Spain yields hit 7 percent as rating cut to brink of junk

18 Jun, 2012

Spanish government bond yields hit a euro-era high above 7 percent on Thursday after Moody's cut the country's credit rating to one notch above "junk", pushing its borrowing costs ever higher and raising the prospect of a full-scale bailout.
Moody's slashed Spain three notches to Baa3, its lowest investment grade rating, and said it could cut the rating again within three months. It said the newly approved euro zone plan to help Spanish banks would increase the country's debt burden.
Yields on Spain's 10-year bonds rose as much as 25 basis points to 7.02 percent, a financing level seen as unsustainable in the long term. Shorter-dated paper was also under pressure, with two-year yields rising a similar amount to around 5.20 percent.
"The ratings cut is more bad news for Spain and it increases the chance of a full bailout," a trader said. Euro zone finance ministers agreed on Saturday to lend Spain up to 100 billion euros ($126 billion) to shore up its banks, a move that did little to reassure markets.
If Spain were cut to junk, some index-tracking investors would be forced to sell its bonds, adding to the upward pressure on yields and pushing funding costs higher still. Greece, Ireland and Portugal were quickly forced to ask for bailouts after yields on their bonds rose above 7 percent.
"Spain is teetering on the edge of investment grade status and the risk in the near term is that investors begin to trade the risk they are cut to speculative grade," said ING's head of investment grade strategy, Padhraic Garvey.
"And if they do get cut further, then you'll get another wave of selling."
Spanish banks were large buyers of their sovereign's debt earlier this year, absorbing bonds sold by international investors. But with the banks under increasing pressure it is unclear how much capacity they have to shore up the government in the future.
"If there's no reaction from Europe, it's a likely path (that yields will continue to rise)," said Peter Schaffrik, head of European rates strategy at RBC Capital Markets. "One of the only things we see that can change the situation on a lasting basis is some form of debt mutualisation, which the Germans are reluctant to do." Spain is due to borrow in the bond market next Thursday. Details of the bonds to be sold will be announced on Friday.

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