Spanish minister says high yields unjustified

Wednesday 06 July 2011 17.09
Elena Salgado - Said economic fundamentals did not justify high risk premiums
Elena Salgado - Said economic fundamentals did not justify high risk premiums

A high risk premium on Spanish government debt is caused by market volatility and is not justified by the economy's performance, the country's finance minister Elena Salgado has said.

'Our economic fundamentals do not justify this high risk premium so it should come down,' Salgado said in an interview with AFP.

Investors demanded Wednesday an extra 2.60 percentage points in interest on Spanish 10-year bonds compared to safe-bet German debt, up sharply from 2.54 percentage points yesterday.

Salgado said the markets were demanding higher returns before investing in the debt of other countries such as Italy, not just Spain.

'That is to say, that it is not a Spanish question. It is an instability, a volatility that is effecting the debt markets in general,' the finance minister said.

Spain's risk premium has shot even higher after Moody's downgraded Portugal's debt to junk status yesterday, warning Lisbon may need a new debt rescue package.

Both Spain and Italy are considered by markets to be potentially at risk owing to their strained public finances and weak growth prospects, although unlike Greece, Ireland and Portugal, they appear for the moment not to need rescue.

Despite the higher interest rates Spain has to pay to borrow on the markets, Salgado said the country had no difficulty financing itself.

Spanish bond issues had been received with 'extraordinary' demand that outstripped supply four times over, she said.

Spain's government was only paying the risk premium on new debt and it had already raised a lot of money in previous years with bonds carrying long maturities, Salgado added.

'The summary of all that is that the weight of interest of our debt on gross domestic product is still one of the lowest in Europe,' she said.

The government was determined to carry on pushing through reforms and meeting its commitments to ensure that the risk premium declined, the minister said.

'But in any case, the government's opinion is that at the moment the effect is from the instability of the markets, not factors related to the Spanish economy.

Banks will need around 'half' top estimates

Spain hopes its savings banks will need 'a lot less' than the maximum estimate of €15 billion in new capital to put them on a sound footing, Salgado said.

Madrid hoped the banks would require 'in the area of half' of the top estimate of €15 billion to bolster their balance sheets by September in line with new capital requirement rules.

Spain's lenders, especially regional savings banks that account for about half of all lending in the country, have been heavily exposed to bad debt since the collapse of the property sector at the end of 2008.

The Bank of Spain has estimated the entire banking system requires no more than €15.15 billion to recapitalise.

The extra money is required to meet stringent new rules on capital levels introduced by the Spanish authorities so as to regain credibility on world financial markets.

Under the new rules, Spain requires banks to boost their rock-solid core capital to 8.0% of total assets if they are listed and to 10% if they are not listed.

Those that fail to find the money will get an injection of public funds in September.

Even if every Spanish bank was obliged to meet the strictest 10% requirement, the maximum funds required would be €15 billion, Salgado said.

'But we already know that in no way will it go over that figure and it will be a lot less,' she added.

Salgado said it was too early to give an exact figure.

'The savings banks might be telling us that conversations with the private sector are going well but until the private capital actually comes in, it would be premature to give (the figure), of course.'