Borrowing costs rise for Spain and Italy
BORROWING COSTS for Spain and Italy rose sharply yesterday as the markets responded to the weekend announcement that Spain is to seek up to €100 billion in aid to bolster its faltering banking system.
An early market rally was shortlived, with equity markets and Spanish and Italian bonds in decline from lunchtime onwards.
While the yield on Spanish 10-year bonds touched 5.99 per cent yesterday morning, by close of trade yesterday it had reached more than 6.50 per cent. Similarly, Italian 10-year bond yields increased by close to 30 basis points, reaching as high as 6.04 per cent yesterday evening.
Italian banks also saw steep falls, with leading lenders UniCredit and Intesa Sanpaolo shedding 8.8 per cent and 5.9 per cent respectively in brisk trade.
While pointing out Ireland and Portugal were the best performers on the bond markets yesterday, Rory Murray of Glas Securities in Dublin stressed that the real focus was on Spain and Italy.
Similarly, Michael Symonds of Daiwa Capital Markets in London said that the underperformance of Italian assets was a particular concern. “Italian banking stocks have fallen sharply whereas most Spanish banks have continued to hold on to gains,” he said yesterday evening, suggesting that market watchers are searching out “fresh prey”.
Italy, the third largest economy in the euro zone, is due to go to the bond markets this week. The OECD predicts Italy’s economy will shrink by 1.7 per cent this year, compared to 1.6 per cent in Spain.
Investor concern yesterday focused on the exact cost and the structure of the bailout for Spain, with Merrill Lynch noting that the direction of the markets “will depend on the details which are at present limited”.
A key issue for investors is the exact source of the Spanish bailout funds, and the implication of this on funding costs and on other creditors. A comment from a German finance ministry spokesman that suggested that Spain was more likely to tap the euro zone’s new permanent bailout facility, the European Stability Mechanism (ESM), rather than the existing European Financial Stability Facility (EFSF), may have weighed on investor sentiment yesterday.
Loans from the ESM would be senior to Spanish government bonds and therefore more likely to be repaid in the event of a default, making private investors wary.
London-based Clear Currency highlighted the issue of potential further collateral requirements on Spain, something that may be affected if Moody’s downgrades Spain to BBB level.
“Any additional collateral requirement at the ECB would put greater pressure on the banks’ balance sheets at an unfavourable time,” it said.
US treasury 30-year bonds gained for the first time in six days yesterday as Spanish and Italian bonds slid, signalling investor flight into perceived safe-haven assets. – Additional reporting: Bloomberg