Spanish government debt yields climb to record high

Yields on 10-year Spanish government bonds have climbed to record highs, prompting fresh concerns that the recent bailout will ultimately prove ineffective.

Yields on benchmark government bonds reached 6.818 earlier this afternoon – the highest ever recorded for the country’s debt obligations.

The Spanish banking sector confirmed it was in line for up to €100 billion in bailout funds on Saturday, intially translating into gains for the country’s leading equity index and inspiring hope that the crisis would prove managable.

The Spanish government had hoped to differentiate the bailout from those offered to Ireland, Portugal and Greece in order to preserve the sovereign’s access to capital markets.

“This financial aid will not worsen the current situation in terms of public debt already in circulation but will in fact strengthen solvency. Furthermore, a sound and suitably capitalised banking system will reduce future state contingent liabilities and strengthen the sustainability of Spanish debt,” the Spanish Treasury claimed in a statement. (article continues below)

However, Andrew Bosomworth, managing director of Pimco, says the money borrowed from the European Stability Mechanism went to the Fund for Ordered Bank Restructuring (FROB) – Spain’s bank recapitalisation agency.

He explains: “FROB is explicitly guaranteed by the sovereign, and the Spanish government will formally be required to sign a memorandum of understanding. The loan will therefore increase Spain’s debt ratio.”

While the IBEX is again struggling to stay above 6500 – a low point taken for year-to-date performance – the yield on benchmark government debt has risen to its highest ever levels, demonstrating the ineffectiveness of this attempt to prevent a feedback loop between the private and public sectors.

An independent analysis of the Spanish banking sector will be presented by no later than June 21.