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Spanish Borrowing Soars as Regional Government Finances Break Down

The Spanish 10-year bond yield keeps going straight up. It sits now at 7.62%, a high since the creation of the euro. Spain had a debt sale today, and they hit their number, selling over 3 billion euros on fairly brisk demand. But these were lower-term (and therefore lower-risk) debt sales, and even with them, the yields were the highest since November, which at the time was an eight-year high. They will need to return to the markets to sell bonds on August 2, and if the yields are at the same rate, it will be very difficult for them to finance them. And there’s a weird paradox, as the five-year notes are selling at rates almost as high as the ten-year.

Clearly this is a bad scenario. That’s why Spanish officials are in crisis talks in Berlin today.

Germany’s finance minister, Wolfgang Schäuble, will meet his Spanish counterpart, Luis de Guindos, for crisis talks on Tuesday amid fears that spiralling bond yields in the eurozone’s fourth biggest economy will force it to seek a €300bn bailout from the European Union and the International Monetary Fund […]

Dealers were unimpressed by de Guindos’s claim that Spain would not become the fourth eurozone country to require a formal bailout, after Murcia on Sunday became the second Spanish region to request financial assistance from the government. The Spanish finance minister categorically denied that a bailout was imminent, but media reports from Spain suggest up to six regions could require financial aid, with Catalonia next in line.

“What began as a Spanish banking bailout looks to be moving rather quickly towards a possible sovereign bailout. Overlay that with increasingly negative news on Greece and you get a fairly negative mix, so the path of least resistance for the euro is down,” said Jeremy Stretch, currency strategist at CIBC.

The switch from a bank bailout to a regional government bailout puts a significant stress on the national government, perhaps too much for them to take. After that report was filed, Catalonia did request financial aid. That includes the city of Barcelona. Spain called for the promises made at the EU summit to be immediately instituted, but that was not likely to happen.

Does this sound like a country well-positioned to inaugurate another massive bailout, at a time of 24% unemployment? Regardless, that’s what’s coming down the pike.

Fiscal crises like these usually happen in slow motion, but this one is three years in the making. When the reckoning happens, it will be swift. And Spain is not Greece or Portugal or Ireland: there’s not enough room in the bag of tricks for Europe to pull something out, without a major intervention by the European Central Bank.

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David Dayen

David Dayen