Ever since the Spanish Prime Minister announced a $24 billion package to bail out Bankia, international investors have been betting that the government can’t finance the bill. And now they consider Bankia bailout a benchmark to estimate the potential cost for the rest of the industry. As foreign investors avoid Spanish debt, the country’s 10-year borrowing costs have reached levels over 6.63% yesterday.
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The Spanish banking sector still hasn’t recovered from the collapse of real-estate bubble. Nearly all the major Spanish banks including CaixaBank (CABK) SA and Banco Popular Espanol SA (POP) are around today as a result European Central Bank’s refinancing operations. Rising borrowing costs may force Spain to join the league of Greece, Ireland and Portugal.
“The problem for Spain is that they can’t simply finance all this by issuing debt,” said Edward Thomas, the head of fixed income investment at Quantum Global Wealth Management, Switzerland. “It’s a perfect storm for Spain, with more banks now being sucked in.”
Bankia has generated doubts over “the size of that hole in the banking system.” David Mackie, chief economist at JPMorgan Chase & Co., says that the gross funding required to recapitalize the banks could shoot up to 350 billion euros.
Another looming headache for the cash-starved Spanish Treasury is the 20 billion euros of debt due in October. There is buzz that international auditors are going to conduct a stress test in June that will give a more clear picture on how much of additional financing the banks may need. “We have to wait for the outcome of the independent audit and that could certainly be another trigger,” said Tobias Blattner, a London-based economist at Daiwa Capital Markets.
Despite the Spanish Prime Minister repeating that Spain won’t seek a European bailout, the international investors continue to sell Spanish bonds. By the end of April, they held only 37% of the total Spanish bonds, compared to 50% at the beginning of January.