Spanish Bailout Concerns Investors

Spanish Bailout Concerns Investors

Published: June 13, 2012 (Issue # 1712)

MADRID — Investors continue to find more questions than answers in Spain’s decision to seek help for its ailing bank sector and tap a 100-billion-euro ($125-billion) area bailout fund.

The country’s borrowing costs rose sharply Tuesday for the second day in a row while stocks seesawed as markets fretted about whether the new 100-billion-euro lifeline is enough to contain the 17-country single currency union’s debt crisis and whether private investors in Spain might not see their debts paid off.

“EU leaders continue to give their best impression of blind men groping around in the dark for a solution to the debt problems afflicting Europe,” said Michael Hewson, senior market analyst with CMC Markets.

The interest rate — or yield — on Spain’s 10-year bond rose to 6.63 percent, close to the 7-percent level that forced Greece, Ireland and Portugal to ask for more rescues of their public finances, according to financial data provider FactSet.

Stocks slipped early on Madrid’s IBEX-35 index Tuesday, then turned to positive territory and were up 0.9 percent in midday trading.

The bank rescue package was announced Saturday by finance ministers from the 17-country euro area, but no amount has been set for how much Spain’s banks will receive. Investors are also becoming increasingly worried that private bondholders could be placed lower in the pecking order of debt repayments if money from a new eurozone rescue fund is used in the bailout.

It is not yet clear where the euro area bailout loans will come from. If the money comes from the existing eurozone rescue fund, the European Financial Stability Facility, its repayments will have the same priority as all the other private bond investors. However, if the funds are to come from the new bailout facility, the European Stability Mechanism, its bond repayments will be given a higher priority than everyone else’s — which could mean that other debt would be less likely to be paid off. That could make bondholders less willing to buy Spain’s debt or demand a higher interest rate to compensate for the added risk of losses.

Spain will wait for the results of two independent audits of the country’s banking industry before saying how much of the 100 billion it will tap. The bailout loans will be paid into the Spanish government’s Fund for Orderly Bank Restructuring (FROB), which would then use the money to strengthen the country’s teetering banks.

In a report released late last week, the International Monetary Fund estimated Spain needs around 40 billion euros ($50 billion) to prop up banks hurting from an unprecedented real estate boom that went bust.

Investors also want to know whether Spain will ask for a safety margin of extra money to cushion itself against further shocks, such as a deterioration in the economy.

While Spain’s bailout is designed to prop up its banks, investors are also worried that the Spanish government might eventually be forced into asking for a bailout to help it pay its way.

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