Situation continues to darken in Spain

18 Jun 2012 by Jim Fickett.

A primary current symptom of Spain's, and Europe's, troubles was worse again today; the 10-year Spanish yield was up to 7.2%. From the Financial Times:

Investors are becoming accustomed to shortlived rallies. The relief that swept across financial markets after Greece’s centre-right New Democracy party narrowly won Sunday’s election evaporated in less than an hour. …

Investors and economists say that the eurozone crisis has moved to an endgame, where little less than substantial central bank intervention in the short term and moves towards a longer-term European fiscal union will assuage markets.

“It’s not really about countries any more – it’s about trying to come to terms with a deep systemic issue and what Europe should be doing about it,” says George Magnus, senior economic adviser to UBS.

The shortening length of relief rallies – the one that followed last week’s announcement of a bailout for Spanish banks lasted only slightly longer – suggests Europe’s policy of incremental steps “doesn’t pass muster” in terms of convincing the market that the eurozone crisis is on the way to being resolved, Mr Magnus says. …

Unease over Spain’s fiscal woes intensified on Monday, with Madrid’s 10-year benchmark borrowing costs rising to a new euro-era record of more than 7 per cent and the cost of insuring against Spanish default hitting a record high. …

“Spain can still issue debt, but has lost access to debt markets at economic levels,” says Nick Gartside, international chief investment officer for JPMorgan Asset Management.

Although borrowing at current levels will weigh on Spain’s fiscal position in the long run, it also has a “very quick and corrosive” effect on the economy by pushing up borrowing costs for Spanish companies and households, Mr Gartside points out.

One important measure of Spain's underlying problems is the percent of loans by Spanish banks that are considered “doubtful”, i.e. unlikely to be collected. The following shows data through April, reported today by the Bank of Spain (only annual data are available through 2010).

The percentage of doubtful loans continues to rise both because the economy is worsening and because regulators are forcing the banks to be more honest about the quality of their portfolios. Investors are unsure how to guess the future of the banks and the economy; apparently increasing numbers are deciding to get out of Spanish assets.