Borrowing costs for 10-year bonds at 6.47% moved ever closer to the 7% mark for Spain — the point at which Ireland, Portugal, and Greece were forced to seek a bailout from the EU and IMF.
An increasing number of nervous investors opted for German bonds as a safe haven, accepting record low payments of 1.345% and driving the spread between them and Spanish debt to a euro-era high of 5.16%.
The decision to recapitalise the nationalised lender, Bankia, by issuing new debt was a change of mind by the government that on Monday said it would inject bonds.
Bankia has asked for a €19bn injection, on top of €4.465bn it received earlier this month. Other banks could need around €30bn, Spanish media said.
A Spanish source quoted by Reuters said: “There is a clear preference to tap the market. The other option (injecting state bonds directly into Bankia) is marginal.”
The source said Spain’s bank restructuring fund, the FRPB, has liquidity and could tap the market, while treasury also had strong liquidity. “We’ll choose one or the other mechanism.”
The source indicated that the government would ask treasury to issue and distribute debt to the regions with strict conditions to meet deficit targets and implement austerity programmes.
The issuing of “hisbano-bonos” — joint bonds by the 17 regional governments and guaranteed by the state, is expected to happen on Friday. It is hoped the move will make it easier for them to borrow to finance their debts.
Moody’s has downgraded four regions, including wealthy Catalonia, which has debt payments of €13.48bn to meet later this year.
The situation in Spain was described as “a perfect storm” by economist Sony Kapoor. “Spain is caught in a vicious downward spiral of cutting government spending, which is deepening the recession, weakening its already fragile banking system, rising unemployment, and falling tax revenues which then creates European pressure for further spending cuts. Unless something is done to arrest the decline, Spain is headed towards a fully-fledged bailout.”
Spain, like Ireland, is hoping eurozone countries will allow the rules to be changed for the EU’s bailout funds, the EFSF or the ESM, so they can lend directly to banks.
Currently, only governments can borrow to recapitalise banks, and this then goes on the country’s debt. Spain’s debt is forecast to be around €81bn this year.
Retail sales fell 11.3% in April, the steepest decrease in years, indicating just how worried citizens are about the situation as they save their money instead, and add to the drop in GDP and unemployment, pushing Spain deeper into recession.