Spanish bond yields have risen above 6.5 per cent today, sparking fears that the country may hit the 7 per cent level which prompted bailouts in Greece, Ireland and Portugal.
The Spanish-German yield spread, the difference between the amounts the two countries pay on their debt, has also risen precipitously in the last three months, from 3 per cent in February to 5.1 per cent, a record in the post-euro era. The previous high was 4.7 per cent, in November 2011, as this chart via FT alphaville shows:
The November panic was eased by a €1trn injection of credit into the European system through the European Central Bank's three-year longer-term refinancing operation, and it may take a similar amount to end this crisis.
The biggest problem this time is the Spanish bank Bankia, particularly the costs associated with the government's part-nationalisation, when it took control of 45 per cent of the bank earlier this month. The bank is saddled with a number of bad debts, and the government lacks the cash to pay them off. As a result, the FT reports, it is considering novel methods to pay it off:
Spain is considering directly injecting its own government debt into BFA-Bankia to help fund the stricken lender’s €19bn nationalisation, in an attempt to sidestep borrowing money directly from the bond markets.
The plan, viewed as highly unorthodox by analysts, involves Madrid issuing Spanish government guaranteed debt to Bankia in return for equity, with the bank then able to deposit the bonds with European Central Bank as collateral for cash.
If Spain carried out that plan, it would allow it to dodge the cost of borrowing at its exorbitantly high yields. But the ECB is unlikely to look kindly upon Spain using loopholes in the rules to fund a pan-European bailout of its banks, with one analyst telling the paper:
This is very cheeky – the ECB executives are going to be furious.
Bankia is not the only issue, though. Almost all the Spanish banks have problems, and in total hold around €180bn in bad loans stemming from the country's real-estate boom. And, of course, there is the perennial fear of Greek exit from the euro, and the possible contagion that would bring.
Despite these fears, Mariano Rajoy, Spain's prime minister, told a press conference this afternoon that:
We are not going to let any regional government fall, or any bank fall, because they can’t. . . if that happens the country will fall. . .
It might have been more comfortable to do nothing [about Bankia] and look the other way, but the best thing to do when the situation is difficult is to tell the truth and start working from there.