Strategic Briefing | 7.23.12 | The Spanish Risk Factor

Spanish Yield Reaches Record on Regional Bailout Concern
Bloomberg | July 23
Spanish bonds slumped, with 10-year yields climbing to a euro-era high, after El Pais said six regions may ask the central government for financial assistance, increasing concern the nation will need additional aid…. “The probable bailouts of some Spanish regions is weighing on markets and pushing up yields,” said Craig Veysey, head of fixed income at Principal Investment Management Ltd. in London, part of Sanlam Group, which manages $72 billion. “There is concern that Spain might be looking for a sovereign bailout sooner rather than later as a result of having to bail out the regions. Yields at current levels aren’t viable for Spain.”

Spain slump deepens as bailout fears grow
Reuters | July 23
The economy contracted by 0.4 percent in the three months from April to June having slumped by 0.3 percent in the first quarter of the year, the central bank said in its monthly report. As Spain’s benchmark 10-year debt yields rose further above the 7 percent level that triggered an unsustainable spiral in borrowing costs for the euro’s zone existing bailout recipients, Economy Minister Luis de Guindos ruled out a full-scale rescue on top of the 100 billion euros earmarked for the country’s banks. Ministers in Madrid insist there is little more they can do to bring the borrowing costs down, but the central bank’s deputy governor said more austerity was needed.
Spain on Edge as Focus Shifts from Banks to State’s Finances
The Curious Capitalist (Time) | July 23
Spain got the green light from its E.U. partners last Friday for a $120 billion bailout of its troubled banks…. A rout on the Madrid stock exchange and a big jump in the yields on Spanish government bonds, which soared to over 7%, a crisis level that is unsustainable. What’s going on? The short answer is that the markets are switching their attention from the parlous state of Spanish banks, which have $192 billion in what the Bank of Spain calls “doubtful loans” on their books, or almost 9% of total lending, and are now focusing on the state’s finances, which are showing new signs of deterioration. That’s a worrying development for the euro zone as a whole, since the emergency bailout funds it has agreed on would barely cover a Greek-like sovereign rescue of an economy as big as Spain’s.
German Parliament to vote on Spanish bank rescue
Associated Press | July 23
Germany’s finance minister urged lawmakers Thursday to support a rescue package worth up to (EURO)100 billion ($122 billion) for Spain’s ailing banks, arguing it was necessary to help the country cope with “excessive” market fears and prevent the eurozone’s debt crisis spreading further. Germany’s Parliament has to endorse all decisions to use money from the eurozone’s rescue fund. The country is Europe’s biggest economy and the biggest single contributor to the bailout fund; it will guarantee loans to the tune of up to (EURO)29 billion under the Spanish package.
IMF Calls on Eurozone to Take Determined Action in Response to Crisis
Int’l Monetary Fund | July 18
The euro area crisis has reached a critical stage, as financial markets in parts of the region face acute stress. In its latest assessment of economic developments in the eurozone, the IMF calls for determined action towards establishing banking and fiscal unions in the euro area to bolster monetary union. GDP growth in the euro area is expected to come in at -0.3 percent in 2012 and 0.9 percent in 2013. The pace of fiscal adjustment is particularly fast in the hard-hit periphery countries, and this is weighing on the growth outlook. Projected consolidation for 2012-13 ranges from more than 4 percentage points of GDP in Cyprus, Portugal, Greece, and Spain, to 0.5 percentage points or less in Germany, Austria, Finland and Luxembourg. The rate of unemployment is expected to continue to vary widely across the region—from 5 percent in Germany to about 24 percent in Spain this year.