Spanish borrowing spreads at euro-era high

Spain’s benchmark borrowing costs compared with those of Germany jumped to the highest level since the inception of the eurozone on Monday, as investors continued to react negatively to Madrid’s fourth attempt to reform its troubled banking sector since the crisis began.

Spreads on Spanish 10-year bonds over German Bunds hit a euro-era high of 486 basis points, surpassing the record hit last November. Yields on Spanish benchmark debt reached 6.30 per cent while German 10-year Bunds were at an all-time low of 1.44 per cent.

The jump in Spain’s borrowing costs followed the country’s fourth attempt to strengthen its banking system on Friday, with lenders forced to raise an additional €30bn in provisions.

Analysts have welcomed moves to force banks to accept two independent audits of real estate assets and a reversal of a previous denial that any lender would receive more state rescue funds, but have not accepted Madrid’s argument that the latest law will be definitive.

“After this new regulation is approved just three months after the last one, we believe it is fair to ask ourselves, once again, if this is the end game,” said Juan Pablo López, a banks analyst at Espirito Santo investment bank. “We believe that more probably needs to be done, although the situation looks more manageable after the new law.”

Meanwhile on Monday Spain sold €2.9bn of 12-month and 18-month treasury bills, with borrowing costs for the former rising from 2.623 per cent to 2.985 per cent compared with the last similar auction, and increasing from 3.110 per cent to 3.302 per cent for the 18-month note.

Spanish banks over the weekend released information about how much they would have to raise in new provisions from the latest bank reform.

Banco Santander, Spain’s largest by assets, said it would set aside €2.7bn in new provisions, which it would pay for from the sale of it Colombian unit and retained earnings. Added to €2.3bn from existing outstanding provisions, Santander must pay a total of €5bn to absorb by the end of the year, with the post-tax total amounting to €2.9bn.

To comply with the latest round of forced provisioning BBVA, the country’s second-biggest lender, said it would lift its provisions by about €1.8bn, which would be reduced to €1.3bn after taxes, while Banco Popular needs €1.7bn, which it said would be absorbed through its own reserves and recurring earnings.

Caixabank must set aside €2.1bn in new provisions, or €1.5bn after tax, while Bankia, which was partially nationalised last week, will need €4.7bn before tax.

European shares were trading sharply lower as concerns about Greece’s failure to form a government heightened fears that the eurozone crisis was deepening. Spain’s Ibex 35 was trading down 3 per cent in mid-morning trade.

Michala Marcussen, global head of economics at Société Générale, said that markets were responding to the triple story of Greece, Spain and new economic forecasts from the European Commission.

But she said the sharpness of Monday’s market reaction was surprising given that problems in Spain’s banking system and the frailty of public finances have been “brewing for some time”, while the Greek situation was not new. “Who really expected Greece to agree a new government this weekend?”

Analysts say that if Spanish benchmark yields were to reach 6.5 per cent again, that could prompt action from the European Central Bank. The ECB could, for example, decide to resume buying sovereign debt under its securities markets programme.

“But the ECB can not solve this crisis alone. Many people are refusing to listen to the message that it’s about putting in place a credible solution for public finances and the broader economy,” says Ms Marcussen.

Meanwhile, in Italy, the government successfully raised a total of €5.25bn at auction. Rome sold €3.5bn in three-year bonds at an average yield of 3.91 per cent, below the market price of about 4 per cent. Italy also sold three “off the run” eight to 13-year bonds.

Yields on 10-year Italian bonds were trading at 5.73 per cent.