Monday 25 September 2017

Markets fall as Spanish bonds hit 14-year yield high

IMF changes rules to make it easier for countries to tap emergency aid

People queue up to buy 'El Gordo' (The Fat One) Christmas lottery tickets in downtown Madrid yesterday
People queue up to buy 'El Gordo' (The Fat One) Christmas lottery tickets in downtown Madrid yesterday
Donal O'Donovan

Donal O'Donovan

SPAIN'S new government had a baptism of fire in the markets yesterday -- it was forced to pay a 14-year high to borrow.

European shares declined for a fourth consecutive session yesterday, with banks falling after record-high yields at a Spanish debt auction.

As the debt spirals out of control, the IMF announced dramatic changes to its rules to make it easier for countries in trouble to tap emergency loans.

The latest developments come as the debt markets look increasingly like they did prior to the financial crisis in 2008 when global lending shut down following the collapse of Lehman Brothers. That lending strike led to a global financial meltdown.

Yesterday, Spain's government paid 5.11pc to borrow for just three months, double what it paid just a month ago.

Belgium, which has a high level of debt but no deficit issues, was also hit hard by rising debt costs. France is under pressure and Italy's access to loans at viable rates hangs in the balance.

The crisis has spread to Europe's banks which are now being hammered in the markets. Fitch Ratings said the exposure of US investors to European banks was at the lowest level since 2006. It said investors were pulling money out of European markets.

This week alone US investment bank Jefferies said it had reduced its investments in Ireland and the rest of the European "periphery" by 75pc since the start of the month.

Investors in Europe and beyond have been cutting their exposure to eurozone government bonds as the two-year-old debt crisis has spread to core countries such as France, Austria and the Netherlands.

ECB lending

As banks shy away from lending to one another, the ECB has been forced to step in. The ECB said lending to European banks reached €247bn this week.

It is the most since mid-2009, a sign that the interbank market -- where banks lend to each other -- is simply not functioning.

Spain was in the firing line after it borrowed in the markets in the wake of Fitch Ratings saying the newly elected government needs to take "additional measures" to meet deficit targets.

Spain paid more than Greece and Portugal to borrow for just three months and is now moving rapidly towards a bailout -- if Europe does not come up with a solution before it needs to borrow larger sums early next year.

The deputy leader of the incoming People's Party government, Maria Dolores de Cospedal, called for a euro-region deal to "save and guarantee the solvency" of Spain's €650bn of debt.

She said Spain could not afford to finance itself at an interest rate of 7pc.

As the crisis deepens, the IMF announced radical changes to the way it operates. It has changed its rules and made it easier for countries facing outside shocks to borrow from the global rescue fund.

The Washington-based IMF said it had created a new "precautionary and liquidity line" to provide loans to countries.

The new loans can be tapped by countries with "strong economies" facing short-term financing needs and come without the kind of oversight and terms and conditions Ireland was forced to sign up to for its IMF bailout deal.

"The reform enhances the fund's ability to provide financing for crisis prevention and resolution," IMF managing director Christine Lagarde said.

The revamping of lending instruments is the second in 15 months as the IMF tries to get countries to request funding before crises develop.

Irish Independent

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