Spanish Bonds Plunge as Government Boosts Rescue Fund for Banks

Spain’s 10-year bonds declined, pushing yields up the most in four weeks, after the nation’s government bolstered the powers of its bank rescue fund, known as FROB, to restructure troubled lenders.

German securities pared a decline as Federal Reserve Chairman Ben S. Bernanke said he wouldn’t rule out further bond purchases to boost growth and reduce unemployment. A European Union official said the European Central Bank would have sole power to grant banking licenses. Spain’s bonds also slid after Moody’s Investors Service extended the nation’s debt review and reiterated the risk of a downgrade. Standard & Poor’s lowered Catalonia’s credit rating to junk.

“The increase in the size of FROB may indicate banks’ re-capitalization needs are greater than estimated by reports,” said Elisabeth Afseth, a fixed-income analyst at Investec Bank Plc in London. Spanish borrowing costs surged because of the “bigger transfer of liabilities to the sovereign,” she said.

Spanish 10-year yields climbed 26 basis points, or 0.26 percentage point, to 6.86 percent as of 4:49 p.m. London time, after rising as much as 30 basis points, the most since Aug. 2. The 5.85 percent security due Jan. 2022 slid 1.72, or 17.20 euros per 1,000-euro ($1,259) face amount to 93.14. The 30-year rate jumped as much as 26 basis points to 7.40 percent, the highest level since Aug. 3.

The FROB will be able to take on debt to a limit of 120 billion euros in 2012, the Spanish economy ministry said in a statement today.

‘Bad Bank’

The “bad bank” Spain’s government will set up to take soured real estate from the lenders it has bailed out will seek private investors and try to sell the assets over 10 years to 15 years, it was also announced today.

“The size of the bank or asset management company will depend on the assets that are defined, which are the companies that are helped out and very definitively the valuation given to these assets,” Economy Minister Luis de Guindos said at a news conference in Madrid today. The aim is for private investors to take a majority stake in the bad bank and that it shouldn’t yield a loss for taxpayers, he said.

The FROB was among the mechanisms approved today by Spain’s cabinet as it set out a new framework for restructuring a banking industry mauled by losses from the country’s property crash. The terms of the European bailout of as much as 100 billion euros that Spain sought for its banking system in June require the government to spell out procedures for dealing with failed lenders that limit costs to taxpayers.

Bernanke Comments

Bernanke told central bankers and economists at the Fed’s annual symposium in Jackson Hole, Wyoming, that “nontraditional policies” should not be ruled out if economic conditions warrant, according to a text of his speech released in Washington.

“The costs of nontraditional policies, when considered carefully, appear manageable, implying that we should not rule out the further use of such policies if economic conditions warrant,” Bernanke said.

Germany’s 10-year yields rose two basis points to 1.34 percent, after climbing as much as eight basis points, the most since Aug. 20. The rate increased five basis points this month.

The ECB would have sole power to grant banking licenses under proposals to give the central bank supervisory powers and build a euro-area banking union, a European Union official said.

ECB Meeting

The central bank would have a monopoly on granting all bank licenses within the 17-nation euro area under the plan, due to condition of anonymity because the plan isn’t final.

ECB policy makers meet next week in Frankfurt, where they may announce their own bond-buying program to quell the euro-area debt crisis.

ECB President Mario Draghi said on Aug. 2 the central bank may resume buying government bonds to reduce borrowing costs of crisis-hit countries including Spain and Italy.

Spain’s requesting purchases of its sovereign debt by European rescue funds may increase medium-term risk to bondholders even as it would alleviate it in the short term, Moody’s said in a statement yesterday.

The New York-based ratings firm reduced Spain’s credit rating to its lowest level of investment grade on June 13, cutting it three steps to Baa3 from A3.

Volatility on Spanish government bonds was the highest in euro-region markets today, followed by Italy, according to measures of 10-year bonds, the spread between two-and 10-year securities, and credit-default swaps.

German securities returned 4 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. Italian bonds earned 11 percent and Spanish debt fell 3 percent.

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