than consensus expects, as they see up to 5% more downside to GDP. However, this is not the worst of it.

The biggest concern they highlight is that of contagion. As the analysts write: "It seems likely that the EFSF will not need to raise money for the bail-out. Rather, it will provide the FROB with EFSF bonds that can then be repoed with the ECB. However, if, contrary to expectations, the EFSF needs to raise in the markets, this could undermine Italy's credit rating as a contributor of around 20% of the EFSF guarantees." If this does happen, Germany must admit defeat and Draghi will have to step in and print Europe's way out of the crisis.