Spain's borrowing costs near crisis level

Spanish banks lent heavily during the property bubble and are sitting on around €180bn of bad real estate loans.

Story highlights

  • Spain's borrowing costs jump as worries over the country's banking system continue
  • Yields on Spain's 10-year government bonds move closer to level that prompted bailouts elsewhere
  • Analysts believe the government has not gone far enough in addressing wider issues affecting the country's banks

Spain's borrowing costs have jumped as lingering worries over the state of the country's banking system and the cost to the state of nationalising Bankia continued to pound sentiment.

Yields on Spain's 10-year government bonds on Monday moved above 6.50 per cent once again -- moving closer to the 7 per cent level that prompted bailouts for Greece, Portugal and Ireland.

Spreads on Spanish 10-year bonds over German Bunds were also flirting with euro-era highs, climbing above 500 basis points.

Spain's cost of borrowing had recovered dramatically from the highs seen at the end of last year after the European Central Bank injected more than €1tn into the eurozone banking system under its three-year longer-term refinancing operation.

Spanish and Italian banks were heavy users of the LTRO, using the money to buy government bonds.

Breaking down Bankia's problems
Breaking down Bankia's problems


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Breaking down Bankia's problems 03:06
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Is Spain too big to fail?


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Bankia troubles put Spain on edge
Bankia troubles put Spain on edge


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Open Mic: Spain's economy
Open Mic: Spain's economy


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Open Mic: Spain's economy 02:12

However, as concerns have grown over a possible Greek exit from the euro and the risk of contagion, spreads on so-called peripheral government debt have risen.

While Spain has taken action to deal with worries at Bankia, many analysts continue to believe the government has not gone far enough in addressing wider issues affecting the country's banks, which lent heavily during the property bubble and are sitting on an estimated €180bn of bad real estate loans.

Last week Mariano Rajoy's government unveiled its latest plan to tackle problems in its banking system, announcing it would make an emergency €19bn injection in to Bankia -- which was created from the merger of seven domestic savings banks. The controversial move will take the total amount of state aid in Spain's second-largest bank by domestic deposits to €23.5bn and will give Madrid a holding of up to 90 per cent of Bankia.

The government is understood to be considering injecting its own government debt into Bankia and its parent. Under the plan, Madrid would issue Spanish government guaranteed debt to Bankia in return for equity. The bank would then be able to deposit those bonds with the ECB as collateral for cash.

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