So much for the lasting power of the ECB’s 1 trillion euros in cheap bank loans. Spain is again looking like a basket-case, more because of market dynamics rather than any particular policy misteps.
Many observers have praised Spain for its willingness to implement reforms. And yet the markets have another idea. The cost of insuring debt issued by Spanish banks against default has risen sharply over the past month, as a tough budget this week did little to soothe concerns over the country’s deteriorating fiscal situation.
Default insurance for Santander is up 52 percent since March 1 to 393 basis points and the equivalent for BBVA jumped 54 percent over the same period. Both Spanish banks underperformed the Markit iTraxx senior financials index – which measures Europe’s financial institutions’ insurance, or credit default swap prices. It rose by 20 percent over the same period.
Markit analyst Gavan Nolan said a lot of the move was caused by the European Central Bank’s low-interest, three-year loan programmes, or LTROs, that have pumped money into the banking system.
They’ve actually tightened the relationship between the banks and the sovereign. So the banks have been buying sovereign debt and that has made their fortunes even more intertwined than they have previously.