Spain is taking a beating in the markets this morning, and that may have a lot to do with bond auctions next week, according to Dow Jones. The Spanish government prepares to auction treasury bills Tuesday and long-dated bonds Thursday. If yesterday’s Italian bond auction is any indication, then investors will have ample opportunity to manifest recent recent cynicism and drive yields higher.
Spain front-loaded much of its debt issuance for 2012, and has already auctioned nearly 46 per cent of the €86 billion ($113 billion) in debt it planned for the year at its lowest borrowing costs since 2010.
However, this is bad news for Spanish banks, which have purchased large amounts of government bonds with cheap cash from the ECB. Bank of America Merrill Lynch analysts estimated that Spanish had increased government debt holdings by €68 billion since November or €240 billion total—6 per cent of Spanish GDP.
The worry is that ratings agencies could downgrade these assets, and banks holding large amounts of securities would be forced to face margin calls or write downs on these assets. This would exacerbate the weakness of the Spanish financial system.
Also on the horizon is a decision from Moody’s on the credit ratings of Spanish banks’ credit ratings. Morgan Stanely analysts predicted that this is likely to happen on the week of April 23.
The DJ report notes that bond auctions in Germany and France on Thursday will also draw scrutiny.