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Flashnote

Global Research

Cross asset Spain

Spanish Banks
EU to the rescue
EU will provide up to EUR100bn to the Spanish government to support the recapitalisation of its banking system We think the full EUR100bn would be enough to cover the banking systems capital shortage We also believe the announcement will provide at least temporary respite for the Spanish bond market and support the euro

10 June 2012
Carlo Digrandi* Analyst HSBC Bank Plc +44 20 7991 6843 carlo.digrandi@hsbcib.com Madhur Jha Economist HSBC Bank Plc +44 20 7991 6755 madhur.jha@hsbcib.com Steven Major Global Head of Fixed Income Strategy HSBC Bank Plc +44 20 7991 5980 steven.j.major@hsbcib.com Daragh Maher FX Strategist HSBC Bank Plc +44 20 7991 5968 daragh.maher@hsbcib.com

The European Union confirmed on Saturday June 8 that it is to offer up to EUR100bn to recapitalise the ailing Spanish banking system, with the final amount being disclosed after the audit of the banking system is completed which should be by 31 July at the latest. Luis de Guindos, Spains economy minister, said the amount should be more than adequate to cover the estimated requirements and provide an additional safety margin. We think the scale of the assistance being offered will provide a shot in the arm for the euro and cap the upward pressure on Spanish bond spreads. It should also reduce jitters in the run-up to the Greek elections next weekend. The implications of the move for Spanish banks, fixed income, FX and Economics are considered below. The funds will be provided by the EFSF/ESM and channelled through the FROB (Fund for Orderly Bank Restructuring) although the government will remain fully responsible for granting the assistance. The conditions to be imposed on the banks are still undisclosed but we believe that 1) the government is aiming to re-establish confidence in the sector while supporting lending growth, 2) that no forced recapitalisation will be made and 3) the government will have to negotiate with the ECB, the EBA and the IMF on the proposed conditions for bank restructuring. European financial assistance for the Spanish banking sector to the tune of EUR100bn would add 10 percentage points to Spanish government debt/GDP, lifting it to around 90 per cent by 2015, on the governments estimates (though this might be optimistic given the IMF's recent projections). We expect the ESM, which comes into effect in July, to be the most likely source of the funds, given the timeline for completion of the independent audit of the Spanish banking sector. As the ESM would have preferred creditor status, this would subordinate other creditors and could have implications for the perceived creditworthiness of the Spanish government. In the absence of a eurozone-wide solution to the crisis, namely greater progress towards a fiscal and banking union, market participants could potentially view this as the first step towards a broader bail-out for the Spanish state. Hence any relief from this announcement could prove short-lived.

View HSBC Global Research at: http://www.research.hsbc.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations Issuer of report: HSBC Bank plc

Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it

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