Spain 'shut out' of bond markets

Spain has warned that high borrowing costs mean it is effectively shut out of the bond markets and the European Union should help Madrid recapitalise its banks.

Prime minister Mariano Rajoy today called on European institutions to help Spain's difficulties with liquidity. "The most urgent and important thing is we have a problem of financing, of liquidity and of debt sustainability," Mr Rajoy told the Senate today in Madrid.

"That doesn't depend just on us," he said, adding the ECB's bond buying in August last year brought "considerable relief".

He also called for fiscal union, a single deposit-guarantee fund in the euro region and "euro bonds," while calling on policy makers to make clear that the euro project is "irreversible".

In an interview earlier today, treasury minister Cristobal Montoro said market interest rates are now prohibitive.

"The risk premium says Spain doesn't have the market door open," Mr Montoro said on Onda Cero radio. "The risk premium says that as a state we have a problem in accessing markets, when we need to refinance our debt."

Mr Montoro said Spanish banks should be recapitalised through "European mechanisms", departing from the previous government line that Spain could raise the money on its own.

Spain will test the market on Thursday with an issue of up to €2 billion in medium- and long-term bonds at auction, leaving analysts perplexed about the timing of his
remarks.

The premium investors demand to hold Spanish 10-year debt rather than the German equivalent hit a euro era high of 548 basis points on Friday, on concerns that Spain's fragile banking system and heavily indebted regions will eventually force it to seek a Greek-style bailout.

With Greece, Ireland and Portugal all under international bailout programmes, financial markets are anxious about the risks from a Spanish banking crisis and fret a Greek election on June 17th could lead Athens to leave the single currency and precipitate yet more economic turbulence.

The euro fell to a session low against the dollar and Bund futures rose in response to Mr Montoro's assessment. However, Spain's stock market was up on the day and 10-year Spanish yields were steady below 6.4 per cent.

"The market is quite nervous still, these remarks will make the auction more difficult," said Emile Cardon, market economist at Rabobank.

Prime minister Rajoy has also voiced concern that Spain cannot continue to finance itself indefinitely on the market at such high borrowing costs. He has repeatedly called for urgent action, which is understood to be aimed at the European Central Bank to revive its bond-buying programme or inject more liquidity into the financial system.

Spain is pressing for a direct European rescue for its banks, without the government having to go through the humiliation of asking for help, but Germany has appeared to rule out such a measure for the euro zone's fourth biggest economy.

Finance chiefs of the Group of Seven leading industrialised powers held emergency talks on the euro zone debt crisis today, with Spain being one of the main concerns.

Spain still needs to refinance about €82 billion of debt this year, while helping its regions to repay maturing debts of about €16 billion in the second half of 2012.

The Treasury, which took advantage of favourable funding conditions in the first months of the year after the ECB injected about €1 trillion of cheap money into European banks, holds €44 billion in cash and can meet its financial
obligations for a few months.

But this strong liquidity position could dwindle quickly if market sentiment gets worse and the bill to recapitalise troubled banks soars further.

The government is set to inject €19 billion into nationalised lender Bankia and will soon get the results of an independent audit of its banking sector which will determine how much more is needed for other banks.

Mr Montoro said he did not expect the sum to recapitalise its banks to be too large and insisted that neither Germany nor France had pushed Spain to seek an international rescue.

"We're not talking about astronomical sums, unattainable. The figures are perfectly accessible," Mr Montoro said, also calling for an EU-wide banking union.

German chancellor Angela Merkel opened the door yesterday to the prospect of a euro zone banking union in the medium term, saying she would discuss with EU authorities the idea of putting systemically important cross-border banks under European supervision.

But Berlin is resisting the idea of a joint deposit guarantee for euro zone banks and a bank resolution fund.

Mr Montoro said he hoped talks on the banking union would be completed by the EU summit at the end of this month.

Reuters