Bad bond auction in Spain spooks (rightly) global financial markets

Well, that’s helpful—if you were worried that a bad Spanish bond auction might not spook global financial markets.

Spanish Prime Minister Mariano Rajoy said this morning that Spain “is facing an economic situation of extreme difficulty, I repeat, of extreme difficulty.”

That’s just in case anyone missed the disastrous results of today’s Spanish bond auction. Spain managed to sell 2.59 billion euros in bonds. That was just above the minimum target for the auction and well below the hoped for maximum of 3.5 billion euros.

As bad as the shortfall in demand was, the increase in yields investors required before buying was even worse. The yield on bonds maturing in 2020 rose to 5.338% from 5.156% at the previous auction. The yield on shorter-term bonds maturing in 2015 climbed to 2.89% from 2.44%.

In the secondary market yields on the Spanish 10-year bond climbed to 5.7%. The yield on this benchmark had fallen to a low of 4.6% in late January on hopes that the EuroZone had put the euro debt crisis behind it.

Some of Rajoy’s extreme rhetoric is political posturing. He has been trying to whip up political support for his deeply unpopular 2012 budget that would impose another 27 billion euros in budget cuts and tax increases on the struggling Spanish economy—unemployment is already near 24% in Spain–in order to reduce the country’s 2012 budget deficit to 5.3% of GDP. The alternative to this budget, Rajoy is arguing, is a Greek-style rescue plan with unknown but certainly terrible consequences for Spain.

But part of Rajoy’s rhetoric is absolutely justified. Read more

Tells you something about how beaten up Spanish bank stocks are when Banco Santander (STD) delivers news of a horrible first half and the stock only falls 5.6%. And that on a day too—July 27–when stock market indexes such as the Standard & Poor’s 500 were themselves down 2%.

The next day, July 28, shares of Banco Santander were up 0.89% and they’ve inched ahead another 8 cents a share today. The shares pay an 8.42% dividend and at today’s price of $10.28 are very close to their 52-week low at $9.43. If they can get back just to their depressed 52-week high at $13.75, you’re looking at a gain of 35% plus dividends. (Banco Santander is a member of my Dividend Income Portfolio http://jubakpicks.com/jubak-dividend-income-portfolio/ )

How bad was the July 27 report?  So bad that Banco Santander’s results from its home market of Spain—you know, the Spain on the edge of joining the euro debt crisis club—weren’t the worst news the bank had to report.

That honor fell to the United Kingdom where a huge $1 billion charge to cover claims that the bank, like other banks operating in the country, mis-sold mortgage payment protection insurance was enough to turn a 9.3% drop in first half earnings per share from the first half of 2010 into a 22.9% plunge.

I’d make the case that the news from Spain wasn’t even the second worst for the bank. Read more

Well that sure worked–the euro debt crisis moves to Spain and intensifies

The financial markets have started to do the math they should have done six months ago, and they don’t like what they’re seeing: The European Union’s much vaunted financial backstop fund might not have enough money to rescue Spain, the numbers argue. That’s because the fund never was as big as advertised.

The realization that the attempt to paper over the euro crisis until 2012 or so isn’t very credible has savaged Portuguese and Spanish government debt today. Read more

Now it’ Spain’s turn to depress the euro

More worries for the euro. This time from Spanish politics.

Prime Minister Jose Luis Rodriguez Zapatero has set a September 30 deadline for announcing his government’s budget plan. Investors want to see a combination of taxes and spending that reduces Spain’s budget deficit, the Euro Zone’s third largest. But they’re skeptical that Zapatero can deliver: Since July 27, the spread between the benchmark 10-year German bund and the Spanish 10-year bond has widened by 0.3 percentage points to 1.79 percentage points. The spread’s historic high since the introduction of the euro came on June 16 at 2.21 percentage points.

The skepticism is well founded. Zapatero heads a minority government that depends on the votes of six members from the country’s Basque Nationalist Party, which advocates separation from Madrid, and abstentions from at least one other lawmaker, to achieve a majority on the budget. If he can’t pass a budget, Zapatero’s Socialist government is likely to fall.

Which is, perversely, the reason the budget is likely to pass.  The prime minister has run a minority government since 2004, cobbling together one fleeting coalition after another. An early election, if the budget fails, would probably go to the pro-business People’s Party according to recent polls. That gives left-wing parties that have voted with Zapatero in the past incentive to find grounds for a deal again.

The real problem for Zapatero is that his own party has shown no enthusiasm for the kind of spending cuts and tax increases that the country needs to convince investors not to sell Spanish bonds and push up the interest rate that the government has to pay on its debt. The strongest action the Socialists have taken was to pass a 5% cut to public sector wages and a freeze on pensions back in May. And that only passed by one vote.

The cliff hanger will further unsettle the European debt markets, which are already pushing up the interest rate spreads on the heavily indebted countries of the Euro Zone periphery—Ireland, Portugal, Greece, and Spain. Read more

Spanish interest rates climb as the country takes another step toward crisis

  You can breathe a sigh of relief that Spain managed to sell a new debt issue at all, but the soaring interest rate the country had to promise buyers is a sign that worries that Spain is headed straight toward a Greek-style debt crisis are all too justified.

Yesterday, May 5, Spain sold $3 billion in five-year notes at an interest rate of 3.532%.

Doesn’t sound too bad right? Wrong. Read more