Keeping an Eye on Spain
Greece was bailed out in May, Ireland in November, and Portugal could follow. Both Greece and Ireland will be lent money from the‚¬750 billion EU/IMF pledged stabilization funds at interest rates that are well below what the market is currently demanding from the countries so that interest payments do not cause the nations to default on their debt. Should Portugal need assistance, it is thought that the funds would be also be available to the country.
A larger concern, however is the possibility that Spain will need aid.The economy of Spain is two times the size of Greece, Ireland and Portugal combined. In a New York Times article the possibility of a Spanish bailout is outlined.
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“Even though Spain, like Ireland, has adopted an austerity plan to help it avoid the need for a bailout, it still could need aid if its banking system proves frailer than the government thinks it is, as was the case in Ireland. This troubling possibility has unnerved lenders, with Spain’s borrowing costs rising even though Madrid has cut its deficit and the country banks maintain they have sufficient strength to absorb their bad real estate loans.”
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The need of Spain to access the EU/IMF funds will depend on the rate of interest at which Spain has to borrow in the next few years.In 2011 ‚¬192 in Spanish debt is due which equates to approximately 20% of total government debt outstanding.
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Current 10 year yields on European debt:
- Germany – 2.77%
- France – 3.24%
- Italy – 4.49%
- Spain – 5.28%
- Portugal – 6.64%
- Ireland – 8.94%
- Greece – 11.78%
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As The New York Times points out,”the looming question is whether Spanish banks are really as healthy as the government and the banks say they are.” Over the last few months, the rise in the yield of the 10 year Spanish bond has indicated that the market remains skeptical.
Spain 10 Year Bond Yield
Source: Bloomberg