Thursday saw the yield on the Spanish benchmark 10-year government bond touch seven percent for the first time since the euro came into existence, a level considered unsustainable and which has prompted bailouts in other EU economies. The record pressure on the country’s borrowing costs came after ratings agency Moody’s downgraded Spain’s sovereign rating to close to junk status on Wednesday, as doubts about the banking system and the sustainability of the government’s debt continued to reign in the markets.
The 100-billion-euro bailout for the country’s banks will push the government’s debt levels to around 90 percent of GDP, which is a major source of concern for investors, and the main reason cited by Moody’s for its decision to lower Spain’s long-term rating three notches, to Baa3.
“Stabilizing the ratio will be a key challenge for the Spanish authorities, requiring years of continued fiscal consolidation,” the agency said in a statement that was issued late Wednesday. The outlook on the Baa3 rating is negative, indicating the possibility of a further downgrade.
The yield on the 10-year bond hit a euro-era high of 6.998 percent. At the close, it was trading at 6.899 percent. The yields of other maturities also rose. Spain’s risk premium was at 548 basis points above the benchmark German bund, after equaling the maximum recorded since the single currency came into existence of 552 basis points.
Economy Minister Luis de Guindos acknowledged that the situation was “unsustainable”
By contrast, the blue-chip Ibex 35 index closed up 1.22 percent at 6,696.00 points.
“The markets are telling us that they’re unconvinced by the bank bailout and that the next step is that the government will have to concede, capitulate, and go for a sovereign loan,” James Stewart, head of macro research at AX Markets in London, said in an interview with Bloomberg Television. “That seems to me quite likely, and even now I think it’s moving on from Spain to Italy.”
A yield of seven percent is considered to be unsustainable, triggering — as was the case for Ireland, Greece and Portugal — the need for a full-blown rescue package. Given the size of Spain’s economy, that would exercise an enormous drain on the resources of the European Financial Stability Facility (EFSF), and its permanent replacement, the European Stability Mechanism (ESM).
Speaking on Thursday, Economy Minister Luis de Guindos acknowledged that the situation was “unsustainable,” after meeting with Prime Minister Mariano Rajoy, Deputy Prime Minister Soraya Saénz de Santamaría and Finance Minister Cristóbal Montoro.
Spain’s banks borrowed a record net 287.813 billion euros in May
The prime minister, however, made no comment on Thursday, ignoring questions put to him by reporters both on his arrival at, and exit from, Congress. The job of transmitting a message of calm was left to De Guindos. “The government is on top of things. The government is on top of the issues; it is taking measures and it will continue to take measures,” the economy minister said.
Investors are also concerned about the outcome of the Greek elections on June 17, and the implications that will have on the future of the euro.
Moody’s said that the downgrade reflected the government’s “very limited” access to the financial markets, as witnessed by its need for external assistance to recapitalize its banks. In turn, Spanish lenders have been shut off from the wholesale markets, as seen by their heavy reliance on the European Central Bank for funding.
The Bank of Spain said Thursday that Spain’s banks borrowed a record net 287.813 billion euros in May, an increase of nine percent over April. In May of last year, Spain’s banks borrowed only 53.134 billion euros.
The amount borrowed represented 82.9 percent of total lending by the ECB to banks in the Eurosystem in the month, which came to 382.712 billion euros. The weighting of Spain’s lenders in the Eurosystem is only 12 percent.
Meanwhile, Reuters quoted two unnamed sources as saying that the report by independent auditors Oliver Wyman and Roland Berger will show the country’s banks require additional capital of between 60 and 70 billion euros.
It said the report, which was due to be completed on June 21, will be made available on Monday because Rajoy wants it in his hands when he attends a G20 summit early next week.
Sources at the IMF, which estimates the banks’ needs at around 40 billion euros, calculate that Bankia and its parent Banco Financiero y de Ahorro (BFA) — which has already been nationalized — require between 13 and 14 billion euros, less than the 19 billion they have already requested from the government.