Spain in Post-Bailout Backlash, Davies Says: Tom Keene

Spain is experiencing a backlash following last week’s bailout as borrowing costs increase along with the country’s debt load, according to the French School of Political Science’s Howard Davies.

Spain’s bonds slumped, with 10-year yields rising to a euro-era record, after Moody’s Investors Service cut the nation’s credit rating to one step above junk, citing its rising debt burden and weakening economy. Spanish lenders’ net borrowings from the European Central Bank jumped to a record 287.8 billion euros ($361.4 billion) in May.

“This is just a liquidity arrangement and the obligation lies with the Spanish government, which is becoming more indebted,” Davies, a former Bank of England deputy governor and Financial Services Authority chairman, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “This has not actually solved the problem at all and the market is now realizing that and telling us that very quickly.”

Spain’s 10-year yield climbed 16 basis points, or 0.16 percentage point, to 6.91 percent at 10:49 a.m. in New York time after rising to 6.998 percent, the highest since the euro was introduced in 1999. The yield has jumped 70 basis points this week.

The extra yield investors demand to hold Spanish 10-year bonds instead of similar-maturity German bunds widened 16 basis points to 543 basis points after reaching 551 basis points, also a euro-era record.

‘Risen Further’

The Spanish bailout, which was designed to “channel money from the European Financial Stability Facility into the Spanish government” has “increased the Spanish government’s overall debt,” Davies said. “A consequence of that has been that Spanish borrowing costs have actually risen further.”

Moody’s lowered Spain’s credit rating yesterday to Baa3 from A3 and put it on review for a further downgrade. The request for aid from the European Union to recapitalize its banking system adds to the government’s debt load, it said.

Spanish bonds have handed investors a loss of 5.6 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Spain on June 9 became the fourth euro member to seek a bailout since the debt crisis began almost three years ago, asking for as much as 100 billion euros to rescue lenders pummeled by a real-estate slump now in its fifth year.

To contact the reporters on this story: Joseph Ciolli in New York at jciolli@bloomberg.net; Tom Keene in New York at tkeene@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net