Spain’s borrowing risk premium rises to record

PARIS, France [UPDATED] – German 10-year borrowing rates fell to a record low level on Wednesday, May 30, and the gap with the interest rate which Spain must pay widened also to a record.

The eurozone bond market is under rising pressure from concern about public finances and the banking system in Spain.

The 10-year rate on the German Bund, considered a safe haven for funds, fell to 1.336% and the gap or risk premium for Spain rose to 5.19 percentage points.

Spain’s borrowing rate as indicated by the trading of existing bonds on the secondary market rose to 6.479% from 6.401% at the close Tuesday.

For a eurozone country such as Spain, a rate above 6.0 percent is considered dangerous territory regarding the refinancing of public finances, and a rate of above 7% is considered to put refinancing out of reach.

That implies a risk of needing rescue funding, as was the case for Greece, Ireland and Portugal.

The problems facing Spain, over its public finances but more immediately over its fourth largest bank Bankia and the health of its banking system, have displaced the crisis in Greece as the focus of concern on financial markets.

Press reports based comments by anonymous European officials said the European Central Bank had, or would reject any strategy by Spain to save Bankia by issuing state bonds that the bank could use as collateral for ECB loans.

Bankia last week said it was seeking an extra 19 billion euros ($24 billion) from the government as part of an overall package of 23.5 billion euros.

“The ECB is clearly opposed to the Spanish plan aimed at recapitalizing Bankia with loans from the central bank. Such a development will probably increase pressure on Spain,” bond strategists at BNP Paribas bank said.

A spokeswoman for the Spanish economy ministry said on Tuesday, however, that the government’s preferred route was to borrow on the capital markets.

Spanish central bank governor Miguel Angel Fernandez Ordonez also said on Tuesday he intended to leave his post on June 10, a month earlier than expected, a move that is not helping market sentiment.

Italy is to make a bond issue later Wednesday that will be closely watched on financial markets, economist Peter Chatwell at Credit Agricole CIB said, adding that “market conditions are getting worse.” – Agence France-Presse