Tuesday 12 June 2012

Lack of detail on Spain rescue spooks investors

Spain's Economy Minister Luis de Guindos, left and Spain's Prime Minister Mariano Rajoy talk during a swearing in ceremony for the new governor of the Bank of Spain Luis Maria Linde, unseen, at the Zarzuela Palace in Madrid Monday June 11, 2012. The current Bank of Spain governor Miguel Fernandez Ordonez is stepping down a month earlier than scheduled. (AP Photo/Angel Diaz,Pool)

Spain's Economy Minister Luis de Guindos, left and Spain's Prime Minister Mariano Rajoy talk during a swearing in ceremony for the new governor of the Bank of Spain Luis Maria Linde, unseen, at the Zarzuela Palace in Madrid Monday June 11, 2012. The current Bank of Spain governor Miguel Fernandez Ordonez is stepping down a month earlier than scheduled. (AP Photo/Angel Diaz,Pool)

A miner walks along a road blocked by barricades during a demonstration in Cinera, near Leon, Spain, Monday, June 11, 2012. Strikes, road blockades, and mine sit-ins continue as 8,000 mineworkers at over 40 coal mines in northern Spain continue their protests against government action to cut coal subsidies. (AP Photo/Emilio Morenatti)

A visitor points his finger towards the Stock Exchange's main display, in Madrid, Monday June 11, 2012. After Spain's request for a European financial lifeline of up to a euro100 billion euros ($125 billion) to save its banks the EU made clear the money is more than just a loan. Besides being paid back with interest, there will be strings attached for the Spanish government.(AP Photo/Daniel Ochoa de Olza)

A display shows the new governor of the Bank of Spain Luis Maria Linde as a broker works at his desk beneath the Stock Exchange's main display, in Madrid Monday June 11, 2012. Market relief that Spain had secured European Union help to save its banking sector quickly turned to concern Monday, as investors began to question the mechanics of the euro 100 billion ($124.68 billion) loan package and whether the country could manage the extra debt or be forced ask for more help. (AP Photo/Daniel Ochoa de Olza)

(AP) ? Spain's borrowing costs rose sharply Tuesday for the second day in a row and stocks seesawed as investors fretted about a lack of detail over how a lifeline of up to ?100 billion ($125 billion) from the other countries in the 17-nation eurozone will be deployed to save troubled Spanish banks.

The interest rate ? or yield ? on Spain's 10-year bond rose to 6.62 percent, close to the 7 percent level that forced Greece, Ireland and Portugal to ask for more rescues of their public finances.

Stocks slipped in early on Madrid's IBEX-35 index, then turned to positive territory in late morning trading and were up 0.9 percent.

The bank rescue package was announced Saturday, but no amount has been set for how much the banks will receive and investors are increasingly worried that private bondholders could be placed lower in the pecking order of debt repayments if money from a new eurozone rescue fund is used in the bailout.

It is not yet clear where the euro area bailout loans will come from. If the money comes from the existing eurozone rescue fund, the European Financial Stability Facility, its repayments will have the same priority as the all the other private bond investors. However, if the funds are to come from the new bailout facility, the European Stability Mechanism, its bond repayments will be given a higher priority than everyone else's ? which could mean that other debt would be less likely to be paid off. That could make bondholders less willing to buy Spain's debt or demand a higher interest rate to compensate for the added risk of losses.

"EU leaders continue to give their best impression of blind men groping around in the dark for a solution to the debt problems afflicting Europe," said Michael Hewson, senior market analyst with CMC Markets. "It remains unclear whether the funds will come from: the soon-to-be-wound-down EFSF, or the yet-to-be-formed new bailout fund, the ESM, which would subordinate existing bond holders."

Spain is also getting punished as investors take their money out of shaky eurozone economies because of fears Greek elections on Sunday will hand a victory to the radical left-wing Syriza party, campaigning on a pledge to refuse to comply with terms of that country's bailout package.

"The idea of the Spanish bailout was to calm the market in case the Greek elections do not turn out as the EU would like," said Gary Jenkins, director of Swordfish Research Ltd. "However the end result was to create more volatility and create more concern."

While Spain's bailout does not include the government, investors are worried that Spain might eventually be forced into such a situation.

The rescue for Spain's banks was portrayed by Spanish and European officials as a bid to contain Europe's widening recession and financial crisis that have hurt companies and investors around the world. Providing a financial lifeline to Spanish banks was designed to relieve anxiety on the economy.

Finance ministers of the 17 nations that use the euro said Saturday they would make the loan of up to ?100 billion available to the Spanish government to prop up banks laden with non-performing loans and other toxic assets after the collapse of a real estate bubble.

Recession-hit Spain, which has the eurozone's fourth-largest economy, has yet to say how much of this money it will tap while it waits for the results of two independent audits of the country's banking industry due by June 21 ? after the Greek elections. The bailout loans will be paid into the Spanish government's Fund for Orderly Bank Restructuring (FROB), which would then use the money to strengthen the country's teetering banks.

In a report released late last week, the International Monetary Fund estimated Spain needs around ?40 billion to prop up banks hurting from an unprecedented real estate boom that went bust.

But investors still don't know precisely how much Spain will seek, and how large a safety margin of extra money it might take to cushion itself against further shocks, such as a deterioration in the economy already in its second recession in three years with unemployment of nearly 25 percent, the highest in the eurozone. They're also worried about the financial health of Italy.

A credit line for Spain "may not be the real solution - rather a temporary measure to the mess Spain found itself," said Anita Paluch of Gekko Global Markets.

She added: "Although Italian banks are relatively sound compared to the Spanish counterparts, without the heavy weight of toxic real estate bubble and are much less exposed to the government bonds, the real question is whether the country can grow itself out of the recession."

Associated Press

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