Spain: Political uncertainty amid QE exit risks – Deutsche Bank

Analysts at Deutsche Bank suggest that tensions around the situation in Catalonia are likely to weigh on Spanish growth and confidence.

Key Quotes

“Spain has made considerable progress in correcting imbalances since the crisis - with the current account in surplus and private sector indebtedness falling steadily in recent years. However, material imbalances remain when it comes to Spain's still-elevated fiscal deficit and, more importantly, its large negative net international investment position.”

“Relative to Italy, Spain's external vulnerability is higher with a higher share of non-resident holdings of government debt and, unlike the smaller peripheries, there is less absorption of the external imbalance by the public sector. ECB QE taper could add to the vulnerability in the event of non-resident investors losing confidence in Spain. We do see room for domestic investors to mitigate pressure on the Spanish sovereign if foreign investors gradually turn away, but it may take some sell-off before this comes through.”

“From the perspective of contagion to the rest of the Eurozone, the reduced banking sector linkages and, in most cases, relatively low trade exposures, should limit the risks posed by idiosynscratic Spain tension.”