Yields fall at debt tender but markets remain skeptical

Yields fell sharply at the Spanish Treasury's bill tenders on Tuesday just a day after the government announced tougher capital adequacy ratios for the country's banks and warned that those failing to meet them faced nationalization. But banking stocks were hit by the move and Spain's risk premium widened as investors continued to question whether the plan to strengthen the financial sector went far enough.

The Treasury sold 944.8 million euros in the three-month bills at a cut-off rate of 0.995 percent, down from 1.848 percent at the previous tender on December 21. It sold a further 1.3 billion euros in six-month bills at a marginal rate of 1.828 percent, down from 2.650 percent. Demand was heavy for both issues, with orders for the three-month bills 5.48 times the amount on offer and 5.1 times in the case of the six-month tender.

"Market doubts have largely disappeared," Economy Minister Elena Salgado said after the auction.

The minister announced on Monday that the government was raising the minimum core capital ratio of the banks to 8 percent of risk-weighted assets from 6 percent at present. She said that lenders had until the fall to conform with the new benchmark or demonstrate they were in a position to do so. If not, savings banks, or cajas, would be obliged to transform themselves into commercial banks in order to allow the state bank restructuring fund (FROB) to inject capital into them.

Bloomberg yesterday quoted two people aware of the deal as saying that the FROB plans a bond issue in euros to be managed by Citigroup, HSBC, Royal Bank of Scotland Group, Santander and Société Générale.

The regional cajas are seen as the weak link in the domestic financial system because of their exposure to the ailing property sector and their fund-raising limitations.

The minister estimated the amount required by the sector to be 20 billion euros, a figure well below Moody's Investors Services' estimate of 89 billion euros.

"The government has missed another opportunity to throw some light on the real recapitalization needs of the sector to the market, leaving investors with ample room for interpretation," Bloomberg quoted Ignacio Cerezo, a banking analyst at JP Morgan Cazenove, as saying in a research note.

However, José Viñals, the director of the monetary and capital markets department of the IMF, and a former deputy governor of the Bank of Spain, welcomed the development.

"In the case of Spain the markets' view of the [situation] in the country is probably worse than the reality, and therefore, showing greater transparency and having financial institutions with high levels of capitalization seem to me to be good ways to increase confidence," he told Spanish newswire EFE.

A number of the cajas currently fail to meet the new capital criteria, while commercial bank Bankinter's ratio is also currently under 7 percent. Bankinter was the biggest blue-chip loser yesterday with a drop of 5.16 percent. Santander and BBVA were down 3.13 and 2.92 percent respectively.

Salgado also said yesterday that the government expects a budget deficit of 9.2 percent of GDP for last year against a target of 9.3 percent. The Economy Ministry said the shortfall in the central government's finances was 5.1 percent of GDP, compared with a target of 5.9 percent.