Spain’s banks may struggle to refinance about 85 billion euros ($111 billion) in debt next year as costs surge on concern continental Europe’s fourth-biggest economy may need an Irish-style bailout.
“There’s a universal dumping of Spain going on,” said Andrea Williams, who helps manage about 623 million pounds ($968 million), including shares in Banco Santander SA, at Royal London Asset Management. “The fear is that Portugal, Spain and Italy are now in line after what happened in Ireland.”
Anxiety over Spain’s ability to bring down the euro-region’s third-highest budget deficit after Europe handed Ireland an 85 billion-euro aid package has driven up financing costs for the country’s lenders already battered by rising bad loans and falling revenue. The average yield investors demand to hold euro-denominated Spanish bank bonds, relative to government debt, rose 141 basis points to 385 basis points in November — the biggest monthly jump on record, according to data compiled by Bank of America Corp.
As the cost of insuring the country’s debt against default rose to its highest level, Spanish lenders now pay the biggest premium ever on their debt relative to other banks in Europe. Spreads on Spanish bank bonds in euros rose to a record 166 basis points more than the average for all lender debt denominated in the currency, up from a gap of 63 basis points on Oct. 31, according to Bank of America data.
The risk for Europe is that Spain’s economy is twice as big as that of Greece, Ireland and Portugal combined, meaning the euro region’s 750 billion-euro bailout fund may not be big enough if the country resorts to aid. Spain’s 10-year government bonds slid yesterday by the most since the euro’s debut. The extra yield investors demand to hold the securities instead of benchmark German bunds widened to euro-era records.
“The big elephant in the room is not Portugal but, of course, it’s Spain,” Nouriel Roubini, the New York University professor who predicted the global financial crisis, said at a conference in Prague yesterday. “There is not enough official money to bail out Spain if trouble occurs.”
The European Central Bank may have to step up purchases of Spanish government bonds and backstop its banking system if the country runs into financing difficulties, Willem Buiter, Citigroup Inc.’s chief economist, said in a note to investors yesterday. “Once Spain needs assistance, the support of the ECB will be critical,” Buiter wrote.
Bond Sales Fall
Spanish financial companies sold 300 million euros of bonds in Europe this month, excluding debt with government guarantees, compared with 2.37 billion euros in the same period a year earlier, according to data compiled by Bloomberg.
Spain says the government’s finances and the country’s banks are sound. The lenders are “fundamentally healthy,” Jose Luis Malo de Molina, chief economist of the Bank of Spain, said in a news conference in Madrid yesterday. “The Spanish financial system does not have a problem of deep frailty such as the Irish economy has.”
The country’s lenders have about 30 percent of their medium- and long-term debt maturing by December 2012, according to the Bank of Spain’s October financial stability report. The report says the fact that 50 percent of maturities fall after 2013 “softens” the refinancing needs of the lenders, even as it advises them to rely more on debt with longer maturities.
Cajas at Risk
“Asking the Spanish banks how they are going to meet these refinancing needs is absolutely a fair question for them,” Claire Kane, a banking analyst at MF Global in London, said in a phone interview.
Four months after the Bank of Spain said publication of stress tests of Spanish lenders “confirm the soundness” of the country’s banking system, investors are again driving up their financing costs. Investor concerns are most likely to focus on the needs of Spain’s savings banks, said Daragh Quinn, an analyst at Nomura International in Madrid.
Savings banks, immersed in a restructuring process that will see their number shrink by almost two-thirds as the central bank coaxes them into cost-saving mergers, have about 30 billion euros of debt coming due next year, according to Bloomberg data.
The cost of insuring the five-year senior debt of Caja de Ahorros del Mediterraneo, an Alicante-based savings bank, is about 700 basis points compared with about 246 basis points for Santander, Spain’s biggest lender, which earns about 25 percent of profit from its home country as it boosts income from countries such as Brazil and the U.K.
“The government and European policy makers must be looking at what they would need to do if the cajas were unable to refinance next year,” said Peter Chatwell, a fixed-income strategist at Credit Agricole CIB. “It’s at that point the situation would start to look like that which Ireland has suffered.”
Even in the toughest scenario, it’s unlikely funding would be cut off for the strongest Spanish lenders such as Santander, Banco Bilbao Vizcaya Argentaria SA or La Caixa, Quinn said.
Spanish lenders can pick among different strategies for bridging a prolonged period of being shut out from the debt markets, said John Raymond, an analyst at CreditSights Inc. in London. Those include tapping funding from the European Central Bank, stepping up the already stiff competition for retail deposits or scaling back lending, he said.
ECB Loans Decline
Spanish banks had loans from the ECB of 67.9 billion euros in October, a 30 percent drop from the previous month. Spanish ECB loans as a proportion of banking assets stand at about 2 percent, compared with about 7.8 percent for Ireland.
Santander, which has 27 billion euros in debt maturing next year, said it added 94 billion euros in customer deposits this year and also has as much as 100 billion euros in collateral it can use to tap funds from central banks.
A spokeswoman from Santander, who asked not to be named in line with company policy, declined to comment. The lender’s shares fell as much as 3 percent in Madrid trading today, dropping below their June lows to extend declines this year to 36 percent. Santander was trading at 7.47 euros at 11:54 a.m., a gain of 1.9 percent.
“If Santander were to go to the ECB for 50 billion euros then we really would be in crisis territory,” said Kane. She said that was highly unlikely because Santander can also sell debt through its non-Spanish subsidiaries.
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