There will not be Spanish debt buying unless profitability goes up (JP Morgan)

By Tania Suárez, Madrid | It seems that September will be a busy month, the beginning of a year full of interesting appointments for investors. As noted from JPMorgan, markets have already priced in aggressive Spanish debt buying by the European Central Bank, “but the risks shall remain high.” Many sources agree that the ECB is not expected to provide many details of the SMP.

“There’s not a clear indication about the size of the program, the limit of maturity” front-end “or the target return / cap,” JPMorgan analysts explain.

In regard to the SMP’s seniority, Draghi is expected to point out that the ECB will be treated “in a similar way as private bondholders in any debt restructuring.” Although JPMorgan believes that this statement “must be taken with caution,” and that “the official sector will always have the option not to participate in the restructuring of debt in the future.”

Moreover, these analysts expect other monetary policy decisions, such as “the rate cuts refinancing / deposits to be announced in October.” Another issue could be the new collateral profile which is likely to be revealed in September, although they estimate that the details and the application will follow.

JPMorgan experts consider that if the ECB starts buying Portuguese debt, “it will indicate his real motive for SMP intervention, and therefore, its front-end implicit goal of profitability in Spain.” In this sense, these analysts believe that if aggressive buying Portuguese debt takes place, it would signal “a source of transmission of monetary policy and a front-end goal of the Spanish yield around 2%.”

Shall Portuguese debt purchases be modest, this would indicate “a matter of access to market / debt sustainability and a front-end target of Spanish yield around 4%.” And the failure to buy Portuguese debt would reflect “a pure market access reason and a front-end target of Spanish yield of around 6%.”

According to experts from JPMorgan, any of the last two methods is more likely to happen than the first, so it is possible that “Spanish debt is not bought unless current levels of profitability increase.”

Markets expect a lot from the ECB’s intervention, but sources of JPMorgan consider this optimism an “exaggeration”.

“Risks have been underestimated, especially when there are other significant risks (Greece, the German Constitutional Court, Dutch elections, review of the ratings from Moodys of Spain / France / Austria),” they explain.

These experts’ conclusion is that their expectations about the peripheral crisis will remain negative in the long term.

“Unless the ECB has really changed its position to a more aggressive interventionist one, recent political actions probably will mean only a temporary respite,” they point out.