Spanish Banks’ ECB Loans Rise as Rajoy Mulls Second Bailout Call

Spanish lenders’ net borrowings from the European Central Bank rose to a record 376 billion euros ($465 billion) in July as investors shunned the country’s banks pushing Prime Minister Mariano Rajoy toward a second bailout.

Net average ECB borrowings climbed from 337 billion euros in June, the Bank of Spain in Madrid said today. Gross borrowing was 402 billion euros, up from 365 billion euros in June, accounting for 33 percent of borrowing in the euro region.

Rajoy said on Aug. 3 he’ll need to analyze the details of the ECB’s plan to bring down borrowing costs before deciding whether to request more aid as he waits for the first installment of a 100 billion-euro bank bailout to be paid out.

“These banks clearly are having to borrow more from the ECB so that they can continue to buy the debt and this can only go on for so long,” Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London, said in a telephone interview.

Spanish lenders are tapping the ECB to finance purchases of government debt as foreign investors dump the bonds binding the sovereign and the banks together. Domestic lenders increased their holdings of sovereign bonds by 84 billion euros in the first six months of the year while foreign institutions reduced their investments by 78 billion euros, according to the Spanish treasury.


“While the pressure still exists on the Spanish government market these banks are likely to be increasing their holdings,” Chatwell said.

Spain is slipping deeper into recession even as the euro region’s biggest economies weather the financial crisis. German output rose 0.3 percent in the second quarter and French gross domestic product was unchanged compared with forecasts for a 0.1 percent decline, their statistics offices said today. The Spanish economy shrank by 0.4 percent in the period while the currency union as a whole contracted by 0.2 percent.

The country’s 10-year benchmark bond yield rose to 6.86 percent at 10:28 a.m. today in Madrid, compared with 6.84 percent yesterday.