Spain’s campaign to cajole the European Central Bank into buying its bonds is backfiring.
The nation’s 10-year borrowing cost has jumped more than half a point to 6.62 percent since Jaime Garcia-Legaz, the deputy minister for trade, became the country’s first official to urge the ECB to support its bonds on April 13. Yield increases accelerated after May 24 when Prime Minister Mariano Rajoy signalled that Spain’s debt sustainability may be in danger, and peaked at 6.70 percent on May 30, moving closer to the 7 percent level that forced Greece, Portugal and Ireland to seek outside aid.
Economy Minister Luis de Guindos said late yesterday that the future of the euro is at stake, as data showed a net 66 billion euros ($81 billion) of capital left Spain in March. “I don’t know if we’re on the edge of the precipice, but we’re in a very, very, very difficult situation,” he said at a conference in Sitges, Spain.
Investors have lost more on Spanish debt this year than any government securities apart from those of Greece. Spain, the fourth-biggest euro economy, owes bondholders 731 billion euros, more than the three countries that have already been bailed out combined. Rajoy’s suggestion that his country risks being forced out of capital markets reinforces concern that it may not be able to manage its debts, according to Marius Daheim, a senior strategist at Bayerische Landesbank.
“The ECB decides on its own terms, doesn’t pre-announce these purchases and can only be effective in moving markets if it doesn’t preannounce, so there’s probably not much sense in any government calling for them to act,” said Daheim, who’s based in Munich. “It would have been better for politicians to either leave it up to the ECB completely to take that decision or at least consult them behind closed doors.”
The extra yield investors demand to hold Spain’s 10-year debt securities instead of German bunds reached a euro-era record of 548 basis points today. Foreign investors have cut their holdings of the country’s debt to 37 percent of the total, down from about 50 percent at the end of 2011, as the government attempts to rein in a budget deficit that was more than twice the euro-area average last year amid worsening bank losses and cash-strapped regional governments.
The ECB halted its bond-buying program, known as the Securities Markets Programme, after offering 1 trillion euros of three-year loans to banks in December and February. The purchases, which began with Greek debt purchases in May 2010, absorbed a total of about 212 billion euros. Rajoy said May 24 after a meeting of European Union leaders in Brussels that it’s “up to the ECB to take this decision that it has already taken in the past.”
Italian Prime Minister Mario Monti called yesterday on German Chancellor Angela Merkel to take steps to halt the crisis before a backlash builds against budget cuts, pushing for Europe’s largest economy to abandon opposition to direct euro- area aid for banks. Europe should accelerate efforts “to limit the contagion,” Monti said.
Spain’s government should talk less about what the central bank should do, former ECB Executive Board member Jose Manuel Gonzalez-Paramo said in an interview with state newswire Efe on May 28, adding that the central bank had already shown “largesse” to Spain. Klaas Knot, the head of the Dutch central bank, said April 13 that the ECB is “very far” from reactivating its policy of bond purchases.
“It can be counterproductive,” Mark Schofield, head of interest-rate strategy at Citigroup Inc. in London, said of the Spanish calls for ECB assistance. “The ECB is probably very concerned about the moral hazard in the SMP program, and the problems in Spain are much broader than just liquidity.”
The request also may heighten volatility in Spanish bonds because investors will “tend to think there’s no smoke without fire,” Schofield said.
Investors have lost 5.2 percent on Spanish government debt this year, including reinvested interest, while Greek bonds have dropped 44 percent, the only two declines among 26 bond markets tracked in indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
Public appeals for help as Spain struggles to rescue Bankia Group, the nation’s third-largest bank which has asked for 19 billion euros of aid, are incompatible with the ECB’s independence, according to Charles Zerah, who helps oversee 48 billion euros at Carmignac Gestion in Paris.
“The calls cannot be successful because the ECB is independent,” said Zerah. “The situation in Spain is quite critical, in terms of the banking sector. They need to come with a very serious program for several banks.”
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