Now Spain feels the Euro pain
SIXTEEN Spanish banks and four of the country’s regions were downgraded by ratings agency Moody’s last night as the sovereign debt crisis spread from Greece to the Eurozone’s larger troubled economies.
The rating agency slashed the long-term debt and deposit ratings of the embattled country’s banks by between one and three notches including those of its largest lenders Banco Santander and BBVA, and kept seven of them on review for further reductions.
Moody’s also downgraded Santander UK to reflect its link to parent company Banco Santander, but said at “A2” its rating was one notch above that of its parent. It also pointed out that Santander UK had “no direct exposure to the Spanish government (or regional governments)”, and said the FSA was unlikely to allow Santander UK to substantially weaken itself in order to support its parent.
Moody’s blamed the renewed recession, a dramatic deterioration in the country’s property portfolio, funding difficulties and the reduced ability of the Spanish government to support its lenders as its own creditworthiness diminishes, for the move.
The downgrade came as Spain’s government was forced to pay extraordinarily high interest rates to borrow money yesterday as fears of contagion grew, while shares in its fourth-biggest lender Bankia plummeted. Both the bank and the government were forced to deny rumours of a €1bn (£0.8bn) run to withdraw money from the bank, which pushed shares down another 14.08 per cent.
Bankia’s stock losses total 40 per cent in the last month.
Despite being part-nationalised just last week at a cost of up to €10bn, analysts still expect the bank, and the whole sector, to have to make more provisions against real estate losses.
Meanwhile, the Spanish government tried to sell €4.5bn in three- and four-year bonds yesterday, but only raised around €2.5bn due to low demand.
It had to pay a yield of 4.876 per cent on three-year debt, up sharply from 4.037 per cent earlier this month, and 5.106 per cent on the four-year bonds, far higher than the 3.374 per cent paid on a similar auction in March.
Ten-year yields rose to 6.314 per cent – levels last seen in December, before the European Central Bank eased market tensions by pumping €1 trillion in cheap loans into Europe’s banking system. The cost of credit default swaps on five year bonds rose 13 basis points (bp) to an all time high of 553bp, also reflecting the increased risks of lending to the country.
“Spain’s banks have been brought to their knees by a huge, speculative real estate bubble to which the banks had, and still have, large exposure,” said Ted Scott from F&C Investments.
“The Spanish government will probably be forced to pour more money into the banks before being prevailed upon to seek assistance from the Eurozone bailout fund and the IMF.”
As chaos struck Spain, Fitch slashed Greece’s credit rating deeper into junk, from B- to CCC, to “reflect the heightened risk that [it] may not be able to sustain membership of the monetary union” and warned that all Eurozone members would be at risk of a downgrade if Greece exited.
The concerns pushed the IBEX down 1.44 per cent, while the FTSE 100 dropped 1.25 per cent – a six-month low. Italy’s FTSE MIB fell 1.69 per cent, while on Wall Street the Dow Jones fell 1.2 per cent.