Risk premium hits highest peak since January

After closing its worst week since November, when the Irish crisis pummeled other peripheral nations, uncertainty over the Greek bailout continued to keep investors hesitant about Spanish debt on Monday. The risk premium on Spain's sovereign debt over the benchmark German bund reached close to 260 basis points, its highest level since January.

Nevertheless, the upward trend slowed later in the day, and by the afternoon was practically stationary. The spread between the yield on the Spanish benchmark 10-year bond and the German equivalent widened from 67 basis points in late 2009 to 247 basis points at the end of 2010. BBVA President Francisco González warned on Monday that the spike in Spain's risk premium "limits credit and blocks job creation."

The chief of Spain's second-largest bank thus linked Spain's difficulty financing itself in the debt market with the country's internal problems, mainly the 21-percent unemployment rate and weak consumption rates.

This week and the next will be key for euro countries to reach an agreement over Greece's second aid package, even as that country continues to be left out of the financial markets. The divergence of opinions between the European Central Bank and the German government over the role of the private sector in a new Greek rescue package is at the heart of investor skittishness.

This lack of consensus increased the pressure on peripheral euro countries, raising risk premiums for Greece, Portugal, Ireland and Spain. However, analysts note that the Spanish situation is very different from the other three countries, which have accepted aid packages. Spain is due to sell 12- and 18-month bills on Tuesday, and will auction off more debt on Thursday.

The EU Competition Commissioner, Joaquín Almunia, warned on Monday that if Spain does not meet its deficit goals this year, it's going to have "a rough time" because it will be unable to finance its growth.

Meanwhile, the Bank of Spain more than tripled its inspections of savings banks last year, according to a report published yesterday. The cajas are considered weaker than commercial banks because of their greater exposure to the real estate bubble.