Spain Debt Costs Seen Unjustified in Berlin Crisis Talks

Spanish borrowing costs surged after crisis talks in Berlin late yesterday produced a statement saying bond yields don’t reflect the strength of Spain’s economy.

“The current levels of interest rates on sovereign debt markets don’t correspond to the fundamentals of the Spanish economy,” German Finance Minister Wolfgang Schaeuble and Spanish Economy Minister Luis de Guindos said after their meeting in a joint decalaration that also praised Spain’s deficit-cutting efforts.

Their words failed to provide market support as the plunge in Spanish securities extended into a 10th day. Spain’s two-year note yield climbed 20 basis points to 7.09 percent at 7:43 a.m. London time, breaching the 7 percent level for the first time. The five-year yield rose 14 basis points to 7.74 percent while the rate on 10-year bonds added 9 basis points to 7.71 percent.

The Spanish government today denied an El Economista report that Germany is urging Spain to request a 300 billion-euro ($363 billion) bailout package that would erase the need to sell debt to investors for as many as two years.

Spain’s bank bailout and agreements made among European leaders at the end of June to build a so-called banking union should be implemented “quickly,” they said. Schaeuble starts his three-week vacation today, while de Guindos visits Paris for talks with his French counterpart, Pierre Moscovici.

Bailout Denials

Policy makers denied yesterday that an international bailout was being prepared for the euro region’s fourth-largest economy after Spanish 10-year bond yields surged to a euro-era record. After taking on as much as 100 billion euros of bailout loans to aid banks, Spain’s government is struggling to maintain access to markets.

Luxembourg Finance Minister Luc Frieden said no work is being done for a rescue of the Spanish government, though officials in the 17-nation euro area must be prepared to move quickly.

“In such difficult times as we are in, one has to follow the situation on a permanent, daily basis and be ready to act at any moment,” Frieden said in a telephone interview yesterday in Luxembourg. “The political decisions in the case of Spain and also of Greece have been taken to be able to act fast. That’s what is important especially now in the summer months.”

ECB Bazooka

A full-blown Spanish bailout can be averted if the European Central Bank starts buying the nation’s bonds in large quantities, the head of the Organization for Economic Cooperation and Development said. Europe should deploy all of its instruments “but mostly the ECB,” OECD Secretary General Angel Gurria said in a Bloomberg Television interview in London yesterday. “There is the bazooka.”

ECB council member Ewald Nowotny said in an interview poublished today there are arguments in favor of giving Europe’s rescue fund a banking license, reopening the debate on bolstering its firepower as leaders face the prospect of a full- scale Spanish bailout.

Spain didn’t have enough funds to bail out its banks and the central government is now at risk of being overburdened by the borrowing needs of cash-strapped regional governments that are locked out of markets. Prime Minister Mariano Rajoy’s administration created an 18 billion-euro facility on July 13 to help states meet their debt redemptions and plug shortfalls.

Catalonia, the biggest regional economy and the most indebted, said yesterday it is considering tapping the fund, and Valencia, the second-most burdened, has said it will do so.

Concerns the Spanish government itself will need some kind of international assistance helped push down the euro. Yesterday the European currency fell below $1.21 for a second day, also pressured by Moody’s Investors Service’s decision to cut its outlook for the Aaa credit ratings of Germany, the Netherlands and Luxembourg. As Spanish bonds slumped, the main Ibex 35 share index fell 3.6 percent in Madrid.

To contact the reporters on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net; Rainer Buergin in Berlin at rbuergin1@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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