Next Spain? Analysts consider country next in line for a bail-out

With Europe agreeing a €85bn bail-out for Ireland's banks, analysts consider who, if anyone, could be next.

Demonstrators burn a picture of Ireland's Prime Minister Brian Cowen in front of Leinster House in Dublin.

In a note outlining the 2011 outlook for European banks, analysts at Deutsche Bank said sovereign concerns were "top of the agenda".

"We expect this process to continue in early 2011, as Deutsche Bank’s economics team believes Portugal is highly likely to tap IMF / EU(ESFS) rescue mechanisms next year. But we believe that the dominoes should stop falling at Spain."

Their fixed income colleagues at Deutsche said in a note on Monday that they were not at all surprised to see concerns over Spain rising again.

"The market seems to think it's inevitable Portugal requests assistance next - perhaps in January? - and then after that Spain will be scrutinised with a fine tooth comb over the coming months. In doing the work for the Outlook we've increasing come to the conclusion that whether you think the Sovereign problems stop at Greece, Ireland and perhaps Portugal depends on whether you think this is a problem with the overall Western financial system or whether you think its only a problem with individual over-leveraged entities."

Simon Samuels, an analyst at Barclays Capital said in a note last week:

"The Irish crisis and subsequent bail-out have returned sovereign concerns to the forefront of investors’ minds. But is it simply the case that some harsh comments from Angela Merkel have made bond investors run for cover? We don't think so."

He added:

"Simply put, the Irish sovereign has been dismembered by its banking system...In September, Irish banks faced redemptions of €25bn of government guaranteed debt. Whilst the government could (and did) extend this guarantee, just like Iceland in 2008, it no longer looked credible to the market, bond holders became nervous, and the system began to implode."

Writing about who could be next, he said:

"Our view is that the challenges facing Spain remain substantial – with the likelihood of a positive outcome poor until at least the sovereign and the banks have successfully navigated their way over the funding hump facing them both in Spring 2011. The question marks over asset quality will likely last far longer. By contrast, we are far more sanguine on Italian prospects. The absence of an asset bubble, and limited wholesale funding reliance suggests the banks pose little incremental risk to the Italian sovereign."

He added:

"Many commentators have suggested that Spain is too big to be allowed to fail. Whilst concrete plans on how to resolve a full-blown Spanish crisis remain opaque, should the tail risk of a Spanish bail out materialise, it is likely that the (stronger) French and German economies will bear the brunt of rescuing Spain, and by extension, the Eurozone."