Investors flee Spain as financial crisis spirals

AFP, Wednesday 30 May 2012

Borrowing rate on bonds shoots to a danger level as Madrid battles to avoid falling into eurozone crisis

Spain's debt risk premium smashed euro-era records Wednesday after the central bank chief quit early and Madrid scrambled to finance a major banking rescue.

The borrowing rate on Spain's 10-year bonds shot to a danger level of 6.703 per cent -- unsustainable over the longer term -- as Spain battled to avoid becoming the next nation to fall to the eurozone crisis.
When compared to safe German debt, investors in Spanish bonds were demanding an additional 5.39 percentage points, a level that easily crashed through euro-era records set each day of this week.
Markets recoiled as a sense of turmoil engulfed Spain.
Stock prices skidded across the world on fears of a Spanish economic collapse and the European single currency plunged to $1.2439 -- striking a low point that was last seen in July 2010.
Bank of Spain governor Miguel Fernandez Ordonez shook investors by announcing late the previous evening that he would depart 10 June -- a month before his term comes to an end on 12 July.
The central bank chief, who said he was leaving early to give his successor time to take the reins, had sought in vain a hearing in the lower house of parliament to explain stricken lender Bankia's woes.
"Nothing is more important now than regaining confidence because without that we cannot resolve any of our problems," Ordonez told the Senate on Wednesday.
Confidence in Spain has deteriorated in past months, and took a further hit in past weeks over "the management of the latest banking crisis," he said.
Spain's conservative government this month instructed banks to set aside 30 billion euros in 2012 in case property-related loans go bad, on top of 53.8 billion euros demanded under February reforms.
It also appointed independent auditors to value banks' real estate assets, hammered since the 2008 property crash. That decision was widely seen as showing a lack of confidence in the central bank.
At the centre of the banking storm, Bankia has asked the government for 19 billion euros in capital in addition to 4.465 billion euros invested by the state earlier this month to salvage its books.
But no-one seems clear about where the money will come, especially when debt markets are charging exorbitant sums to lend to Spain.
Economy Minister Luis De Guindos said the state-backed Fund for Orderly Bank Restructuring (FROB) would issue bonds to raise capital, which it could then inject into the bank.
He denied a report in the Financial Times that the European Central Bank had rejected one option being considered by Madrid.
The Economy Ministry had floated this week a plan to issue government bonds and transfer them directly into Bankia, which could then use them as collateral to borrow from the market or the ECB.
"Pay more attention to the Spanish government than the Financial Times," De Guindos said.
"The Spanish government has not presented any plan to the European Central Bank nor has the European Central Bank rejected anything whatsoever related to it."
The ECB issued a statement denying it had taken a position or being consulted on the plan.
But the government failed to quash growing concerns over Spain's financial sector.
Centre-right daily El Mundo this week said three other banks, CatalunyaCaixa, NovacaixaGalicia and Banco de Valencia, could need another 30 billion euros in public funds to meet new regulations.
Yet another lender, Banco Popular, whose bonds have been downgraded to junk bond-status, said this week it was in talks to sell its Internet banking business in a scramble for cash.
In addition to the banking crisis, displayed graphically in daily home-owner evictions, investors fret about a recession, predicted by the authorities to last at least until mid-2012, and a jobless rate of 24.4 per cent in the first quarter, the highest in the industrialized world.
Despite all those troubles, Prime Minister Mariano Rajoy says he will not flinch from an austerity plan aimed at cutting the public deficit from 8.9 per cent of economic output last year to 3.0 per cent by 2013.
In Brussels, an official told AFP that the European Commission may recommend giving Spain an extra year to meet that target but only with tough conditions attached.
Leading Spanish daily El Pais said those conditions would include accelerating the calendar for raising the retirement age and broadening value-added tax.
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