Date: Thursday 31 May 2012
Spanish 10-year bond yields were around 6.6 per cent mark on Thursday as Spain remains under intense pressure in the debt markets. In contrast, Germany is financing its debt at ultra-cheap levels while Austrian and French 10-year yields have moved to their lowest levels since the creation of the euro.
MQS Asset Management Chief Executive Bob Gelfond said that 10-year yields above 6.5% create an unsustainable situation for Spain and that a solution will be needed soon. Gelfond believes that Spain can withstand these levels in the short-term but the financing costs will eventually become too much to handle.
On Wednesday, the possibility that the European Union would allow the use of the European Stability Mechanism to refund banks had cheered the markets momentarily. However, European Commissioner for Economic and Monetary Affairs Olli Rehn ruled out the possibility, stating that those funds cannot be directly injected into banks.
CMC Markets analyst Michael Hewson explained that countries such as Germany, Austria and Finland would not agree to such a plan. Nor were the funds allowed to be used to shore up the banks in Ireland, Portugal, or Greece. Regardless, analysts say that there are not enough funds to cover all bank capitalisation needs.
"They’ll [Spain] use it up very quickly and the rest of Europe will be back for more," he said.
Spain is now considered to be against the ropes and analysts believe Spain’s intention of tapping the Treasury debt auctions for funding Bankia is an uphill battle. "With bond yields already nearing unsustainable levels ... raising the sort of money required will put its public finances, which are already borderline, in an even worse state," Hewson added.
"Spain can either use its bank restructuring fund (FROB), which does have some available funds, or try the treasury route, which at current rates will be extremely expensive."
Worries about Spanish bank exposure to bad loans is just one factor and there is also the fear that regional governments will have bigger-than-expected debts and that the economic deterioration will continue to devastate the country.
According to Capital Economics European economist Mark Miller, "Conventional wisdom is starting to approach a situation where Spain is likely to need some sort of external bailout...despite denials from the government itself."
"Then I suppose there is the further question of whether such a bailout would in fact solve Spain’s problems (…) Markets are starting to look ahead, particularly in the environment where there is a risk, for example, that countries such as Greece leave the Eurozone. The overall environment as far as the Eurozone is concerned is clearly unfavourable, which is keeping up the pressure on 10-year bond yields."
"In some ways, it’s a race against time because of the time that is being taken by the auditors, but equally debt servicing costs in Spain are accelerating quite quickly," Miller said.
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