Spain’s borrowing costs soar

Posted on July 20, 2012

Spain’s benchmark borrowing costs climbed to within a whisker of a new euro-era high as concerns over its deteriorating economy cast a cloud over eurozone finance ministers’ approval of a €100bn loan to help Madrid recapitalise its banks.

Spanish bond yields have continued to rise in recent weeks despite parliament approving €65bn worth of additional spending cuts and tax rises earlier this week and the unanimous approval of the banking loans, which will unlock €30bn of aid by the end of the month.

    A poorly received debt auction on Thursday, Madrid’s downward revision of its economic growth forecasts for 2013, and the Valencia region’s request for aid from the central government have exacerbated concerns over Spain’s ability to avoid a full bailout.

    As a result, Spain’s 10-year bond yields rose to a high of 7.284 per cent on Friday, according to Bloomberg data, only slightly below the euro-era high of 7.285 per cent touched earlier in the crisis. Tradeweb, another data provider, said the 10-year yield hit a record 7.309 per cent.

    The rise in Spain’s shorter term borrowing costs is even more alarming. Spain’s two-year bond yield spiked to 5.76 per cent, the highest since late last November, while the three-year yield rose to 6.54 per cent. Spain’s main stock market index plunged 5.8 per cent, its largest daily drop in two years.

    Shorter maturity bond yields have for much of the year been kept somewhat anchored by the European Central Bank’s three-year bank loans in December and earlier this year. Italian and Spanish banks used much of the money to buy their government debts, particularly shorter term loans that matched the maturity of the ECB’s loans.

    As a result, Spain has focused on selling short-dated bonds to keep its borrowing costs down, but the sharp increase in short-term yields puts further pressure on Madrid.

    Traders and investors have kept a close eye on shorter term bond yields, arguing that if they continued to rise it would increase the likelihood of Spain’s! being forced to request a formal government bailout from the eurozone rescue facilities, the European Financial Stability Facility and the European Stability Mechanism.

    The cost of insuring against a Spanish sovereign default through credit-default swaps rose to 610 basis points according to Markit, a data provider, near a record high. This indicates it costs an annual €610,000 to insure against a Spanish government debt against default for five years.

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