Spain’s Bond Pain and Growth Worries

 Global equities faced selling pressure on Tuesday after Spain’s bond yields rose to their highest level since last November, threatening to derail the global recovery and erode confidence in the Euro zone’s ability to contain their debt crisis. 

The rise in Spanish bond yields on Tuesday reflects new worries about Spain’s weakened banking sector which has heavy exposure to Spain’s falling real estate market, weak GDP growth, high unemployment, and greater banking recapitalization levels in the future.

The Spanish government has refused to provide more government aid for their troubled local banking sector which has a multitude of property losses on their balance sheet.

Bankers in Spain admit that more capital is likely needed for Spanish banks carrying mortgage defaults and losses on their balance sheets. Those losses could easily accelerate in the future because of new EU implemented austerity measures along with a Spanish unemployment level that is currently at 23%, the highest in the 17 member Euro zone.

Spain’s unemployment level is slightly under 50% for young adults. Half of Spain’s young adults under the age of 24 are jobless.

Paul Donovan, a global economist from UBS, told Bloomberg’s David Tweed that there’s been a lot more focus on Spain’s debt to GDP but the underlying problem for Spain is its lack of economic growth for 2012 and next year.

Donovan gave his opinion about what actions could be taken to assist Spain if the debt crisis worsens.

“If there is a sign of markets becoming disorderly, the ECB will come in and decide to act” Donovan said.

Donovan believes that if Spain’s bond yields rise to 6% then additional assistance may be needed.  However, speculation has grown lately about the possibility of the EU’s rescue fund being used to assist Spain if their bond yields rise further to unsustainable levels.

Spain’s current 10 yr. bond yield

When the European market opened this morning, Spain’s bond yield was at 5.98% but it lowered to 5.93 (-.05) during the first hour of trading.

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