Spain borrowing rates hit new high after downgrade

Friday, June 15, 2012
AP and Reuters

MADRID/LONDON/NICOSIA, Cyprus -- Spain's key borrowing rate hit a fresh high Thursday not seen since the country joined the euro in 1999, after a credit ratings agency downgraded the country's ability to just above junk status 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 Thursday, close to the level which many analysts believe is unsustainable in the long term and the rate that forced Greece, Ireland and Portugal to seek bailouts of their public finances.

The worries about Spain sent its 10-year government bond yields up as much as 25 basis points to a record high of 7.02 percent, just over the 7-percent mark that drove Greece, Ireland and Portugal to seek international bailouts.

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

Spanish yields have risen sharply this week after eurozone ministers agreed at the weekend on a rescue plan of up to 100 billion euros for the country's banks that has failed to convince investors it solves Spain's financial problems.

The yields on Spanish debt later eased back to be around 19 basis points higher on the day at 6.97 percent.

Moody's said the downgrade was due to the offer from eurozone leaders of up to 100 billion euros 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 Spain next week when it is scheduled to auction debt.

“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.

Eurostat, the European statistics agency, said Wednesday 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.

Cyprus Downgraded

Moody's credit ratings agency drove Cyprus deeper into junk status with a two-notch downgrade to “Ba3” over an increased likelihood that debt-crushed Greece will leave the eurozone.

Moody's said in a statement Wednesday that it has placed Cyprus' rating on review for further possible downgrade. It says that a Greek euro exit would likely raise the amount of money that the government may need to support its heavily Greece-exposed banking sector.

The agency said the two-notch downgrade also reflects the fact that the Cyprus' finances are already strained and that it can't borrow from international markets.

The downgrade comes as an added blow to the eurozone country as it seeks 1.8 billion euros (US$2.6 billion) to help recapitalize its second-largest lender, Cyprus Popular Bank, which is most heavily exposed to Greek debt.

Cyprus' finance minister suggested on Wednesday that the government could seek a European Union bailout to support the bank before crucial elections in Greece this Sunday which are seen as a vote on whether the country stays or leaves the eurozone. Vassos Shiarly said a loan from another country was also an option.

Moody's said it now believes that Cyprus will need more money to support its banks than its earlier estimate, equivalent to 5-10 percent of the country's gross domestic product. It said recapitalization costs would now increase the country's debt levels by just over 10 percent of GDP.

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