Spain's sovereign risk premium rises to euro-era record

Spain's sovereign risk premium shot to a fresh euro-era record Tuesday as Madrid announced new bonds to finance debt-struck regions and as banks scrambled to clean up bad loans. The debt premium - the extra return investors demand to hold Spanish bonds over their safer German counterparts - leapt to a euro-era record of 5.16 percentage points.
Spain's government said it would approve on Friday the issuing of joint bonds - "hispanobonos" - by the 17 regional governments so as to make it cheaper for them to finance their debts. "The goal is to reduce the pressure on the regions, which is often greater than the pressure on the state in general, with some regions not able to borrow on the market," an Economy Ministry spokeswoman said.
Spain's 17 regional governments have suffered a plunge in tax revenues and soaring debt since the collapse of a decade-long property boom in 2008, and they are struggling to pay suppliers. Moody's Investors Service last week warned of the deficit challenges as it downgraded its credit rating for economic powerhouse Catalonia and three other regions, Murcia, Andalucia and Extremadura.
Catalonia president Artur Mas called Friday for the central government to approve the use of "hispanobonos", which would be issued for all regions and guaranteed by the state. His region alone faces debt payments, including refinancing costs, of 13.48 billion euros ($17 billion) in 2012. Investors also showed deep concern over stricken banks' struggles to strengthen their balance sheets.
The government this month instructed banks to set aside an extra 30 billion euros in 2012 in case property-related loans go bad, on top of 53.8 billion euros demanded under reforms enacted in February. Three Spanish savings banks - Ibercaja, Liberbank and Caja3 - announced they would vote on a merger later in the day.
Another lender, Banco Popular, whose long-term debt was downgraded by Standard & Poor's on Friday to junk-bond status, said it was trying to sell its online banking to find the cash to clean up its books. "Banco Popular is in negotiations for the sale and outsourcing of a majority stake of its internet banking and means of payment businesses, although no agreement has been reached as of today," it said in a statement. Investors expressed worries after Prime Minister Mariano Rajoy's conservative government said it was considering issuing sovereign debt and injecting it directly into recently nationalised lender Bankia.