Spanish-German Yield Gap Is `Litmus Test' for ECB: Chart of the Day

Spain may end up receiving a bailout as part of the European Central Bank’s effort “to ring-fence Greece” in the current sovereign-debt crisis, according to Andrew Garthwaite, a global strategist at Credit Suisse.

The CHART OF THE DAY shows the difference between 10-year yields on Spanish government bonds and German bunds, a benchmark for Europe, according to data compiled by Bloomberg. The spread widened today to the highest level since the euro’s 1999 debut.

This gap is a “litmus test” of whether Europe’s financial woes are spreading beyond Greece, the target of a 110 billion euro ($141 billion) rescue plan, Garthwaite wrote in a report today. It stood at 133 basis points as of 3 p.m. London time. The previous peak of 128 basis points was reached in February 2009, as central and eastern European countries struggled to refinance debt. Each basis point is 0.01 percentage point.

Providing financial aid to Spain may soon become essential, the report said. European banks are more heavily invested in the country than in Greece, which the European Union is bailing out jointly with the International Monetary Fund.

Banks in the region own $850 billion of Spanish assets, by Garthwaite’s estimate. The comparable figure for Greece is just $190 billion. Their holdings include $85 billion of government debt, exceeding the $75 billion total for Greek bonds.

“The ECB will be forced into the end game” of buying debt of smaller European countries as well as arranging support for Spain, he wrote, as the central bank has no other options. He called for stock investors to avoid Spain as well as Greece.

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To contact the reporter on this story: David Wilson in New York at dwilson@bloomberg.net