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Subscriber Actionable Intelligence Notice: Spain in the Spotlight

Spain is due to hit the capital markets tomorrow. This is far from an opportune time: Spain’s Borrowing Costs to Rise at Debt Sale as Zapatero Confronts `Abyss’

May 5 (Bloomberg) — Spain’s borrowing costs may climb tomorrow at the country’s first debt sale since its credit rating was cut last week on concern the fiscal crisis pummeling Greek bonds will spread to fellow euro-region countries.

The Treasury may sell as much as 3 billion euros ($3.89 billion) of five-year notes to yield 3.34 percent, according to the median estimate of seven analysts and investors in a Bloomberg News survey. The yield was 2.84 percent when Spain auctioned 4.5 billion euros of the same securities on March 4…

Standard & Poor’s lowered its ranking for Spanish debt one step to AA on April 28, saying more downgrades are possible if the government’s “budgetary position underperforms to a greater extent than we currently anticipate.” Spain, which has the euro-region’s third-largest deficit, has pledged to reduce it to within the EU limit of 3 percent of gross domestic product in 2013, from 11.2 percent last year.

The yield on Spain’s 3 percent notes due April 2015 rose 21 basis points to 3.59 percent as of 5:21 p.m. in Madrid. The yield climbed 20 basis points yesterday, the largest increase since the securities were issued in March, as the EU’s Greek rescue plan failed to convince investors it can insulate other euro nations from the crisis.

Investors demanded an extra 1.35 percentage points of yield to hold 10-year Spanish government bonds instead of German bunds, Europe’s benchmark securities, the most since the single currency was introduced.

Spanish bonds are little changed this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. That compares with a 19 percent loss for Greek bonds and a 6 percent drop for Portuguese debt. German bunds, the benchmark for the 16-nation euro area, returned 4.3 percent as investors sought a refuge.

Notice that the prices that I included are over a week old, and the last few days have hit Spanish bonds hard.

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Rumor Denied

Euro-region ministers agreed on May 2 to the three-year bailout package for Greece. Under the terms of the deal, the government will have to cut its deficit below 3 percent of GDP by the end of 2014, from 13.6 percent in 2009.

Zapatero yesterday denied speculation that Spain is planning to ask for a bailout, saying it may “damage our national interests.”

Hey, isn’t that what the Greek Prime Minister said just a month or so ago. “We are not looking for a handout from the EU, just political support”???? By now we should all know not to trust what we hear come out of these politician’s mouths!!!

European Central Bank council member Axel Weber said today that Greece’s fiscal crisis is threatening “grave contagion effects” in the region.

On that note, if you haven’t read the post from earlier this morning, please do: With Europe’s First Real Test of Contagion Quarrantine Failing, BoomBustBloggers Should Doubt the Existence of a Vaccination

Zapatero has failed to carry out proposals for reining in spending this year as unions protested cuts. His plan to raise the retirement age to 67 announced in February is mired in negotiations. Finance Minister Elena Salgado overruled her deputy Carlos Ocana after he suggested renegotiating wage agreements for public workers.

The government is basing its budget-cutting projections on a return to economic growth of 1.8 percent in 2011, accelerating to 3.1 percent in 2013. The European Commission said today Spain’s economy will grow 0.8 percent next year.

Right!!!! Again I reference the BoomBust contagion link above.

Greek air-traffic controllers and teachers walked off their jobs today and shopkeepers shuttered their stores to challenge Prime Minister George Papandreou’s accord with the EU and IMF.

“The current Spanish government must take very strong decisions to avoid a similar situation,” former Prime Minister Jose Maria Aznar said in a May 3 interview. “The time is almost over.”

Here comes the civil unrest that stems from a people who test the resolve of their percievably weak government. We cover this in our contagion model…

EU Economic and Monetary Affairs Commissioner Olli Rehn said last week that an agreement on a Greek bailout package would “safeguard financial stability” and ease the pressure on governments across the single currency area.

“European officials are still in denial,” Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York, wrote in a research note yesterday. “No reason for contagion? Really?”

Although things may go without a glitch, I believe the odds are against it. I have released a rash of research preparing subscribers for such an event. Spain is literally beyond the EU’s ability to bail out and the what was a quasi-solvency/sovereign debt crisis may now morph into a full liquidity crisis – which tends to move much, much more quickly. Just ask Bear Stearns, who collapsed overnight (although warning signs were flashing for months – see Is this the Breaking of the Bear?). Well, the Spanish debacle was visible for at least a year, and I believe the time of reckoning may be approaching.

This in from Zerohedge:

“look at the second chart, the one on the right… EU libor vs repo is widening (pink line) in last 2 days, and also dollar libor is rising faster than euribor (decline in blue line in right chart), ie dollars are harder to come by vs euros in the eu interbank market.  expected.  but most strikingly, the spread between 3m and o/n repo in europe is skyrocketing (yellow line), which means it is getting harder to secure funding on a 3 month basis using ECB collateral vs going to the window overnight. bad bad bad.  means players are less inclined to lend collateralized money out at 3mths.  We are watching an insolvency crisis become a liquidity crisis in real-time.”

(click to enlarge)

Subscribers should reference the following in detail in preparation for the possiblity of an inflection point in funding events:

File Icon A Review of the Spanish Banks from a Sovereign Risk Perspective – retail
File Icon A Review of the Spanish Banks from a Sovereign Risk Perspective – professional
File Icon Spain public finances projections_033010
File Icon Banks exposed to Central and Eastern Europe
File Icon Spanish Banking Macro Discussion Note



Disclosure: Short European Banks