• Spanish retail sales slump
• Commentators fear Spain will need bailout
10.06am: Italy's borrowing cost just hit a six-month high at its auction of €8.5bn of short term bonds this morning.
The average yield on the six-month bills came in at 2.104%, up from 1.772% at a similar auction at the end of April. That's the highest level since December 2011. Demand was also lower, with the bid-to-cover ratio* falling to 1.61 from 1.71 last time.
* - a measure of how well subscribed the auction was, where 1=fully subscribed with no bids unfilled, and 2=twice as many bids as bonds on offer.
9.53am: Here's the ever-pithy Gary Jenkins of Swordfish Research on the way that Spain and Greece are 'competing' for headlines :
It's a bit like watching two candidates on The Apprentice desperately trying to save themselves in the board room from being dismissed by Lord Sugar, only for them both to be fired.9.33am: Banknote printer De La Rue has refused to comment on speculation that it has drawn up plans to print drachma notes again if Greece quits the eurozone.
De La Rue reported financial results this morning, but chief executive Tim Cobbold wouldn't be drawn on whether Athens had asked his firm to prepare for a new currency to be issued.
Looking at De La Rue's results, the company also told shareholders that it has "a strong pipeline of opportunities", with its order book 14% larger than a year ago. So someone's ordering new notes....
There are 200 countries in the world. Every country doesn't order every year. This year there are orders for customers we didn't supply in a previous year.
9.21am: Economists and analysts are watching events unfold in Spain with a sense of deja vu.
After Greece, Ireland and Portugal, Mariano Rajoy's efforts to retain the confidence of the financial markets in the face of economic crisis have a grim inevitability, argues Shahin Vallée, visiting fellow at Bruegel, the Brussels-based think tank.
Appearing on Bloomberg TV this morning, Vallée argued that Spain will inevitably need some form of EU assistance - both for its banking sector and to shore up its own finances, adding:
This is a movie we've played three times already.Elisabeth Afseth of Investec reckons that Rajoy may succeed in persuading the EU to refinance its banks directly through its firewall, the ESM. But that might have unintended consequences...
Any support provided to Spain must ensure continued access to market funding and separating out the banks from the sovereign would go some way in achieving this. Could make the Irish want to renegotiate though…Ireland has been pushing Europe for months to ease the hefty costs of repaying the promissory notes that were issued to cover the cost of recapitalising Anglo Irish Bank (details here).
9.06am: Developments in the Spanish banking sector – there are reports this morning that two savings banks are to merge.
Spanish savings bank Ibercaja will discuss a possible merger with rival Liberbank at a board meeting on Tuesday, a source close to the negotiations told Reuters.Spanish banking mergers don't have a great pedigree, especially following the crisis at Bankia – which was created two years ago by merging seven struggling regional savings banks.
"Ibercaja's board will hold a meeting this afternoon to consider an integration with Liberbank," the source said, adding the talks were at a very advanced stage.
8.27am: Spanish government bonds have posted a very slight recovery in early trading. This has pushed the yield on the benchmark 10-year bond down slightly to 6.44% from 6.5% overnight - so slightly further away from the 7% danger zone.
City traders say there's a mood of optimism this morning, on the back of speculation (again) that China may launch a new economic stimulus plan.
Looking across the markets, most stock markets are higher (with Spain lagging behind)
Spain yield down 4bp to 6.44%.There is no 'new' good news as such - but the mkt noting the firmer equities
— Steve Collins (@TradeDesk_Steve) May 29, 2012
FTSE 100: up 44 points at 5400, + 0.8%
German DAX: up 69 points at 6392, + 1.1%
French CAC: up 27 points at 3070, + 0.9%
Italian FTSE MIB: up 122 points at 13179, + 0.95%
Spanish IBEX up 4 points at 6405, + 0.1%
8.10am: Some grim economic news from Spain was just released – retail sales slumped by 9.8% in April, on a year-on-year basis. That's a record fall (based on data going back to 2004), and indicates that the financial crisis is now hitting consumer spending hard, with Spain now officially in recession.
8.03am: Spain's problems are well-covered in today's UK newspapers.
Our own Giles Tremlett reported from Madrid that prime minister Mariano Rajoy warned that Spain "would fall" if it allowed any bank to collapse. The news late last night that Bankia had reported the biggest loss in Spain's banking history added to concerns over Spain:
Nervousness that other Spanish banks may be hiding similar-sized holes saw Spain's borrowing costs soar once more, with investors demanding 6.5% interest on future 10-year debt. That took the rate dangerously close to the unsustainable levels at which other eurozone countries such as Portugal had to request a bailout.In the Daily Telegraph, Ambrose Evans-Pritchard warns that Rajoy has given "a fateful hostage to fortune" by pledging that Spain's banking sector will not need a bailout.
Whether Mr Rajoy can keep his pledge depends on the ferocity of Spain's double-dip recession. Credit has contracted for eighteen months. Madrid expects the economy to shrink by 1.7pc this year but it could be worse as Mr Rajoy tries to slash the budget deficit from 8.9pc to 5.3pc of GDP in a single year.And the Wall Street Journal argues that Rajoy must move swiftly and pick one of the 'bad choices on offer:
Barclays Capital says Spain's housing crash is only half way through. Home prices will have to fall another 20pc to clear an overhang of one million excess properties. That will bleed banks to death.
The Centre for European Policy Studies puts likely write-offs at €270bn. Much of the loss would land on the state, as in Ireland. The risk is that Spain's public debt will surge above 100pc of GDP.
Someone is going to have to recapitalize Spain's banks. With the country now again in recession, its problem real-estate loans—currently at €17.9 billion for Bankia alone—look set to get worse. Bankia itself is the newly created product of the last government's attempt to grapple with the losses in its fragmented, but politically influential, cajas. These small regional lending banks controlled most of Spain's banking market, and the idea behind Bankia was to roll them up into an entity large enough to stand on its own.7.50am: Good morning, and welcome to our rolling coverage of the eurozone financial crisis.
Clearly that hasn't worked. The €19 billion that Bankia now says it needs is well in excess of the value of its equity. If taxpayers are going to put €19 billion into Bankia, then its equity holders deserve to be wiped out and its management replaced. Better that than throwing more good money after bad and letting a zombie bank survive on government life-support to make the costs look lower for the moment.
Today, Spain has elbowed Greece out of the spotlight (for now), as concerns grow over its ability to avoid seeking outside help. Rising bond yields, escalating bank bailout costs, and a shrinking economy risk becoming a toxic combination. Prime minister Mariano Rajoy insisted yesterday that the country will not need a bailout, and will not allow a bank or region to fail, but some financial analysts scent serious trouble ahead.
Elsewhere today, Italy will sell €8.5bn of short-term debt (six-month bills), and updated German inflation data will be released this afternoon.
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