MADRID-Spanish 10-year borrowing costs neared the seven per cent danger level and Bankia shares hit record lows on yesterday after the government, struggling to sort out its finances, proposed putting sovereign debt into the struggling lender. Prime Minister Mariano Rajoy pinned the blame for the rising borrowing costs on concern about the future of the euro. He again ruled out seeking outside aid to revive a banking sector laid low by a property boom that has long since bust. The risk premium demanded by investors to hold Spanish 10-year debt rather than the German benchmark reached its highest since the launch of the euro and closed the day for the first time above 500 basis points, at 511. "There are major doubts over the euro zone and that makes the risk premium for some countries very high. That's why it would be a very good idea to deliver a clear message there's no going back for the euro," Rajoy told a news conference. "There will not be any (European) rescue for the Spanish banking system."
Speaking before Bankia's parent revealed a 2011 loss of 3.3 billion euros - compared to a modest profit previously declared - Rajoy gave no details of recapitalization plans. But he backed calls for the euro zone bailout fund, which will be in place from July, to be able to lend to banks directly. Government sources told Reuters Spain may shore up Bankia with sovereign bonds in return for shares in the bank and could use this method to prop up other troubled lenders - moves which would push the country's debts above the 79.8 percent of economic output which had been expected this year. "This method has been used by Germany and by Ireland in the past, it is perfectly valid," a government source told Reuters. The source said the ECB had not been specifically informed of the plans to inject state bonds into Bankia, although the government was in close touch with the Frankfurt-based institution. A final decision had not yet been made on which option to take.
Bankia's parent company BFA has asked for 19 billion euros (US$23.8 billion) in government help, in addition to 4.5 billion the state has already pumped in to cover possible losses on repossessed property, loans and investments. Investors increasingly believe weak banks, undermined by the collapse four years ago of a decade-long property boom, coupled with heavily indebted regions, could force Spain to seek an international bailout which the euro zone can barely afford. The premium investors require to hold Spanish government bonds over German counterparts hit a euro-era high at 513 basis points, denoting a lack of confidence in Madrid's efforts to stabilize its finances and ailing banks. Having dropped to around 4.7 per cent earlier this year, helped by the ECB's creation of a glut of three-year money, 10-year borrowing costs are now approaching 6.5 per cent and closing in on the 7 per cent level widely seen as unsustainable. Ireland and Portugal were frozen out of capital markets and forced to seek international bailouts soon after their yields topped 7 per cent. "If it goes on for much longer, it just adds to the burden of fiscal consolidation," said Elisabeth Afseth, analyst at Investec in London. "If a large part of that is spent on paying a premium to borrow, it just makes it so much harder." (Reuters)
