Tuesday 20 March 2018

Debt Crisis: Michael Noonan blames Spain for its woes, banks need €62bn

Peter Flanagan in Luxembourg

FINANCE minister Michael Noonan laid the blame for the rocketing yields on Spanish debt firmly at the Mediterranean country’s door today, as it emerged the country's banks need €62bn in additional funding.

His comments came as an independent audit decided that Spanish banks need €62bn in additional capital - the Spanish Government will use the figures from the two outside auditors to decide how much to ask the eurozone for.

Speaking ahead of this evening’s Eurogroup meetings, Mr Noonan said the markets would remain uncertain until Spain applied for its banking bailout, which was agreed a fortnight ago. Since then the yield on Spanish bonds have rocketed to untenable levels, with the interest rate on the country’s 10 year debt touching 7pc.

“I think if Spain made an application on the weekend the agreement was made and they quantified their needs, I think that might have eased the market concern.

“While there’s no request and while there’s no certainty of the amount being requested I think that makes the markets jittery,” he said.

The minister added that while there were no formal talks scheduled on removing banking debts from the state balance sheet, he planned to raise the issue informally.

“It would be Ireland’s policy to separate banking debt from sovereign debt and to explore how that might be done technically so I’ll be advancing that line. There are no papers in circulation to show any real policy initiative in any direction but I presume a lot of that will be done informally,” he added.

Mr Noonan was coy on whether the European Stability Mechanism will be a preferred creditor if Ireland has to borrow from the new bailout fund, saying there wasn’t “clarity” on that issue yet.

Earlier, Spanish borrowing costs hit a new euro era high at a debt auction today, ahead of the country shedding light on the dire state of its weaker banks and the possibility the country will make a formal request for European Union funds to rescue them.

The auction proved the Spanish Treasury can still borrow on international markets, albeit at a high cost, and it made the best of solid demand by selling €2.2bn in bonds, above the targeted amount.

"We want to emphasise the strong demand despite the current situation on the markets," an Economy Ministry source told Reuters.

However, the rocketing yields contrasted with France's sale on Thursday of bonds maturing in 2014 for just 0.54pc, as concerns that Spain might have to take a full sovereign bailout meant that international investors are opting for less risky debt. Madrid had to pay 4.706pc for the same maturity.

While the government does not give immediate breakdown of buyers in primary auctions, data shows international investors are steering clear of Spain and have left the often troubled domestic banks to buy up the government's bonds.

"They got it away, it's about the most positive thing you can say about it. Also it's above the modest target they have set for themselves, but the yields are not anything to be too pleased about it. These are high levels," said Elisabeth Afseth, fixed income analyst at Investec.

Spain, which is in its second recession since 2009 and has the highest unemployment rate in the European Union, is the latest euro zone country in the firing line after Greece, Ireland and Portugal, which have already taken bailouts.

A lack of information on the bank rescue has helped to drive yields on Spanish government debt in recent weeks to levels deemed unsustainable in the medium term.

However, Spanish government bond yields fell further after the auction.

Spain has sold about 61pc of its planned issuance in medium and long-term debt following Thursday's auction, as it got ahead of schedule at the start of the year when banks used cheap cash from the European Central Bank to buy bonds.

The effect of the massive ECB loans of three-year cash is fading fast, and yields have leapt sharply since the last liquidity offer in February.

(Additional reporting Reuters)

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