Spain borrowing rates soar after Moody's downgrade

MADRID (AP) — Spain's bor­row­ing costs broke through another record Thurs­day after a credit rat­ings agency down­graded the country's abil­ity to pay down its debt amid ris­ing fears a bank bailout may not be enough to save the coun­try from eco­nomic chaos.

The inter­est rate — or yield — on the country's bench­mark 10-year bonds rose to a record 6.96 per­cent in early trad­ing Thurs­day, its high­est level since Spain joined the euro in 1999 and close to the level which many ana­lysts believe is unsus­tain­able in the long term.

The rat­ings agency Moody's down­graded Spain's sov­er­eign debt three notches from A3 to Baa3 Wednes­day night, leav­ing it just one grade above "junk status".

Moody's said the down­grade was due to the offer from euro­zone lead­ers of up to €100 bil­lion to Spain to prop up its fail­ing bank­ing sec­tor, which the rat­ings agency believes will add con­sid­er­ably to the government's debt burden.

The low­ered score means that even fewer investors will buy Span­ish debt, because orga­ni­za­tions like pen­sion funds are man­dated to avoid assets with such low creditworthiness.

Spain won't imme­di­ately col­lapse if the rate hits 7 per­cent, but reach­ing that point would affect it at Tuesday's sched­uled debt auction.

"The clock is def­i­nitely tick­ing," said Michael Hew­son, an ana­lyst with CMC Markets.

The bank bailout is intended at recap­i­tal­iz­ing the Span­ish bank­ing sys­tem and calm­ing Europe's debt cri­sis. Instead, investors seem unnerved by the gov­ern­ment tak­ing on extra debt and have pushed Span­ish bond yields — a mea­sure of mar­ket jit­ters — higher all week.

Moody's said the Span­ish government's abil­ity to raise money on global mar­kets was being hin­dered by high inter­est rates, a sit­u­a­tion which had led it to accept eurogroup funds to recap­i­tal­ize debt-burdened banks.

Some details of what the bailout might look like began to emerge Thurs­day. Euro­pean offi­cials are con­sid­er­ing liq­ui­da­tion — sell­ing off a bank's assets — as part of the plan to prop up the Span­ish bank­ing sec­tor, a spokesman for Com­pe­ti­tion Com­mis­sioner Joaquin Almu­nia said.

"Liq­ui­da­tion is always looked at," said Antoine Colom­bani. "We pre­fer to liq­ui­date when it's cheaper for the taxpayer."

This action was rebutted in a state­ment Thurs­day by the Span­ish government's Fund for Orderly Bank Restruc­tur­ing (FROB).

The fund said it had "no plans to ini­ti­ate insol­vency pro­ceed­ings or wind up any credit insti­tu­tion under its man­age­ment or control."

Since a week­end agree­ment to save the banks involves first lend­ing the money to Spain, there are con­cerns that tax­pay­ers are ulti­mately on the hook for the banks' bad deci­sions. Also, investors are wor­ried that the deal raises Spain's debt and deficit levels.

Euro­stat, the Euro­pean sta­tis­tics agency, said Thurs­day that it was unclear how much the country's deficit would rise because it depended on how it lent the money on to the banks. Part of that deci­sion will depend on the inter­est rate the banks are given. If it's too low, it could be con­sid­ered more a gift than a loan and would count against the deficit.

Colom­bani said that under one plan being con­sid­ered, the min­i­mum for the rate would be 8.5 per­cent. Euro­stat did not imme­di­ately respond to ques­tions about whether that would be high enough to avoid hav­ing the loans count against deficit.

One group of investors has ini­ti­ated legal action at Spain's National Court to probe whether for­mer direc­tors at Bankia SA acted law­fully when sell­ing shares in an entity that not long after asked the gov­ern­ment for €19 bil­lion in aid.

Lawyer Juan Moreno Yague said he had opened pro­ceed­ings on behalf of investors get a judge to inves­ti­gate if direc­tors had "pre­sented false accounts to ensure that share­hold­ers invested in a com­pany they knew was in fact bankrupt."

Part of Almunia's role as Euro­pean Com­mis­sioner is to help coun­tries deal with trou­bled banks, and he will travel to Madrid on Fri­day to meet with Prime Min­is­ter Mar­i­ano Rajoy.

The meet­ing is expected to be tense. Rajoy's con­ser­v­a­tive Pop­u­lar Party on Thurs­day accused Almu­nia, for­mer leader of Spain's Social­ist Party, of "dis­loy­alty" and demanded his res­ig­na­tion because he has revealed details of the bank bailout plans before Rajoy's administration.

"The only thing he does is attack the inter­ests of Spaniards, caus­ing panic and ter­ri­ble con­se­quences for every­one," said Rafael Her­nando, the Pop­u­lar Party's spokesman in parliament.

The Span­ish government's erratic response to the cri­sis has irri­tated Euro­pean Union lead­ers, Spain's lead­ing news­pa­per El Pais said on its front page Thursday.

The paper said Rajoy has come under crit­i­cism in EU cir­cles for pre­sent­ing the bailout as a "light" mea­sure and a vic­tory for Spain and the euro, lead­ing to an out­cry for sim­i­lar treat­ment by other austerity-saddled bailout coun­tries such as Por­tu­gal and Ire­land, which have had to strug­gle with heavy, exter­nally imposed fis­cal controls.

Speak­ing to the Ger­man par­lia­ment in Berlin on Thurs­day, Chan­cel­lor Angela Merkel insisted: "Spain is imple­ment­ing the right reforms."

"The Span­ish Prime Min­is­ter is doing this with great courage and great deter­mi­na­tion," she added.

Merkel again wel­comed Spain's move to apply for Euro­pean funds to recap­i­tal­ize its banks. "We know banks must be rea­son­ably cap­i­tal­ized to do keep the econ­omy afloat, that is the les­son from 2008, 2009," she said.

"The faster Spain gets the appli­ca­tion done, the bet­ter," she said.

Spain's bench­mark stock index, the IBEX-35, opened 0.6 per­cent lower Thurs­day but recov­ered to trade 0.1 per­cent higher by the after­noon in Madrid, accord­ing to finan­cial data provider Fact­Set. The 10-year bond yield eased slightly to 6.89 percent.

Posted by Adam Fox on Jun 14 2012. You can follow any responses to this entry through the RSS Feed. Both comments and pings are currently closed.