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ECB slams bailout of Bankia

30 May 2012  •  Source: Michael Derks, FxPro

Spain is again the centre of attention in financial markets today after various news reports claimed that the ECB had told the central government that its proposed bailout of Bankia was a very bad idea. Subsequently, the ECB has declared that they have not been consulted on the plan. Either way, confusion reigns supreme in Spain right now with respect to how to fix the broken banking system. Sounding increasingly desperate, we even had the Economy Minister De Guindos suggesting this morning that the FROB bank fund would be used to recapitalise Bankia, which on the surface sounds a stretch given that the FROB has a few billion euros available while Bankia needs almost EUR 20bn. To add to the panic and pessimism, we also had the departing BOS Governor declaring that the country faced a crisis of confidence.

Spanish bond investors continue to sprint for the exit, with the 10yr yield climbing another 25bp today to 6.66%, and the 5yr yield now above 6%. Alarmingly, short-dated yields are rising more rapidly than those at the longer end – the 2yr yield is up 32bp today at 4.95%. The financial cancer in Spain has spread to their surrounding Mediterranean partners, with the 10yr yield in Italy reaching 6% today. Like Spain, the short end has been crucified today, with the 2yr yield up 45bp at 4.53%. Auctions held this morning in Italy went badly, with very tentative bidding and a weak bid/cover.

Meanwhile, the G4 bond markets continue to register new record lows in yield. The 10yr Bund yield has fallen to just 1.3%, while both the US and UK 10yr yield has declined to 1.7%.

After two years of largely unsuccessful fire-fighting, European leaders are clearly unable to fashion a cohesive and comprehensive response to their sovereign debt and banking crisis, especially now that it has spread like a brush-fire through both Italy and Spain. The way things are headed, it will not just be Greece that is soon forced to reintroduce their own currency.