Spain borrowing rates soar after Moody's downgrade

 

Suggested Topics

Spain's borrowing costs broke through another record today after a credit ratings agency downgraded the country's ability to pay down its debt amid rising fears a bank bailout may not be enough to save the country from economic chaos.

The interest rate — or yield — on the country's benchmark 10-year bonds rose to a record 6.96 percent in early trading today, its highest level since Spain joined the euro in 1999 and close to the level which many analysts believe is unsustainable in the long term.

The ratings agency Moody's downgraded Spain's sovereign debt three notches from A3 to Baa3 Wednesday night, leaving it just one grade above "junk status".

Moody's said the downgrade was due to the offer from eurozone leaders of up to (euro) 100 billion to Spain to prop up its failing banking sector, which the ratings agency believes will add considerably to the government's debt burden.

The lowered score means that even fewer investors will buy Spanish debt, because organizations like pension funds are mandated to avoid assets with such low creditworthiness.

Spain won't immediately collapse if the rate hits 7 percent, but reaching that point would affect it at Tuesday's scheduled debt auction.

"The clock is definitely ticking," said Michael Hewson, an analyst with CMC Markets.

The bank bailout is intended at recapitalizing the Spanish banking system and calming Europe's debt crisis. Instead, investors seem unnerved by the government taking on extra debt and have pushed Spanish bond yields — a measure of market jitters — higher all week.

Moody's said the Spanish government's ability to raise money on global markets was being hindered by high interest rates, a situation which had led it to accept eurogroup funds to recapitalize debt-burdened banks.

Some details of what the bailout might look like began to emerge Thursday. European officials are considering liquidation — selling off a bank's assets — as part of the plan to prop up the Spanish banking sector, a spokesman for Competition Commissioner Joaquin Almunia said.

"Liquidation is always looked at," said Antoine Colombani. "We prefer to liquidate when it's cheaper for the taxpayer."

This action was rebutted in a statement Thursday by the Spanish government's Fund for Orderly Bank Restructuring (FROB).

The fund said it had "no plans to initiate insolvency proceedings or wind up any credit institution under its management or control."

Since a weekend agreement to save the banks involves first lending the money to Spain, there are concerns that taxpayers are ultimately on the hook for the banks' bad decisions. Also, investors are worried that the deal raises Spain's debt and deficit levels.

Eurostat, the European statistics agency, said Thursday that it was unclear how much the country's deficit would rise because it depended on how it lent the money on to the banks. Part of that decision will depend on the interest rate the banks are given. If it's too low, it could be considered more a gift than a loan and would count against the deficit.

Colombani said that under one plan being considered, the minimum for the rate would be 8.5 percent. Eurostat did not immediately respond to questions about whether that would be high enough to avoid having the loans count against deficit.

One group of investors has initiated legal action at Spain's National Court to probe whether former directors at Bankia SA acted lawfully when selling shares in an entity that not long after asked the government for (euro) 19 billion in aid.

Lawyer Juan Moreno Yague said he had opened proceedings on behalf of investors get a judge to investigate if directors had "presented false accounts to ensure that shareholders invested in a company they knew was in fact bankrupt."

Part of Almunia's role as European Commissioner is to help countries deal with troubled banks, and he will travel to Madrid on Friday to meet with Prime Minister Mariano Rajoy.

The meeting is expected to be tense. Rajoy's conservative Popular Party on Thursday accused Almunia, former leader of Spain's Socialist Party, of "disloyalty" and demanded his resignation because he has revealed details of the bank bailout plans before Rajoy's administration.

"The only thing he does is attack the interests of Spaniards, causing panic and terrible consequences for everyone," said Rafael Hernando, the Popular Party's spokesman in parliament.

The Spanish government's erratic response to the crisis has irritated European Union leaders, Spain's leading newspaper El Pais said on its front page Thursday.

The paper said Rajoy has come under criticism in EU circles for presenting the bailout as a "light" measure and a victory for Spain and the euro, leading to an outcry for similar treatment by other austerity-saddled bailout countries such as Portugal and Ireland, which have had to struggle with heavy, externally imposed fiscal controls.

Speaking to the German parliament in Berlin on Thursday, Chancellor Angela Merkel insisted: "Spain is implementing the right reforms."

"The Spanish Prime Minister is doing this with great courage and great determination," she added.

Merkel again welcomed Spain's move to apply for European funds to recapitalize its banks. "We know banks must be reasonably capitalized to do keep the economy afloat, that is the lesson from 2008, 2009," she said.

"The faster Spain gets the application done, the better," she said.

Spain's benchmark stock index, the IBEX-35, opened 0.6 percent lower Thursday but recovered to trade 0.1 percent higher by the afternoon in Madrid, according to financial data provider FactSet. The 10-year bond yield eased slightly to 6.89 percent.

PA

Independent Comment
blog comments powered by Disqus
Career Services

Day In a Page

The 50 Best beachwear

The 50 Best beachwear

The hottest summer gear for men and women
Still standing: George Galloway reveals why his staunchly Leftist outlook is still invariably right

Still standing: George Galloway

Written off, ridiculed, wrongly accused of taking bribes the honourable member for Bradford West, has never bowed to the critics.
How will Daniel Radcliffe's fans react to his latest turn - as a damaged, drug-taking Beatnik poet?

Daniel Radcliffe as drug-taking Beatnik poet

His decade as the boy wizard may be over, but that hasn't hexed Daniel Radcliffe's enchanted life.
For whom the bell tolls: £20m 'Memo' project takes shape on Dorset's Jurassic coast

'Memo' project takes shape on Dorset coast

It started as a stonemason's visionary idea – to commemorate all the species that have ever existed and are now extinct.
Just add sunshine: Bill Granger's Turkish delights

Just add sunshine: Bill Granger's Turkish delights

Turkish cuisine is perfect for those long, sociable weekend meals with friends. It's just a shame that money can't buy the key ingredient.
Objets czar: David Usborne’s collection of myriad objects is quite the mystery

Objets czar: David Usborne’s collection of myriad objects

To others, they're junk. To David Usborne, they are his life: useful gizmos, mysterious thingamajigs and anonymous articles that dominate his home.
The iron ore lady: Why the world's richest woman is mired in controversy

World's richest woman: Gina Rinehart

Family feuds, attempts to control the Australian media and bitter public disputes are keeping the mining magnate in the headlines.
We just click: How Lego keeps building on its success

How Lego keeps building on its success

This year, Lego announced record profits. Gerard Gilbert visits its Denmark HQ.
The other bits: Mark Hix creates delicious and economical meals with cheaper cuts of meat

Mark Hix cooks with cheaper cuts of meat

Our chef creates delicious and economical meals on a budget
Strokes of genius: How to create summer's bold make-up look

Strokes of genius: Summer's bold make-up

From coral lips to fly-away fringes, make-up artist Kim Brown and hair stylist Richard Scorer reveal how to create the look
Marking his territory: Kilian Hennessy creates fragrances designed to provoke the senses

Marking his territory: Kilian Hennessy

The perfumer creates fragrances designed to provoke the senses
Photo essay: Britain's 1948 Olympians today

Britain's 1948 Olympians today

Photo essay
The top five E3 2012 triumphs: From Ubisoft's suite of titles to Dishonored and The Last of Us

The top five E3 2012 triumphs

The games and moments that left us grinning like the Cheshire Cat
The green movement at 50: Can the world be saved?

Can the world be saved?

Population growth and climate change are the big problems facing the earth in the next 50 years. But are there any solutions?
France: Will xenophobia go mainstream?

France: Will xenophobia go mainstream?

In the beautiful Rhone delta, John Lichfield visits a village where a dangerous new political landscape is taking shape