Draghi effect stems outflows of capital from Spain

Spain saw a net inflow of capital in September for the first time in 14 months as the country benefited from European Central Bank President Mario Draghi’s pledge to use everything at his disposal to save the euro.

According to figures published Friday the Bank of Spain, the country saw net capital inflows of 30.988 billion euros, the third-biggest positive balance since 1990. The ECB’s plan to buy the sovereign debt of financially distressed euro-zone countries unveiled at the start of September has encouraged investors to move back into the Spanish sovereign debt market. This has been reflected in Spain’s risk premium, which is down by over 200 basis points from its levels of well above 600 basis points in July.

"This represents a clear change of sign in the evolution of capital movements in Spain due to the possibility of the ECB intervention in defense of the euro,” Reuters quoted Nicolás López, director of analysis and markets at M&G Valores, as saying. “At least it has stemmed the hemorrhaging of capital outflows and the scenario of panic that prevailed.

“At least it has stemmed the hemorrhaging of capital outflows and the scenario of panic that prevailed,” M&G’s López added.

At least it has stemmed the scenario of panic that prevailed” Nicolás López

Some 312 billion euros in capital was withdrawn from Spain between July of last year and September of last year. In the first nine months of the year, net outflows amounted to 216.174 billion euros.

In September, Spain booked a current account deficit of 370 million euros after a shortfall of 3.726 billion a year earlier and a surplus of 1.224 billion in August.

The government of Prime Minister Mariano Rajoy has taken advantage of the easing of tensions in the debt markets to put off the decision of whether to ask the European Stability Mechanism (ESM) for a bailout. The ECB conditioning its intervention to euro-zone countries first asking the ESM for help.

However, former ECB Executive Board member, Spaniard José Manuel González-Páramo said a bailout might not be necessary given the ease with which the Spanish Treasury has managed to raise funds of late. The Treasury has already met its funding needs for this year and has been building up a buffer for next year.

It is by no means excluded that a bailout will not be requested"

“It is by no means excluded that a bailout will not be requested, if a sequence of good news is produced in terms of the deficit and other things,” González-Páramo said in an interview with Bloomberg Television in London on Thursday.

“If you had asked in July whether Spain would be in the situation it is now in terms of funding, you would never have bet that this would be the case. But you see what you see,” said González-Páramo, who now teaches at IESE business school in Madrid, said.

ECB would not necessarily have to buy bonds to bring down borrowing costs, González-Páramo said. “It’s an expectations game, the same game we have seen since July: the expectation that you could request a bailout and the ECB could intervene has kept funding costs down,” he said. “Ideally we should see no intervention.”