Spain bank rescue fails to dazzle investors
ReutersEuro-zone finance ministers agreed on Saturday to lend Spain up to 100 billion euros.
MADRID (MarketWatch) -- Spanish stocks reversed a dramatic early rally on Monday and borrowing costs shot higher as analysts poked holes in the nation's bank-bailout plan announced over the weekend, and focused anew on problems that continue to dog the euro zone.
Borrowing costs shot higher by midday in Madrid and kept going. The yield on the 10-year government bond (10YR_ESP) had eased as much as 17 basis points, to climb 23 basis points to 6.42%, according to Tradeweb. Those costs soared above 6.7% in late May as concerns over Spain's role in the euro-zone crisis escalated.
"It is the fact that by accepting this deal, the Spanish government is opening a can of worms because the funding from the European Stability Mechanism has priority credit status, so effectively you're making all other issued Spanish bonds inferior to banking bond loans, which is essentially what happened to Greece," said Steen Jakobsen, chief economist at Saxo Bank.
The Spanish government announced Saturday that it would seek assistance from the European Union -- of up to 100 billion euros ($125 billion) -- to shore up the banking sector, hit hard by bad loans that have resulted from the collapse of the housing market.
The amount will be determined once the results of an independent audit of the banks is known June 21. The International Monetary Fund last Friday estimated that banks in Spain need to lift capital levels by €40 billion. The loans will be channeled through Spain's FROB bank bailout fund via either the ESM or the European Financial Stability Facility, which many say Spain doesn't want because it comes with more strings attached.
"From a market perspective, you need to price bonds lower because the quality of bonds you own is lower than it was on Friday," said Jakobsen.
Investors appeared to get out of Spanish banks as quickly as they got in. Heavyweight
Bank problems loom large
In a research note Monday, fixed-income strategist Guy Mandy said Spanish banks may still have a hard time raising funds in the market despite recapitalization.
"The problem in Spain is not just an issue of rectifying write downs or subordination on sovereign debt, as with Greece, but a large volume of deteriorating housing assets," said Mandy, fixed-income strategist at Nomura, in a note Monday.
"Large equity dilutions, equity values adversely affected by the servicing costs of recap instruments and a predefined maturity all lead to a reduction in the value of equity and could lead to an increased likelihood of greater state bailouts," he said.
Mandy went further to say that Nomura still believes the euro-area debt crisis will get "significantly worse before any meaningful combination of policy responses take place." And absent that, which they see as a must in the form of European Central Bank quantitative easing that is pre-announced and proportional to the scale of the issues facing markets, a euro-breakup still remains possible.
On the positive side, economists at Exane BNP Paribas in emailed comments said at least Spain is finally addressing the need to restructure its banks and realizing that it can't do it on its own.
Positive for Spain is the fact the government won't be required to burden the economy with any additional austerity measures, nor additional fiscal oversight, which will help with short-term growth, said Exane economists. But households and banks still need to deleverage and the bank bailout is only one step toward resolving the country's crisis, they added.
Recapitalizing its banks, said Exane economists, will push Spanish public debt to roughly 100% of gross domestic product by the end of 2014. "Thus, in the absence of decent nominal growth and given the still high fiscal deficit, it would be optimistic to think that Spain will not require official assistance to soften its debt burden," they said.
Wall Street stocks were turning negative by the time Europe stocks were just over an hour from closing. Crude-oil futures for July (CLN2) , which earlier jumped 2%, while gains for the euro versus the dollar became limited by the afternoon in Europe.
Greece, Italy add to investor worries
FxPro analysts said Spain's bank bailout move fits in the "firefighting category of measures, rather than a reform that will ensure the longer-term viability of the eurozone."
The next hurdle for markets is just around the corner and observers said volatility was likely this week in the runup to June 17 elections in Greece, which could decide whether the country remains in the euro if pro-bailout parties do not drum up enough support.
"If not, and the vote goes to the anti-bailout SYRIZA whose leader is able to form a government, we shall likely be facing the market upheaval thought to be associated with 'Grexit', as well as circumstances that would prompt the ECB into action with its Securities Market Programme," said Mike Lenhof, chief strategist at Brewin Dolphin, referring to the bond-buying action by the central bank, which has been dormant for months.
"Indeed, with the stability of the global financial system at risk, the likelihood is that the other major central banks are on standby already," he said.
As well, noise is building over Italy's economic and financial problems. A note from Citibank last week said the country could be forced to seek international bailout help as well, with its debt-to-GDP ratio set to rise for "an extended period."
In step with Spain, the yield on Italy's 10-year government bond (10YR_ITA) jumped 25 basis points to above 6%.
"Spanish bonds are hitting 6.4%. If they go above 7% Italian bonds will follow them up, (Italian Prime Minister Mario) Monti seems to be losing parliamentary backing and we could see an August, September election," said Jakobsen. "It doesn't mean things are bad, but it means tail-risk transparency is disappearing."