Spain insists it will continue to tap private debt markets

SPAIN REITERATED its determination to continue tapping private debt markets for day-to-day funds as financial markets delivered a cold response to Europe’s €100 billion support package for the country’s banks.

While the Spanish request for aid is predicated on access to markets for nonbank borrowing, the agreement did nothing to arrest the relentless upward pressure on the interest rates the country must pay. Amid uncertainty over the rerun of the Greek election next Sunday, Italian bond yields also rose yesterday.

If Spain is to avoid a full-blown bailout later this year, its borrowing costs are going to have to come down quickly. Some €82.5 billion in sovereign debt falls to be refinanced before 2013, alongside a further €15.7 billion for autonomous regional governments and a central government deficit of €52 billion.

“The Spanish treasury reaffirms its commitment to capital markets, and will therefore continue to execute its funding programme through its regular auction calendar,” the treasury said.

By pushing ahead with a “pre-emptive” bank bailout process in advance of polling day in Greece, Spain and the European authorities hope to avoid the worst of any contagion fallout in the event that the election winners repudiate the EU-IMF deal for Athens.

As campaigning intensifies, Greek analysts suggest the prospect of a pro-bailout government taking office may be no more than 50 per cent. This heralds serious danger for Spain and all other countries in the euro zone, Ireland included.

In international banking circles, a €100 billion rescue deal is seen as the minimum required. At the same time, credit rating agency Fitch said the package was “at the extreme end” of its stress estimates and sufficient to cover “a housing market collapse on a par with that seen in Ireland”.

The International Monetary Fund still believes the largest Spanish lenders would be sufficiently capitalised in an “adverse scenario” to withstand a further deterioration in their loan business.

Although several other banks would need to increase capital by about €40 billion to meet new regulatory requirements, the IMF added that the actual requirement would be larger. This includes “restructuring costs and reclassification of loans . . . that may be identified in the recently launched independent valuations of assets”.