ECB Bond Purchase Program Eases Conversion Of Weak Spanish Debt Into Safe German Debt, Strengthening German Banks

Tuesday, September 25, 2012 07:19
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ECB Bond Purchase Program Eases Conversion Of Weak Spanish Debt Into Safe German Debt, Strengthening German Banks

Tags: bonds | euro | European debt

Friday will be a big day for Spain. Stress test results will be revealed that will reflect the health of Spain’s financial system by showing how much capital Spain’s banks will need.
 
Spain was promised a €100 billion aid package this summer by a coalition of European countries but fears are that amount prove insufficient.

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In the effort to create a unified bank monitoring system, the one country that had been dragging its feet the longest is also the country with the most at stake in coming to Spain’s aid. Germany has the greatest exposure to Spain’s debt at $139.9 billion. $45.9 billion of that is direct exposure to banks.
 
Concerns that Spain would not be able to manage its debt crisis if it worsened caused a downgrade of Germany’s debt from stable to negative by Moody’s. So the safety of Germany’s own banks could come into question.
 
Yet European Central Bank (ECB) president Mario Draghi’s plan to purchase the debt of cash-strapped countries has made it easier to convert Spanish debt into German bunds.
 
It has boosted the value of Spain’s bonds and cheapened the German bund.
 
The bund is considered to be one of the safest securities in the world. Demand for that debt continues to be high as Spain considers asking for more aid, triggering the ECB’s bailout program.
 
Overall, Europe’s economic outlook is growing weaker, despite the structuring of a framework to save the euro. Manufacturing output fell to its lowest levels in 39 months in September—a clear sign that Europe’s economy is headed toward recession.
 
The moves apparently have come too late to prevent the slump into recession and the agreement to create the unified banking system will see Germany shoring up distressed nations and weakening its status as a safe haven.
 
The current appeal of bunds from the cheap prices will help shore up German banks. Most banks are heavily exposed to Spanish debt, yet not enough to threaten their stability.

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