Bloomberg News

Spanish Stocks Sink to Four-Month Low on Deficit Concerns

April 03, 2012

Spanish stocks tumbled to a four- month low, led by banks and construction companies, as concern grew that the government’s efforts to rein in the budget deficit will choke off growth.

Banco Santander SA (SAN) and Banco Bilbao Vizcaya Argentaria SA (BBVA), the nation’s largest lenders, fell at least 4 percent. Ferrovial SA, a Madrid-based builder and airport operator, sank the most since May 2010 as government changes to corporate taxes capped deductions on financial costs.

The IBEX 35 Index (IBEX) dropped 2.7 percent to 7,824.5 at the close in Madrid, the lowest since Nov. 25. The gauge has declined 8.7 percent this year, the worst performance of 24 developed markets tracked by Bloomberg. The losses take the gauge within 2 percentage points of its 2011 low, and 13 points from the March 2009 bottom that followed the financial crisis.

“You have austerity, indebtedness and unemployment all being talked about constantly in a mix that is not good,” said Francisco Salvador, a strategist at FGA/MG Valores, a Madrid- based broker. “Either this explodes into a further selloff or investors move onto another theme. I believe there are still some more losses to come.”

Spain’s public debt will rise to a record this year, the government said today as it presented its budget to Parliament. Prime Minister Mariano Rajoy is implementing the deepest austerity measures since the nation returned to a democracy in 1978 in an attempt to contain the shortfall.

Unemployment Gains

Unemployment in Spain, where more than half of young people are out of work, rose for the eighth month in March. The number of people registering for jobless benefits increased by 38,769 to 4.75 million, the Labor Ministry said today.

Writing in a report today, Citigroup Inc. economists said Spain is likely to receive funding this year from the International Monetary Fund and European Union partners as Greece did. While a debt restructuring is unlikely, “more radical fiscal and structural” measures are required in the country, London-based Ebrahim Rahbari and Guillaume Menuet wrote in the note.

Spanish bonds fell as the nation prepared to sell as much as 3.5 billion euros ($4.67 billion) of government debt tomorrow. The yield on the 10-year note rose 10 basis points to 5.45 percent at 6 p.m. local time.

Santander Sinks

Santander dropped 4 percent to 5.55 euros, the lowest in almost three months. BBVA declined 4.5 percent to 5.70 euros.

Ferrovial (FER) tumbled 6.4 percent to 8.24 euros for its largest retreat since May 2010. As part of its budget measures affecting taxes, the government said last week it will cap deductions on financial costs to 30 percent of earnings before interest, taxes, depreciation and amortization.

Repsol YPF SA (REP), Spain’s biggest oil operator, declined 2.9 percent to 18.26 euros. The firm’s YPF SA Argentine unit tumbled 15 percent in New York trading yesterday on concern the government of President Cristina Fernandez de Kirchner will try to take control of the subsidiary.

The cost of options protecting against losses in shares of Santander and Telefonica SA (TEF), Spain’s biggest phone company, has never been lower relative to credit-default swaps on their bonds, spurring concern investors are underestimating risk in the equities.

Implied volatility for three-month puts priced 10 percent below shares of Santander, Spain’s largest lender, fell to 39.75 yesterday, while five-year swaps were at 359.48 basis points, data compiled by Bloomberg show. The ratio between the values fell to 0.107-to-1, an unprecedented level, on March 29. The equivalent figure for Telefonica reached a low yesterday.

To contact the reporter on this story: Alexis Xydias in London at axydias@bloomberg.net

To contact the editor responsible for this story: Andrew Rummer at arummer@bloomberg.net


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