MADRID – Spain’s government called for prudence Friday at the end of a week of mounting pressure on the country’s bonds, saying rash conclusions should not be drawn about a plan to shore up its ailing banks with euro zone funding.
Deputy Prime Minister Soraya Saenz de Santamaria said in a press conference after the weekly Cabinet meeting that it is too soon for a verdict on a plan – approved last weekend by euro zone finance ministers – to recapitalize Spain’s struggling banking sector with a European loan of up to 100 billion euros ($126 billion).
Prime Minister Mariano Rajoy’s government said last Saturday it will ask for the assistance, but it is waiting for the results of two independent audits of Spain’s banks before putting in the formal request.
Uncertainty surrounding the lack of details about the plan roiled Spain’s bond markets, which were further affected by Moody’s decision this week to lower Spain’s sovereign credit rating by three notches to Baa3, or one level above junk status.
Saenz de Santamaria on Friday tried to shift the market’s focus away from the soaring yield on Spain’s benchmark 10-year bond, which hit a new euro-era high this week, insisting that Spain will get through the current crisis just as it has others in the past.
The country’s risk premium – the extra return investors demand on Spanish 10-year bonds compared to equivalent safe-haven German debt – hit a new all-time high of 543.7 basis points at Friday’s close, due in part to investors’ fears that this Sunday’s parliamentary elections in Greece could trigger that country’s exit from the euro.
The yield on Spain’s 10-year bond in the secondary market closed Friday at 6.87 percent, down four basis points from Thursday but still near the 7 percent level that economists say is unsustainable and which triggered international sovereign bailouts of Greece, Ireland and Portugal.
This week alone, the Iberian nation’s risk premium climbed 55 basis points.
Referring to the growing gap between the yield on Spanish and German debt, the deputy premier said she is concerned but stressed that in terms of the government’s borrowing costs the interest rates are determined in Treasury auctions and not on the secondary market, where bonds and other previously issued financial instruments are traded among investors.
Nevertheless, Saenz de Santamaria said “we can’t allow the interest rates that are being paid for the debt.”
Also Friday, Spain’s central bank said the combined debt of the country’s central, regional and local governments climbed in the first quarter to a new record of 72.1 percent of gross domestic product, or double the level of 35 percent of GDP in the first quarter of 2008, prior to the onset of the global recession.
Spain, according to figures published in April by the European Union’s statistics office, Eurostat, is among 14 EU member states – including Germany and France – that in 2011 had public debt of more than 60 percent of GDP, the upper limit established under the terms of the EU’s stability and growth pact.
The European Commission issued a statement Monday insisting that the loan being made available to Spain from the European Financial Stability Facility and the European Stability Mechanism, which is to enter into force this summer, is sufficient for even the “most adverse scenarios” and includes a “safety margin.”
Prior to this week’s bond market turmoil, Spain also hailed the financial assistance as a loan that Spanish banks “will receive under very favorable conditions” and predicted it would alleviate market pressure on Spain.
Both Rajoy and his economy minister, Luis de Guindos, said earlier this week that the loan – to be channeled through the state-backed Fund for Orderly Bank Restructuring, or FROB – would be specifically used to shore up troubled Spanish banks and will not entail additional austerity conditions for the country as a whole.
Spain’s banks have been hard hit by the collapse of the country’s 1995-2007 real estate boom, which has left them saddled with toxic property assets.
Recently nationalized BFA-Bankia – the country’s fourth-largest financial institution – is seeking what would be the largest bank bailout in Spanish history after saying on May 25 it needs another 19 billion euros ($23.5 billion) to boost loss provisions.
The 2008 global financial meltdown came as Spain was struggling with the bursting of the property bubble. The ensuing slump has led to numerous business failures and pushed the country’s jobless rate above 24 percent.
Nearly half of Spaniards under 25 are jobless and tens of thousands of families have been evicted from their homes after falling behind on their mortgages. EFE