Frying temperatures, fraying nerves

Spain may have been crowned king of soccer at the South Africa world cup but whatever euphoria that victory has generated seems long gone.

Riding through Madrid on my way to Barajas airport in the early hours of the morning, I am treated to a long, foul-mouthed diatribe on the ill-health of the Spanish economy and the urgent need for a change in government, dashing any hopes of a welcome doze to the airport interrupted only perhaps by a brief appraisal of Spain’s performance on the pitch.

It was a timely reminder that, even though the summer skies are clear and the sun is shining with considerable strength over Spain and Portugal, the mood among these countries’ inhabitants is grim.

Painful measures

Under considerable pressure from the international money markets for most of the year, Spain and Portugal – along with the rest of the rudely named PIIGS (Portugal, Italy, Ireland, Greece, Spain) – are in the process of implementing painful austerity measures in a bid to stave off the notion that they might soon follow Greece in seeking European Union (EU) help to prevent a sovereign default.

This crisis of confidence has created tension that now pervades Iberian society. The pre-stress test Iberian banks are especially jittery.

In the end, all the major local banks passed the well-publicised European stress tests – but only time will tell when they will start having an easier time on the international money markets.

As one Lisbon-based banker explained, the European sovereign crisis hasn’t stopped his bank from doing business, but higher borrowing costs and the general economic malaise have certainly made it much more cautious and selective regarding the deals it now looks at.

Recent data released by Portugal’s central bank shows just how close to paralysis local institutions came this year: until May, Portugal and its banks were unable to obtain long-term debt from foreign investors, leaving the European Central Bank (ECB) to plug the gap, lending unprecedented amounts to Portuguese banks and going large on Portuguese sovereign debt.

You need look no further than one of the summer’s hottest infrastructure deals – the €1.7 billion purchase of a 16 percent stake in Abertis by European private equity firm CVC Capital Partners – to get an idea of how sceptical investors are about Iberian risk exposure.

Initially touted as a €12 billion leveraged buyout involving ACS and La Caixa – Abertis’ main shareholders – together with CVC, the buyout was set to be financed with €8 billion of debt and €4 billion of equity from the consortium.

But as it turned out, many of the banks approached by financial adviser Mediobanca were queasy about having any exposure to Spain, cutting the size of the debt package to just over €5 billion. Even that figure became too troublesome, with the transaction morphing from a €12 billion mega-buyout to a more modest purchase by CVC of part of ACS’ 25.8 percent stake in Abertis.

Of the 14 to 20 banks originally said to be looking at the deal only four – La Caixa, Mediobanca, Societe Generale and Santander – ended up financing the stake purchase with a more modest €1.5 billion debt package.

If initial reactions to the European stress tests are anything to go by, that aversion – and Iberia’s blues – may stick around long after the temperatures start cooling. As Carl Weinberg, chief economist at research firm High Frequency Economics, told the Wall Street Journal :

“The question traders and investors wanted answered by the bank stress tests was this: If Greece, Portugal, Spain, Italy or Ireland default on their bonds — or if prices on those bonds are marked down by 20 percent or more in a restructuring scenario — do European banks have sufficient capital to withstand the shock? The EU, the ECB and the Centre for Economics and Business Research did not answer that question in any way, shape or form.”