Spain’s banks may struggle to refinance about ¤85 billion ($111 billion) in debt next year as costs surge on concern continental Europe’s fourth-biggest economy may need an Irish-style bailout.
“There’s a universal dumping of Spain going on,” said Andrea Williams, who helps manage about $968 million, including shares in Banco Santander, at Royal London Asset Management. “The fear is that Portugal, Spain and Italy are now in line after what happened in Ireland.”
Anxiety over Spain’s ability to bring down the euro-region’s third-highest budget deficit after Europe handed Ireland an ¤85 billion aid package has driven up financing costs for the country’s lenders already battered by rising bad loans and falling revenue. The average yield investors demand to hold euro-denominated Spanish bank bonds, relative to government debt, rose 141 basis points to 385 basis points in November — the biggest monthly jump on record.
As the cost of insuring the country’s debt against default rose to its highest level, Spanish lenders now pay the biggest premium ever on their debt relative to other banks in Europe. Spreads on Spanish bank bonds in euros rose to a record 166 basis points more than the average for all lender debt denominated in the currency, up from a gap of 63 basis points on October 31.
The risk for Europe is that Spain’s economy is twice as big as that of Greece, Ireland and Portugal combined, meaning the euro region’s ¤750 billion bailout fund may not be big enough if the country resorts to aid.
