Bloomberg News

Spanish Bonds Drop on Concern Bailout Not Enough

June 11, 2012

Spanish bonds fell, pushing 10-year yields up by the most in almost a month, on concern the nation’s request for bank aid won’t be enough to stop Europe’s debt crisis from spreading.

Italy’s securities declined as investors bet the country would become the next focus of Europe’s financial woes after Spain’s request for as much as 100 billion euros ($125 billion) of support. Spanish securities reversed an earlier gain on speculation investors holding them will rank behind official creditors in the queue for payment following the rescue. Portuguese bonds advanced after Prime Minister Pedro Passos Coelho said its bailout conditions may be relaxed.

“This bailout doesn’t solve the euro-region debt crisis,” said Christian Reicherter, a Frankfurt-based analyst at DZ Bank AG. “There is skepticism about whether the money is enough for the banks and whether the nation might also need help, and this will keep Spanish bonds under pressure.”

Spain’s 10-year yield climbed 30 basis points, or 0.3 percentage point, to 6.52 percent at 4:37 p.m. London time, the biggest increase since May 14. The 5.85 percent bond due in January 2022 fell 2.06, or 20.60 euros per 1,000-euro face amount, to 95.305. The yield earlier declined as much as 20 basis points.

The two-year yield gained 27 basis points to 4.55 percent, and 30-year rates increased 29 basis points to 6.76 percent.

Fourth Bailout

Spain became the fourth euro member -- following Greece, Ireland and Portugal -- to seek a bailout since the debt crisis began almost three years ago, after its borrowing costs approached euro-era highs.

Prime Minister Mariano Rajoy, who took office in December and denied the need for a banking bailout as recently as May 28, is trying to complete the cleanup of Spanish lenders after past efforts fell short. He’s also faced with an economy in recession and an unemployment rate higher than 24 percent.

The bailout “takes the pressure off the Spanish government in the short term but Spain still has deep economic problems,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London.

Italian 10-year bonds dropped for a fourth day, with the yield climbing 27 basis points to 6.04 percent, the highest since Jan. 31.

The statement on the aid for Spain, issued on June 9, didn’t make clear whether financing will come from the European Stability Mechanism, the region’s permanent support fund, which will probably start operating in July, or the temporary European Financial Stability Facility.

Support Fund

If the cash were to come from the ESM, its treaty provides it with preferred creditor status, junior only to the International Monetary Fund. The EFSF isn’t explicitly a preferred creditor, prompting Finland’s Finance Minister Jutta Urpilainen to demand collateral if the facility were used to advance the money.

Prime Minister Jyrki Katainen also said Finland doesn’t want any of Spain’s bailout to prop up unhealthy banks.

The rescue will probably draw from the permanent ESM, German Finance Ministry spokesman Martin Kotthaus said. The ESM is the “more efficient institution” to use for a bailout program because of its capital structure, he said in Berlin.

“There is a stigma attached to taking help because investors fear that they might be subordinated,” said Rainer Guntermann, a fixed-income analyst at Commerzbank AG in Frankfurt.

German bunds advanced, with the 10-year yield slipping two basis points to 1.31 percent after gaining as much as 11 basis points. The rate slid to its record low 1.127 percent on June 1 as investors sought the securities as a haven amid the deepening debt crisis.

Portuguese Bonds

Portugal’s bonds rallied, with 10-year yields falling to the lowest since September.

If Spain were to get more advantageous terms than other countries that are under assistance programs, “there would be an extension of those conditions to the other countries. I am certain about that,” Passos Coelho said on television station SIC Noticias.

The Portuguese 10-year yield fell 41 basis points to 10.66 percent after dropping to 10.43 percent, the lowest since Sept. 5. The yield on Irish bonds due in October 2020 declined 16 basis points to 7.25 percent.

Volatility on Irish bonds was the highest in euro-area markets, followed by Italian and Spanish debt, according to measures of 10-year debt, the spread between two- and 10-year securities and credit-default swaps.

Previous bailouts haven’t succeeded in taming yields. The rate on Portugal’s 10-year bond was 8.54 percent on April 6, 2011, the day it requested a bailout. By May 6, 2011 it had climbed to 9.56 percent and it breached 10 percent on June 8, 2011. Ireland’s 10-year debt yielded 8.12 percent on Nov. 19, 2010, before the nation requested financial aid from the European Union and IMF. By the end of that year it had reached 9.06 percent.

German debt returned 3.8 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Spanish securities lost 3.1 percent, and Italian bonds rose 8.4 percent.

To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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