The troubling yields suggest that Spain may soon have to apply for a full-scale bail-out.
“A full-on Spanish bail-out is a distinct possibility,” said Alberto Gallo, head of European macro research at Royal Bank of Scotland. “The two major catalysts will be a downgrade to high yield — that is coming but we don’t know when — and the Greek IMF review substantially missing its targets. There are clues already from recent resignations in the Greek government and the fact that only around half of spending cuts have been done — but full results will not be out until September. Other possible catalysts — although probably less important — are the Spanish bank stress tests.”
Spain’s 10 year yields topped 7.5% on Monday as worries about the sovereign’s economic outlook increased. Valencia announced that it would need an emergency loan late on Friday evening.
“Higher Spanish yields have been driven by downward growth revisions and rising liabilities from the regions,” said Gallo. “Despite positive action on the bank reform front, the economy is still deteriorating and there is no firewall behind Europe — the ESM doesn’t have a banking license.”
Yield gloom
The highs follow a sharp increase in the borrower’s funding costs on Friday — Spain’s 10 year moved 26bp higher to 7.23%.
“Those levels indicate that Spain may soon struggle to fund itself in the market and therefore unless some positive action is taken the country will need a full bailout,” said Gary Jenkins at Swordfish Research, of Friday’s levels.
More worryingly, Italy’s yields rose in the short end. “Perhaps the most worrying move on Friday though was that of the Italian two year, which rose 37bps to yield 3.9%,” said Jenkins. “They might just about to be able to bailout Spain if they really want to but if Italy needs help then it might be fiscal union or game over.”
Spain’s next test in the capital markets is a bills auction on Tuesday. See SSA Markets’ market calendar for other upcoming issues this week, including the DMO’s index-linked Gilt syndication.
See SSA Markets for additional data on Spanish regions such as Andalusia, Aragon, Cantabria, Castile and León, Castile-La Mancha. Catalonia, Galicia, La Rioja, Madrid and Murcia.
