Spain is the only country in the world that hasn’t benefited from the credit rally fueled by central bank cash as investors bet its government will be the fourth in the euro region to request a rescue.
Credit-default swaps insuring Spanish bonds surged 21 percent since the start of the year to 461 basis points, according to CMA, signaling a worsening perception of credit quality. That compares with a 1 percent decline in swaps on Portugal, the next worst-performing nation, and more than 40 percent drops for Norway, Sweden and the U.S.
Spain is in “extreme difficulty,” Prime Minister Mariano Rajoy said yesterday, raising the likelihood of a bailout for the second time this week. The government has raised its budget deficit target to 5.3 percent of gross domestic product from 4.4 percent and warned public debt will surge to a record 79.8 percent of GDP this year as it imposes the deepest austerity in at least three decades.
“The market is slowly coming around to realizing that despite the fact the original target was abandoned, the current target is still ambitious,” said Ralf Preusser, head of European rates research at Bank of America Merrill Lynch. “Without growth, almost any debt burden is unsustainable.”
The bailouts of Greece, Ireland and Portugal spurred European finance ministers to increase the size of rescue funds available to fight the deepening crisis to 800 billion euros on March 30. When Greece restructured its debt last month, payouts on $2.9 million credit-default swaps were triggered.
Spain will get external aid from European authorities and the International Monetary Fund this year to help overcome its debt crisis, while continuing to “at least partially” raise funds through bond sales, Citigroup Inc. analysts Ebrahim Rahbari and Guillaume Menuet wrote in an April 3 note.
Demand fell and borrowing costs rose at a debt auction yesterday when Spain sold 2.59 billion euros ($3.4 billion) of bonds, just above the minimum amount it planned and below the 3.5 billion-euro maximum target. The average yield on the bonds due in October 2016, which act as the five-year benchmark, rose to 4.319 percent from 3.376 percent at last month’s sale. The yield was 4.46 percent today.
Spain’s 10-year borrowing costs are approaching levels last seen in December, before the European Central Bank said it would make unlimited three-year loans to banks. Some of the 1 trillion euros taken in the longer term refinancing operations, known as LTROs, was recycled into high-yielding government debt, helping shave as much as 95 basis points off Spanish yields before they began to rise again in March.
“The Spanish sell-off in the wake of yesterday’s soft auction results both raises the risk the LTRO-related bid may already be losing steam and points to fundamental concerns beginning to reassert themselves,” said Richard McGuire, a senior fixed-income strategist at Rabobank International in London. “LTROs are a liquidity stop gap rather than a permanent solution.”
Spanish borrowing and insurance costs are rising as a deepening economic slump compounds the euro area’s fourth- largest shortfall. The additional austerity measures may deepen a recession that’s left the country with the euro-region’s highest jobless rate approaching 24 percent.
Spanish export growth slowed in January to 3.9 percent from a year earlier, compared with 6.6 percent in December. The government predicts a 4 percent fall in domestic demand in 2012.
“Before we see clearer evidence of significant strengthening in its export industry or domestic economic recovery, Spain will probably continue to trade at a discount relative to other peripheral countries, namely Italy, that don’t need to engineer such a drastic retooling of the growth model,” Preusser said.
Credit-default swaps on Spain are up from 380 basis points at the start of the year and peaked at 492 basis points on Nov. 23, according to CMA. The contracts last month surpassed Italy, which has fallen more than 70 basis points since the start of the year to 408.
A basis point on a credit-default swap protecting $10 million of debt from default for five years is equivalent to $1,000 a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.
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