A mooted rescue package worth up to EUR100 billion for Spain’s beleaguered banks failed to restore confidence in the country’s creditworthiness as concerns mounted that the deal will load more debt onto the Spanish state and threaten to subordinate bondholders behind official creditors. An early rally in Spanish and Italian debt quickly reversed with yields on both Spanish and Italian 10-year government bonds climbing more than 20 basis points….
Following weeks of speculation, the Spanish government on Saturday confirmed it will seek outside assistance for its troubled banks, while European finance ministers said the euro zone stands ready to provide the funds, if requested. While the bank rescue removes a key cause of short-term uncertainty, it would increase Spain’s indebtedness, and has the potential to deter some investors in Spanish debt, if the bailout funds are given senior creditor status over ordinary bondholders. Moreover, soaring unemployment and an economy mired in recession will make it tougher to bring Spain’s budget deficit under control, while Sunday’s Greek election threatens to send another bout of contagion through Europe’s financial markets.
Bond markets, which have become increasingly concerned about Spain’s fragile banks in recent weeks, were only briefly soothed by the news of the rescue package.
Spanish 10-year yields fell to just above the psychologically important 6% level, before climbing once more as investors digested the weekend’s news. At 1140 GMT they were 24 basis points higher at 6.43%, according to Tradeweb. Ten-year yields on Spain’s peripheral counterpart Italy also rose, by 23 basis points to 5.98%.
Although the bailout is specifically targeted at the banking system, it adds to Spain’s overall debt pile, as the country’s bank recapitalization fund is a government-owned entity…
Tick tock.
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