The financial crisis threatening the Spanish government deepened Thursday as Spain’s borrowing costs surpassed their euro-zone record.
The move followed yet another sovereign credit downgrade and coincided with fresh evidence Thursday of economic and financial stress as the decline of Spanish housing prices accelerated to a 12.6% annual rate in the first quarter and Spanish banks increased their reliance on European Central Bank funding.
Coming just a few days after Spain was forced to seek a European-Union bailout for its banks of up to €100 billion ($125.57 billion), the new raft of bad news sent Spanish borrowing costs soaring. The yield on Spain’s 10-year government bond rose to as high as 6.96%, a new euro-era record and a sign that demand for Spanish debt is rapidly drying up. If Spain cannot find enough investors to buy its bonds, it will need to seek a bailout.
Late Wednesday, Moody’s Investors Service became the latest ratings agency to downgrade the beleaguered Iberian nation’s debt, increasing speculation that a bailout for the Spanish government might follow that of its banks. The three-notch downgrade left Spain’s rating one level above junk, as Moody’s highlighted the increase to the country’s overall debt burden arising from the proposed bailout of Spanish banks.
“That’s quite an aggressive move from the ratings agency, especially taking into account the negative rating watch which will be reviewed in the next three months,” noted rates strategist Alessandro Giansanti at ING.
According to Thursday data from Spain’s INE statistics agency, Spanish housing prices fell at a 12.6% annual rate in the first quarter, after falling by 11.2% in the fourth quarter and by 7.4% in the third, signaling that Spain’s housing bust will continue to weigh on its economy.
That means that housing prices have fallen 26% since their peak in the third quarter of 2007, according to the INE, though some private valuation firms estimate steeper declines.
Spanish housing prices, however, have been slow to correct, largely because banks have been reluctant to unload repossessed properties. Many economists draw comparisons with Ireland, which is grappling with a housing bust of a similar magnitude and where prices have fallen 50%.
But the situation in Spain is changing as banks face deepening financial stress and new government regulations force them to unload properties. Robert Tornabell, professor of banking and finance at ESADE business school in Barcelona, said the first-quarter housing price data “is a sign of worse to come.”
Separately, data Thursday from the Spanish central bank showed average net ECB borrowings for May for Spanish banks rose to €287.31 billion from €263.54 billion in April, highlighting the growing difficulties local institutions face to obtain financing on international markets.