Spain: Three major developments - BBH

Research Team at BBH, suggests that with Brexit, the pressure on Italian banks, and the surge and then sell-off in the yen, Spain may have been pushed off some investors' radar screens.  

Key Quotes

“There are three important developments to note.  

The first is related to Spanish banks.  The Advocate-General of the European Court of Justice (ECJ) opined yesterday that Spain could impose a time limit on claims of unfair mortgage terms.  If the ECJ concurs with the Advocate General as is frequently the case, Spanish banks may avoid refunding potentially billions of euros to a customer who paid too much for mortgages.

Spain had mortgage rate floors that prevented borrowing costs from falling in line with key benchmark rates.  The bottom line is that ruling if upheld, will save Spanish banks billions of euros. BBVA appears to have been the most exposed, according to reports, estimated to be nearly two bln euros in retroactive payments.  

The second development involves Spanish politics.  |It appears that Rajoy, whose PP did a bit better in the June election compared with December, is getting closer to securing another term.  

Third, the Spain, along with Portugal, have a ten day period to plea for clemency before the EC considers the sanctions for failing to do enough to meet their budget targets last year.  

It seems clear that the EC is trying to balance the importance of the rules and recognizing the efforts that both countries have made in recent years.  

We anticipate the EC to ultimately decide on symbolic action.  The EC does not want to appear as a harsh taskmaster, but an ally in coordinating policy and getting the fiscal houses in order, which not-so-incidentally appears to be a prerequisite for German agreement for more burden sharing.    The EC has no interest in sabotaging the fragile Portuguese recovery or undermining the stronger Spanish recovery.    

Both the head of the Eurogroup of EMU finance ministers (Dijsselbloem) and the European Commissioner for Economic and Financial Affairs (Moscovici) have separately suggested that the fine may be zero.    

This would be the first time that a member would be fined for the failure to hit the budget target.

All three of the developments discussed here could be positive for Spain.  The banks may not take as large of a hit as it seemed like for overcharging mortgages.  Spain looks likely to escape without a fine (or perhaps the EC will call it a fine but of zero value).   Lastly, Span appears to be moving toward a minority government, though the confidence of this may be the weakest of the three.”