Spain in the Cross Hairs

There have been several press reports in recent days, all vehemently denied, that a multilateral effort is underway to put together a special aid package for Spain.  Often times, one hears "where there is smoke, there is fire." Yet in this case, the denials look credible.  The European Financial Stabilization Facility (EFSF) which is the lion’s share of the 750 bln euro package is only coming into effect at the end of the month.  

News wires report that Germany has acknowledged that 90% of the funding has been secured and this is the threshold needed to make the facility operative.  Other details of the EFSF have been reported today.  Apparently the EFSF is considering issuing foreign currency bonds that could be hedged in the swap market for example. One important implication is that this foreign currency borrowing would underscore the ECB and German point that 1) it is not the beginning of a European bond market, and 2) it is temporary in nature.

Just because there is not a special Spanish funding program does not mean that officials are not concerned about Spain.    Spanish banks borrowed a record from the ECB last month and the CEO of BBVA noted earlier this week that many Spanish banks and corporates are being frozen out of the capital markets.      

The premium that Spain is being forced to pay over Germany for 10-year money is at the widest since the advent of the euro.  The 2-year spread is the widest in nearly two years.   This means that the existence of the EFSF has not stabilized the Spanish bond market.   The IMF’s Strauss-Kahn is visiting Spain at the end of the week and, although promoted as a normal visit, it is bound to get the chins wagging about the need for assistance.

Tomorrow will see a test of the market’s appetite for Spanish bonds.  The government plans on selling about 3.5 bln euros of 2020 and 2041 stock.  While the former is bound to be challenging enough, it is the latter that may be most troublesome.  Note that the much more solid credit of Sweden (strong Q1 GDP and downward revisions in this year and next year’s deficit) failed to sell all of its long dated (29-year ) bond earlier today.  

On top of this, what the market is concerned that Spain will have to come to the market in a big way next month.  According to Bloomberg data, Spain will have to raise about 25 bln euros in July to cover the bond and bill redemptions.

  1. Abhishek says

    Spanish Banks are depending disproportionately on the ECB on funding as BBVA says that Spanish private sector is finding it difficult to access foreign funding.

  2. Element says

    Spain is reducing wages and conditions and making it much easier to dismiss workers, in an attempt to increase labor market flexibility. Ok, that may make sense, in this employers market, but if this occurs in order to protect bankers, with bad debts … that’s not ok.

    Article 23.
    (1) Everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment.
    (2) Everyone, without any discrimination, has the right to equal pay for equal work.
    (3) Everyone who works has the right to just and favourable remuneration ensuring for himself and his family an existence worthy of human dignity, and supplemented, if necessary, by other means of social protection.
    (4) Everyone has the right to form and to join trade unions for the protection of his interests

    UN Universal Declaration of Human Rights – Adopted and proclaimed by General Assembly resolution 217 A (III) of 10 December 1948

    There’s a fine line to be trod here. There are a lot more angry people then there are stupid inept bankers with banks full of bad debts.

    If austerity is used (again) to prop-up bad banks in another PIIG, then the social blow-back will be intense. Yes, you need a bank for depositors and businesses and investment, but frankly, given the private banks daft loans, poor decisions and risk-taking, are they really more ‘efficient’ than a public sector Govt bank?

    I doubt it!

    Thus it may be better to have a large National Bank backed by Govt, for all depositors, and let the rest, full of bad loans, face bankruptcy and liquidation.

    Why not? Why is this not occurring?

    Those UN Human Rights have one purpose, and one only. They are in no way ideological. They are to preserve world peace and thus stability and constitutional continuity.

    So it’s not a good idea to let any of them be overturned or diminished just for short-term economic and political expediencies and convenience for bankers, or even employers, and especially not for politicians in Brussels or elsewhere.

    If the EU stands for Universal Human Rights then show it.

    Punish bankers not the general citizen, who actually requires wage and employment protection, via a UN mandated Union organization, so they can function, and so society as a whole can function.

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