Spanish Bond Yields Rise Again

The yield on 10-year Spanish bonds rose above 6% this morning in reaction to the turmoil in Greece and fears that it would spread to Spain. The differential between Spanish bonds and German bunds rose to 4.49 points as the German yields fell to an all-time low of 1.53%. Yields on British gilts also posted an all-time low of 1.9%.

As we’ve noted in another story this morning, Greece has essentially decided to exit the Eurozone. All that remains is for the country to figure out how to do that. And that’s the problem: there is no set mechanism for leaving the euro and the chaos that would follow a Greek abandonment of the single currency sends shivers down the spines of traders.

As for the Spanish bonds, the government has said that it will bail out Bankia, the country’s third-largest bank at a cost of €7-€10 billion. The big question, of course, are how many others the government will have to rescue. The amount of the Bankia bailout is hardly enough to push Spain into a deeper financial hole, but there are fears that the government will have to spend much more on the country’s smaller banks. To date Spain has injected about €15 billion into its banks.

Another question is just what exactly is the limit to Spain’s vulnerability. No one believes any of the estimates any longer.

As Spanish yields inch closer to 7% — a level most observers deem unsupportable by any country — we can expect to hear news similar to that of a few months ago, with the only difference being that “Spain” will replace “Greece” in the reports.

Paul Ausick