March 8, 2021

Debt Anxiety Raises Cost of Borrowing for Spain

In an added sign of mounting anxiety ahead of a European Union summit meeting on Thursday, borrowing from the European Central Bank rose sharply Tuesday, indicating that many banks were having trouble raising money on open markets.

The treasury of Spain sold 12-month notes worth 3.79 billion euros, or $5.4 billion, and 18-month notes worth 661 million euros, meeting the target amount. Borrowing costs were much higher than they were a month earlier, however: 3.702 percent for the one-year bills, compared with 2.695 percent in June. The yield on 18-month bills rose to 3.91 percent, from 3.26 percent.

Separately, the European Central Bank reported that banks borrowed 197 billion euros in its weekly funding operation, the largest amount since February. A total of 291 banks asked for central bank loans, the highest number in four weeks.

When banks borrow from the European Central Bank, it often means that other banks are refusing to lend to them at rates competitive with the 1.5 percent that the central bank charges for one-week loans.

The demand for central bank loans was also a sign that bank stress tests carried out by European regulators, whose results were released Friday, had not restored confidence in the banking system, as hoped.

Five Spanish banks were among the eight institutions that failed the tests, highlighting the national banking sector’s exposure to a collapsed property market. Still, two Spanish savings banks are set to defy volatile market conditions by listing their shares this week, in what is seen as a crucial test of whether banks, known as cajas, can tap the stock market to meet stricter capital requirements.

Shares in Bankia are to start trading Wednesday, followed by those of a smaller caja, Banca Civica, on Thursday.

Bankia, formed by a seven-way merger led by Caja Madrid, is the largest among the unlisted cajas. With an initial market valuation of 6.5 billion euros, Bankia will also be among the country’s biggest listed companies despite being forced to sharply cut the price of its initial public offering to attract sufficient demand.

On Monday, Bankia set a final price of 3.75 euros a share, 15 percent below its initial pricing range.

Investor appetite for Spanish government bonds will also be tested Thursday, when the treasury is planning to sell 2.75 billion euros of 10-year and 15-year bonds.

In April, when Portugal was forced to join Greece and Ireland in seeking an international bailout, yields on Spanish government debt remained relatively stable. Any notion of decoupling between Spain and other suffering euro economies, however, has since been wiped out by the deepening crisis in Greece, as well as by more recent concerns over Italy’s finances and Prime Minister Silvio Berlusconi’s tense relationship with his finance minister.

Haggling by European Union leaders over whether, and how, private investors should contribute to a second bailout for Greece has also rekindled contagion fears.

Chancellor Angela Merkel of Germany sought to damp expectations that the summit meeting would provide the final word. “Further steps will be necessary, and not just one spectacular event which solves everything,” she said, according to Reuters.

Last week, the yield spread between Spanish and German government bonds reached 3.76 percentage points, the highest level since the introduction of the euro.

Raphael Minder reported from Madrid, and Jack Ewing from Frankfurt.

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