SPAIN ISSUES DEFIANT WARNING TO MARKETS / THE FINANCIAL TIMES ( HIGHLY RECOMMENDED READING )

Spain issues defiant warning to markets

By David Oakley in London, Quentin Peel in Berlin and Nikki Tait in Brussels


Published: November 25 2010 19:47

Spain has warned financial traders betting against its debt that they will lose money, in a defiant challenge to the markets which are driving Madrid’s cost of borrowing sharply higher.


José Luis Rodríguez Zapatero, Spanish prime minister, on Friday ruled out any rescue package for the country even as the premiums demanded by investors to hold Spanish sovereign debt over that of Germany’s rose to euro-era highs.


This week’s sharp rise in Spanish 10-year bond yields to 5.2 per cent is an indication of growing concern in eurozone bond markets that the fiscal crisis in Ireland could spread to other debt-laden countries including Portugal and Spain.


“I should warn those investors who are short selling Spain that they are going to be wrong and will go against their own interests,” Mr Zapatero said in an interview with Barcelona-based broadcaster RAC1, according to Bloomberg. He “absolutely” ruled out any need for a rescue.


On Friday Portugal rejected as “totally false” reports it was under pressure to accept an international bail-out. A report in Financial Times Deutschland said eurozone countries and the European Central Bank were pressing Portugal to seek aid, adding to the uncertainty.


The newspaper quoted an unnamed source in the German finance ministry saying: “If Portugal were to use the fund, it would be good for Spain, because the country is heavily exposed to Portugal.”


The eurozone’s peripheral bond markets came under further pressure amid increasing worries that the debt crisis was spreading. Irish yields rose 3 basis points to 9.071 per cent and Portuguese yields rose 3 basis points to 7.038 per cent.


The euro tumbled further in morning trading, to below $1.32 against the dollar, 3.5 per cent lower on the week and a fresh nine-week low.


Gary Jenkins, head of fixed income at Evolution Securities, said: “The worrying trend continues in the eurozone, with bond yields rising and concerns about contagion refusing to abate.”


The Spanish 10-year bond yield has now risen more than 100 basis points since the start of the month and 50 basis points in the last week alone. It has a gross funding requirement in excess of €155bn in 2011. The yield spread over Germany rose to 2.65 percentage points.


In equity markets, banking stocks tumbled across the region, weighing on wider indices. The jump in bond yields undermined confidence in the Iberian banks. Santander, the eurozone’s biggest bank by market capitalisation, fell 3.2 per cent to €7.57 while BBVA fell 3.3 per cent to €7.48.


On Thursday, Irish, Portuguese and Spanish bond yields surged to their highest points since the launch of the euro, as traders said even some of the bigger eurozone countries could soon be affected. Matt King, global head of credit strategy at Citigroup, said the danger was the selling could develop a momentum of its own.


“The moment you have even a flicker of a doubt about default risk, it becomes rational to reduce positions in a larger country like Spain purely on grounds of diversification,” he said.


Myles Clarke at RBS said: “Some people want to put on a just-in-case euro break-up trade and they’re looking for any way to do this. You can’t do trades in any size in the stressed peripherals like Ireland or Spain, so people are looking for what else might work.”


A senior trader at a US investment bank added: “I’m freaking out. The investors who were bottom-fishing last week are all selling this week.”


The renewed volatility came as Germany rejected any suggestion of an increase in the size of the €440bn ($588bn) European financial stability facility – the eurozone rescue fund established by European Union finance ministers in May to help debt-laden members of the common currency zone.


Media reports said the German government had been approached by the European Commission to double the size of the rescue fund, to ensure funds were available in the event of Spain and Portugal seeking assistance.


Copyright The Financial Times Limited 2010