Spain’s debt risk premium shot to a euro-era record yesterday as stricken banks scrambled to clean up bad loans and investors feared the state would end up footing the bill.
Spain’s retail sales fell 9.8 per cent in April... the biggest monthly drop since the statistical series began in 2003
The sovereign debt risk premium – the extra return investors demand to hold Spanish bonds over their safer German counterparts – leapt to a euro-era record of 516 basis points (5.16 percentage points).
Markets buckled on signs of a banking system under stress as it is forced to abide by tough new requirements even as it struggles with a vast exposure to the collapsed property sector.
The government this month instructed banks to set aside an extra €30 billion in 2012 in case property-related loans go bad, on top of €53.8 billion required under reforms enacted in February.
Under pressure to bolster the balance sheets, three Spanish savings banks – Ibercaja, Liberbank and Caja3 – announced they would vote on a merger later in the day.
Another lender, Banco Popular, whose long-term debt was downgraded on Friday to junk-bond status, said it was trying to sell its online banking to find the cash to clean up its books.
But the big preoccupation was news that Prime Minister Mariano Rajoy’s conservative government is considering issuing sovereign debt and injecting it directly into recently nationalised lender Bankia.
A spokesman for the Economy Ministry, however, said the preferred option would be to sell bonds on the market and use the proceeds for the banks.
“Spain’s cunning idea is to issue government debt which it will hand to the troubled institution,” said a report by analysts at Moneycorp in London.
“Bankia will use the bonds as collateral against which to borrow from the European Central Bank.
“But this is a lot to ask of the ECB. It will not be overjoyed at the prospect of loading up with yet more questionable assets and might refer the matter to the other members of the troika in charge of the EU and IMF bailout funds.”
Bankia’s board on Friday asked the state to inject €19 billion to help it abide by more stringent capital rules, and some media said other banks could need yet another €30 billion.
The government had already injected €4.465 billion into Bankia this month by converting a loan to its parent group into capital.
On the stock market, Spain’s IBEX 35 index dived 1.67 per cent to 6,295.4 points. In foreign exchange deals, the European single currency fell to $1.2536 from $1.2541 late in New York.
“It is not surprising Spain equity market is suffering losses,” said trader Anita Paluch at Gekko Global Markets in London.
“The negative sentiment is prevailing, as investors are watching the Spanish bonds to hit seven per cent mark – a level that is considered a breaking point, at which Spain will need to revert to international financial help in order to get out of trouble.
“It’s actually something we have seen back in the days when Greece, Ireland and Portugal had to be bailed out.”
Banco Popular shares slumped 4.32 per cent to €1.64 after the news broke that it is seeking new capital, adding to a 7.57 per cent plunge the previous day.
“Banco Popular is in negotiations for the sale and outsourcing of a majority stake of its internet banking and means of pay-ment businesses, although no agreement has been reached as of today,” it said in a statement.
French banking group Credit Mutuel-CIC, which has a five per cent stake in Popular, could be among the interested buyers, a source close to the deal told AFP.
Banco Popular expects to reap a profit of about €2 billion from the sale, the source said.
The bank’s ability to borrow on the markets was hampered by Standard & Poor’s decision on Friday to downgrade its long-term debt to BB-plus – junk bond status – from BBB-minus. As a result, the rating was left with a negative outlook.
Meanwhile, Spanish retail sales fell 9.8 per cent in April over the previous month, the biggest monthly drop since the statistical series began in 2003, according to the the national statistics institute.
Retail sales fell 3.8 per cent in March as Spain, which is struggling with an unemployment rate of 24.4 per cent, fell back into recession in the first quarter.
The retail sales figure for April was down 11.3 per cent from the same month last year, compared with a four per cent annual drop in March, the statistics institute said in a statement.