Spain Builds Contagion ‘Firewall,’ Pimco’s Bosomworth Says

Pimco Fund Manager Andrew Bosomworth
Andrew Bosomworth, a fund manager at Pacific Investment Management Co. Photographer: Dmitry Beliakov/Bloomberg

Spain is taking steps to build a “firewall” to stem contagion from Portugal’s debt woes as it cuts the deficit and retools its economy, said Andrew Bosomworth, a money manager at Pacific Investment Management Co.

“A firewall is what we are hoping for and the price action in the markets appears to support it,” Bosomworth said in a telephone interview from Munich. “I think the ingredients” for it “are certainly in place,” he said. Newport Beach, California-based Pimco managed $1.24 trillion of assets as of December, including the world’s biggest bond fund.

The gap in yield between German and Spanish 10-year debt narrowed for a third day to 188 basis points, its lowest level since Feb. 2, while the spread on Portuguese debt widened, a sign that investors are becoming more positive on Spain even after the collapse of its neighbor’s government.

While Spain has won credibility for now with its pledges to bring down the third-largest budget deficit in the euro region and make its economy more competitive, investors will watch to ensure the government meets its commitments, said Bosomworth, a former European Central Bank economist.

“We’ve had the announcements and now it’s about the execution and delivery of them,” said Bosomworth, 45. Pimco is a unit of Munich-based Allianz SE.

Spanish Prime Minister Jose Luis Rodriguez Zapatero has changed rules on labor and pensions to bolster confidence in the economy, and also committed to slashing the deficit to 6 percent of gross domestic product this year from 9.2 percent in 2010.

Balance Sheets

The government has also given lenders deemed to be short of capital about a year to bolster their balance sheets or risk partial nationalization. The Bank of Spain, which says 12 banks may need a combined 15.2 billion euros ($21.3 billion) to meet new minimum capital requirements, has told them they must spell out by today how they intend to raise the money.

Banco Base, a grouping of four savings banks led by Caja de Ahorros del Mediterraneo and Cajastur that needs to boost its capital by 1.45 billion euros, said today it would tap the government’s rescue fund. The lender follows savings banks that have said they’ll take money from the fund, known as the FROB, including CatalunyaCaixa, which will take 1.7 billion euros, and Novacaixagalicia.


Yields on Spanish 10-year debt have fallen to 5.16 percent from the euro-era record high of 5.67 percent on Nov. 30. Portuguese 10-year bond yields jumped to 7.80 percent as the spread between the debt of the two countries widened to 272 basis points from 246 basis points on March 23, the day of the vote in Lisbon’s parliament that led to the government’s collapse. A basis point is 0.01 percentage point.

Analysts say it’s premature to conclude that Spain will be able to stem contagion from a European debt crisis that has caused Greece and Ireland to seek financial rescues. A bailout for Portugal, should the country request it, may total as much as 70 billion euros, according to two European officials with direct knowledge of the matter.

“It’s too early to say” whether a firewall has been built for Europe’s debt crisis, said Luis de Guindos, a former deputy finance minister in the government of Jose Maria Aznar and a professor at IE business school in Madrid. “The fact is that Spain is decoupling from Portugal and that’s a reality. Whether this trend continues depends on the implementation of reforms and the growth prospects for the Spanish economy.”

Bank Focus

Investors will look to see what progress the government makes in cutting the deficit and repairing the finances of regional administrations, de Guindos said by phone. Another challenge will be how Spanish economic growth withstands the prospect of higher interest rates signaled by the ECB, he said.

A concern for investors is the true scale of the capital needs of lenders, said Patrick Jacq, senior fixed-income strategist at BNP Paribas SA. The amount of funds needed to ensure an “adequate recapitalization” of Spanish banks may be as high as 100 billion euros, according to George Magnus, senior economic adviser for UBS Investment Bank in London.

“Spain as a country, as a government, has probably managed to escape the crisis,” Jacq said. “The question that remains is whether its banks have. We’re close to entering a period where we’re going to see the focus shift away from the sovereigns and back to the state of the banks.”

Spain is still in a “very, very tight spot,” Charles Wyplosz, director of the International Centre for Monetary and Banking Studies in Geneva, said in a March 24 interview with Bloomberg Radio. “The Spanish government may have to bail out a number of banks and there are good reasons to be nervous.”

Spanish banks’ capital needs, while probably higher than the government’s estimates, may not be as high as some analysts “blow them up to be,” said Soenke Siemssen, head of fixed-income research at Bayerische Landesbank in Munich. The country’s lenders may need between 30 billion euros and 50 billion euros, he said.

“Spain has made progress,” Siemssen said. “It’s not a strong fire-break, but I think it’s there.”

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