Spanish 10 year now trading well above 5.56% as Spanish banks hide €50bn in bad debt

With all eyes quite rightly on Greece the past couple of months we’ve been encouraging readers to keep an one eye on Spain. Back in May, when the Spanish 10 year bond was trading around 5.3% we wrote:

Why is 5.56 so important? Because this is around the level that the bailed out countries of Greece, Ireland and Portugal managed to get loans via the ESFP fund and other mechanisms. Should rates in Spain start to spike above this level it becomes essentially becomes ‘cheaper’ for Spain to ask for a bailout than to try and borrow money at market rates.

Then, a couple of weeks ago we published this chart noting that the 6 month trading range that Spanish 10 years bonds had been in had been violated to the upside – signaling possible higher borrowing costs for the Spanish government. We wrote:

If the Spanish 10y holds above 5.56% we could see a rapid move higher. This will be a real problem because 5.56% is around the level that Greece, Ireland and Portugal all got bailed out.

Well today, after using 5.56% as support rather than overhead resistance the Spanish 10 year is trading at 5.7% edging worryingly near 6% where we are sure alarm bells will start ringing about the solvency of Spain.

Back in May we also took a look at the cost of insuring against a Spanish default (known as a CDS). we wrote:

The above side-by-side with Greece [see linked chart above] sees that at the moment the market professionals don’t seem to concerned with trouble in Spanish bond land… However, a look at how fast those Greek CDSs moved up should be a warming to just how fast things can change.

Well what a difference a month makes. Back then the Spanish 5 year CDS was trading around 241. Today we’re trading around 310 – that’s a 28% increase in the cost of insuring Spanish debt in about a month. This puts Spain in the same place Greece was in back in March 2010 – 4 short months later Greek CDS were trading at 1000, bankruptcy territory.

(click for sharper image)

It hasn’t helped that Bloomberg is out today reporting that Spanish banks have €50bn in ‘unrecognized’ real estate loans. This may translate to the Spanish banks needing bailing out to the tune of €20bn-€30bn. Are journalistic eyes finally turning to Spain proper?

As we’ve repeatedly pointed out Ireland wasn’t seen to have been in a solvency problem until their 10 year bond really took off, neither was Greece and nor was Portugal – until bond yields shot up. Should the cost of borrowing for the Spanish government rise much above 6% then serious questions are going to be thrown the way of Spain and its ability to honor its debt.

However, a rather large word of caution regarding Euro periphery interest rates going higher. George Soros was out over the weekend warning of an economic collapse.

Let’s face it, we are on the verge of an economic collapse which starts, let’s say, in Greece but could easily spread. The financial system remains extremely vulnerable… We are on the edge of collapse and that is the time to recognize the need for change. [emphasis ours]

It’s worth remembering that Soros has a bit of previous of saying one thing publicly, whilst doing the opposite with his trading book. He famously came out and called gold the “ultimate bubble” whilst buying gold on the quiet for himself.

So is Soros reverting to form and scaring people to sell their European bonds, whilst he’s there to take them off their hands?

We’re also getting reports from a London trading desk that smart money (hedge fund land) are getting more bullish on bonds. We should have a clear idea in about a month or so if so called ‘smart money’ was all that smart this time round.

(chart courtesy of Bloomberg)

Related posts:

1. Gold trades above £950 as Spain 10 year bond breaks critical 5.56%
2. Spain 10 year bond right at that critical 5.56% level
3. PIGS in space
4. The IMF and Central Banks Gold Bullion Sale
5. The US Debt Ceiling… anyone for a game of chicken?

Link to this article: : http://www.goldmadesimplenews.com/gold/spanish-10-year-now-trading-well-above-5-56-as-spanish-banks-hide-e50bn-in-bad-debt-4407/

Posted by Thomas Paterson on Jun 27 2011. Filed under Analysis, Gold News, Markets. You can follow any responses to this entry through the RSS 2.0. You can leave a response or trackback to this entry