1. Spain has plenty of money to help its indebted autonomous regions.
When Catalonia became the third of Spain’s 17 autonomous regions to request funding help, it renewed questions about Spain’s ability to cope with high regional debt. Each region controls its own spending on education, health care, social welfare and transportation infrastructure, and each receives a certain amount of tax revenue from the central government annually. But these revenues typically don’t cover the entire budget, so regions have borrowed heavily to sustain their high public spending. Now, some are having trouble repaying maturing debt, and they’re asking the central government for help.
So far, Catalonia, Valencia and Murcia have requested about €9 billion—and according to Fisher Investments research, Spain has plenty more than that available. In July, Spanish officials established the Regional Liquidity Fund, which made €18 billion available to help the regions meet their obligations. Catalonia (the most indebted region), Valencia and Murcia have spoken for only half of it. If other regions tap the remaining €9 billion, additional funding is available through the Instituto de Credito Oficial. The ICO is Spain’s development bank, but the government began using it to support the indebted regions earlier this year. It’s scheduled to raise €20 billion in capital markets this year, but it also has a banking license, allowing it to access additional cheap funding from the ECB.
2. Despite headlines bemoaning “deposit flight,” there is no bank run.
According to the ECB, Spanish bank deposits fell by €74 billion in July, and deposits have fallen by 10.9% over the past year. While this isn’t ideal for Spain, as Fisher Investments research shows, UK investors likely don’t need to worry about a full bank run at the moment.
As long as eurozone-wide deposits aren’t in decline, falling deposits in some nations shouldn’t be a significant issue. When deposits move from Spain to other eurozone banks, the ECB’s Target2 system helps offset the departed funds. Through Target2, national central banks borrow from the ECB and issue short-term loans to the banks. If deposits leave the eurozone, however, there is no offsetting Target2 transfer.
Over the past year, the Spanish Central Bank’s Target2 liability has increased from €57 billion to €423 billion while eurozone-wide deposits have held fairly steady, suggesting most deposits leaving Spain are remaining in the eurozone. The same phenomenon was at work when Greek banks endured capital flights earlier this year, and the ECB has consistently found ways to keep funding them. It seems likely Spanish banks receive similar support as needed.
3. There’s likely no “silver bullet” solution for the eurozone.
When ECB chief Mario Draghi announced he’d do “whatever it takes” to save the euro, many assumed he’d soon present a sweeping solution to quickly solve the eurozone’s troubles. Perhaps the ECB would resume purchasing Italian and Spanish debt to help keep those nations’ borrowing costs down, or it would grant the ESM a banking license so it could borrow from the ECB, increase its firepower and buy as much sovereign debt as needed.
However, while helpful, neither of these will solve the eurozone’s issues overnight. The same holds for any of the big measures proposed at EU summits, like Eurobonds, banking union, political union and fiscal union. Helping lower Italian and Spanish yields might ease the immediate pressure on those countries, but this only buys them additional time to solve their deeper problems. Portugal, Greece, Spain and Italy aren’t in their present situations because they have high debt, but because their economies are less competitive than others in Europe. Only through heavy economic reform can they become more productive. They’ve all begun this process, but it likely takes years for the eurozone’s less competitive nations to develop healthy private sectors and achieve the robust economic growth needed to ease their debt burdens.
But this is likely ok, because:
4. The eurozone doesn’t need an instant fix for equity markets to perform well.
For three years, one main fear has been at the root of all eurozone-related fears: The messy collapse of the common currency. Markets likely don’t care that the eurozone’s issues may not fade for years—investors simply need increased confidence that the euro won’t fall apart in the near term. And every time EU officials compromise on an incremental solution like the sovereign bailouts, funding help for Spanish banks or looser collateral rules for the ECB, investors get more confirmation of leaders’ willingness to do whatever’s needed to prevent the worst-case scenario, and they become a bit more confident in the euro’s future.
Over the next several months, EU summits and other supposedly critical events may come and go without much apparent progress. But EU leaders have spent significant political and physical capital to hold the currency union together—too much to change course now—and they likely continue doing just enough to preserve the euro. As more and more investors recognize this, according to Fisher Investments research, the improved sentiment should provide a measure of relief for equities—and equity investors in the UK and globally.