Spain beset by bank crisis, downgrades, bond pressure

Reuters: Spain’s borrowing costs shot up at a bond auction on Thursday and its troubled banks suffered a double blow, with shares in part-nationalised Bankia diving and 16 lenders - including the euro zone’s biggest - having their credit ratings cut.

Official data confirmed Spain was back in recession and a newspaper reported a big outflow of deposits from Bankia, but the government said it had taken a fundamental step to strengthen Spain’s credibility by agreeing big budget cuts with the country’s free-spending regions.

Moody’s Investors Service cut the long-term debt and deposit ratings of the 16 Spanish banks, including Banco Santander, the euro zone’s largest, saying the government’s ability to support some banks had weakened.

Spain’s banks, saddled with bad loans after a property boom collapsed, lie at the heart of the euro zone crisis as markets fear any major rescue would strain Madrid’s already stretched finances and possibly require an international bailout.

Gary Jenkins, credit analyst at Swordfish Research, said Spain had problems which went beyond the risk of contagion from the crisis in Greece, whose future in the euro is in doubt

“Whilst the attention of the world is on Greece, the fact is that Spain faces many challenges irrespective of how the Greek situation is finally resolved,” he wrote in a note.

Moody’s cut the rating of BBVA, Spain’s second largest lender, as well as Santander even though both are generally regarded as sound, unlike some of their smaller peers.

Nicholas Spiro of Spiro Sovereign Strategy said the government of Prime Minister Mariano Rajoy was not handling the crisis well. “Sentiment towards Spain is deteriorating with each passing day, mainly because of a loss of confidence in the Rajoy government’s approach to tackling the problems in the banking sector,” he said.

At Thursday’s debt auction, the Treasury had to pay around 5 percent to attract buyers of three- and four-year bonds. The latter sold with a yield of 5.106 percent, way above the 3.374 percent the last time it was auctioned.

Spain officially slipped into recession in the first quarter this year, final figures confirmed on Thursday, leaving the country threatened with a prolonged slump as the turbulent euro zone struggles to balance austerity with growth.

The European Commission warned last week that high debts of the 17 regions, which account for about half of overall public spending, and the welfare system would prevent Spain meeting its goal of cutting the budget deficit to 5.3 percent of gross domestic product this year from 8.5 percent in 2011.

However, the government said the regions - most of which missed their deficit targets last year - had agreed to cut their spending by 13 billion euros and increase revenues by 5 billion euros.