Friday, May 25, 2012

Spanish spreads hit new records as larger bank bailout expectations grow

As expectations of ever larger bank bailouts in Spain hit the market, both the 5-year and the 10-year Spanish government spread to Germany reached new records, with the 5-year spread exceeding the November high for the first time.

5yr Spain sovereign spread to Germany
10yr Spain sovereign spread to Germany - The board of Bankia, the large Spanish bank that was taken over by the government, met Friday to discuss a restructuring plan that will include a request for more state aid, bolstering calls for a coordinated relief blueprint for Europe’s fragile financial sector.

Trading in shares of Bankia, the country’s fourth-largest lender, were suspended Friday while its board determined how much new aid it needs. The bank’s shares have whipped about violently in recent weeks on fears it could succumb to the massive losses it has built up in the country’s collapsed real estate sector.
The bailouts were never built into the debt to GDP ratio projections. The debt levels have strayed from the target even before the additional support for the banking system became necessary. Nobody really believes that Bankia is an isolated case, raising the possibility that Spain would need to undertake an Ireland-style banking recapitalization. That may require external support from EFSF/IMF, which frightens existing bond holders as they continue to sell Spanish debt.
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