Selasa, 10 April 2012

Following up on two prior posts , spanish ten year debt is close to 6 percent danger zone. When the ten year crosses 7 percent , you are basically in the bailout zone if that level is sustained. Even as important , note the action on the two year bond - the level to watch there is 4 percent as the danger zone.

Spanish 10-Year Bond Yield Hits 5.99% as Official Denials in Spain Escalate; "Bailout" on the Way

10-Year Spanish Government Bond Yield

Official Denials in Spain Escalate

From Iibre Mercado with an assist from Google translate, please considerFear pervades the Government: "We do not need a bailout"
Fear among members of the Government. Featured Rajoy government ministers and Governor of the Bank of Spain have ruled on Tuesday block the possibility that Spain required some kind of international rescue.

The Minister of Finance and Public Administration, Cristobal Montoro, has said that the Government did not seek help from European Rescue Fund to clean up the Spanish banks have a liquidity cushion "considerable" after having gone to the European Central Bank auction (ECB) held in December and February.

In this sense, told RNE by Europa Press, the finance minister denied that the government will opt for this possibility to help Spanish banks, as is exploring other. "We are studying the possibilities we have in hand as a government, "he assured Montoro, who has stressed that we must go" faster "in restructuring the banking sector, because you need credit to flow to achieve economic growth and job creation.

"We have to obtain and circulate the money, we are already exploring ways to accelerate the restructuring of banks in our country," said Montoro, while predicted changes in terms of bank mergers "increasingly committed to the supply of credit" .

For his part, Minister of Economy and Competitiveness, Luis de Guindos, has said that Spain does not need a bailout right now because it has a government "absolutely clear-minded" and a coordinated economic policy with European partners.

"Obviously you do not need a bailout right now," said De Guindos in statements to the media after participating in the Forum Europe, which has ensured that you have to do is implement the reforms and carry out the adjustment. In Guindos has also highlighted the need to also implement the outstanding reforms and continue with the process of austerity and reforms to ensure a fair distribution of efforts and a return to growth and job creation.

Finally, the Bank of Spain Governor Miguel Angel Fernandez Ordonez has said that the European Central Bank (ECB) has not addressed the possibility that Spain needs to be rescued by Europe, while highlighting the recent progress with reform labor.
"Bailout" of Spain on the Way

There you have it, three official denials in a single day by the Minister of Finance, the Minister of the Economy, and the Bank of Spain.

Translation: "we need a bailout and fast, but politically we do not want one".

This bailout is going to be far more painful economically speaking than was Greece.

Spain's spreads breaking away from other risk indicators

As the sell-off in Spanish government bonds continued today, Spain's spreads broke away from other global macro risk indicators. Typically Spain's bond and CDS spreads move in tandem with risk measures such as VIX or SovX WE (MarkIT Western European index of sovereign CDS), etc. But this time around, the widening has outpaced these other measures. As an example consider the relationship between Spain's 10yr bond spread (to Germany) and SovX WE (chart below). The red asterisk indicates the current levels.

Spain to Germany 10y Gov. spread vs. SovX WE spread (last 2 years; source: Bloomberg)

One can run the same comparison against VIX or swap spreads and get a similar result. Using Spain's CDS spreads rather than bond spreads also shows that we are in an uncharted territory with respect to this widening. Consider for example that the last time Spain's 10-year spread was at current levels (4.3%), VIX was around 30 (it's 21 today) and the USD 2-year swap spread was over 50bp (31bp today) - see chart below.
Spain to Germany 10y Gov. spread vs. USD 2 year swap spread

Clearly there is plenty of room for the other risk indicators to "catch up" with Spain. But for now it stands on its own with respect to the relative amount of risk that is being priced in. More Spanish and Italian debt auctions loom and it is uncertain just how much more room the periphery banks still have to absorb the extra debt. In the mean time foreigners continue to sell.
Reuters: Spain has found itself the focal point of those concerns after relaxing budget targets earlier this year and with subsequent budget-cutting plans winning little investor support - culminating in weak demand at an auction last week.
Spanish 10-year yields jumped 22 bps on the day to a four-month high of 5.99 percent before finding resistance at the psychological 6 percent barrier - though few in the market believed that level would halt the selling.

"We're going to see Spain develop as the story this week as hedge funds look to short it," a London-based trader at an investment bank said.

Spanish Govt Generic Bonds 2 Yr Note

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As of 11:59:00 ET on 04/10/2012.

Interactive Chart for Spanish Govt Generic Bonds 2 Yr Note (GSPG2YR)

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