Fears Grow Over Spanish Debt Black Hole ? Bring on the Hispanobono !

Published: Wednesday, 30 May 2012 09:00 BST - Written by John Cameron

STORY LINK Fears Grow Over Spanish Debt Black Hole ? Bring on the Hispanobono !

Yesterday’s session saw fears increase over Spain’s troubled retail banking sector, as news emerged that three of the country’s leading banks were considering an emergency ‘merger’ in order to shore up their flagging balance sheets. The news saw the yields on Spain’s benchmark 10-year bonds spiral to 6.5%, perilously close to the 7% threshold considered by analysts to be unsustainable.

The Spanish banking sector’s apparent funding gap has elicited market whispers that the country’s government is preparing to introduce a scheme which will permit regional authorities to borrow government funds using guaranteed bonds, which have been rather awkwardly dubbed ‘hispanobonos’. Rumours suggest that these hispanobonos may be introduced in the very near-term, some analysts have hinted before this weekend, even. Their potential advent has been interpreted by many commentators as an act of brinkmanship by Spain’s policy-makers. The suggestion is that their instigation would mark the de facto introduction of ECB-backed Eurobonds – a move which leading European superpower Germany fervently resisted at last week’s Brussels summit - as it is likely that the Spanish government would encourage the banks to swap their hispanobonos for ECB-backed bills. If Germany starts to resist such a move, then the eurozone itself may begin to unravel.

Potential fissures between leading eurozone players took the euro lower as yesterday’s European equities session drew to a close, sending the GBP EUR exchange rate to well above the key psychological level of 1.2500, within touching distance of its multi-year high.

Looking ahead to today’s session, this morning’s UK Mortgage Approval data for last month will be closely-watched for hints that Britain’s retail banks are regaining their confidence. A reading below March’s 49,900 reading would suppress the Pound in the near-term.

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