Spanish yields fall as bailout plan agreed


THERE WAS some relief for Spain yesterday as the country’s borrowing costs fell, after euro zone finance ministers agreed a plan to support its troubled banking sector.

Yields on Spain’s benchmark 10-year bonds fell 25 basis points, or a quarter of a percentage point, to close the day at 6.73 per cent.

They had soared to 7.07 per cent on Monday ahead of the euro group meeting as investors signalled their dissatisfaction with the lack of detail on measures agreed last month to stem Spain’s banking crisis.

The rate on similar-maturity Italian debt dropped 21 basis points to 5.9 per cent, on speculation the plan will stem the spread of the debt crisis.

At Monday’s meeting, it was agreed that an initial €30 billion in aid from the euro zone’s €440 billion rescue fund will be sent to Madrid by the end of this month. A final memorandum finalising the country’s €100 billion bank recapitalisation plan will be signed on July 20th.

Euro zone ministers also gave Spain an extra year to cut its budget deficit to less than 3 per cent of gross domestic product.

“We got some further detail so now we have a better picture of the timeline for recapitalisation of Spanish banks,” said Donal O’Mahony, global strategist at Davy.

“The market is a little bit more assured about the immediacy of this issue now and it won’t be too long until it gets the final figures,” he added.

Rory Murray, of Dublin-based Glas Securities, said yesterday’s strong performance by Spanish bonds was the result of Monday’s weakness in the market.

“The market yesterday probably positioned itself for an underwhelming announcement on Monday night and what you’re seeing today is closing some of the short positions,” he said yesterday afternoon.

Although the drop in yields is a welcome development for Spain, the country’s borrowing costs remain unsustainably high.

Yields on Irish 10-year bonds inched two basis points higher to 5.96 per cent yesterday, after it was announced that a final decision on bank debt relief for Ireland would be taken by October.

Although the mechanism to be deployed and the amount of relief remain unclear, the European Commission will develop concrete proposals to be submitted to the euro zone ministers in September.

Mr O’Mahony said “some degree of underperformance” by Irish bonds was to be expected yesterday.

“We have been serious outperformers since the summit at the end of June. Italy and Spain have given back some of their gains but we’ve held on to them,” he said, referring to a drop of close to 80 basis points in the yield on Irish 10-year debt since the euro zone’s finance ministers agreed to reopen the Irish bank bailout last month.

They also resolved to make direct bank aid available to euro zone countries, but only after the introduction of a new pan-European bank regulator.

“In terms of the timeline announced last night for a final decision on Ireland’s bank debt, this would not have greatly impacted the Irish market today, given the unknowns that remain from June’s EU summit,” said Murray.

Additional reporting: Bloomberg