Was invited the other day to a panel on Spain´s deleveraging process. Next to me were BBVA´s chief economist and S&P´s head for EMEA sovereign credit ratings. They both espoused optimistic messages: Spain will be ok. Shy that I am when it comes to domestic issues, I machiavellianly chose to muse on the recent Greek debt restructuring and what lessons it may hold for Spain. Greece, you may recall, imposed a 53.5% haircut on 97%+ of its private sector bondholders. Could the same thing happen in the country where I was born? The numbers here, needless to say, would be a tad more dramatic. Spain owes much more money than Greece, so investor losses could be significantly more painful. And not only on bonds: those who sold Spain protection via credit default swaps could also be fatally wounded (outstanding net Spain cds volume is four times what Greece´s was). A big haircut on Spainiard debt could cause ripples throughout markets, in particular when it comes to Euro sovereign debt.
None of my co-panelists believes that such a state of affairs will prsent itself. Spain, they argue, will not follow Greece into haircut-land. But let´s not forget that Greece had to impose haircuts as an inalterable pre-condition to receiving further EU aid. Should Spain finally submit to pressure and become the fourth Euro nation to request a comprehensive bailout, similar conditions may arise.
A haircut need not be a disaster, of course. In fact, it may be argued that investors (creditors) losses would be (should be?) a natural outcome of a crisis such as the current one. No big surprise there, no need for shock. What can be more debatable is whether only private investors should feel the dagger, or rather whether public creditors (the ECB and the like) should also incur setbacks. In the case of Greece, the latter were utterly spared, while the former were mercilessly subjugated.
Spain is not Greece, but it´s nonetheless useful to understand what happened in the Hellenic Republic. Just in case.