Money markets spain bank cds on ropes on sovereign pain

← Homepage

The cost of insuring Spanish bank debt against default jumped on Monday on investor worries about the banks' exposure to the countries' struggling regions after a second Spanish region looked set to ask for state aid. The Spanish region of Murcia moved closer to following Valencia in seeking financial aid from the government, which set up an 18 billion euro fund earlier this year to help the regions refinance their debt. Media reported half a dozen other regions were ready to do likewise. Spanish 10-year government bond yields surged to a euro-era high of 7.55 percent with the cost of insuring against a default also hitting a record peak with investors fretting Spain will soon follow Greece, Portugal and Ireland into seeking aid.

The fate of Spain and its banking system remains intertwined despite a 100 billion euro rescue deal for the country's banks, as investors worry that the country will be shut out of capital markets as its borrowing costs spiral. The cost of insuring debt issued by Santander jumped 26 basis points to 472 bps, within a whisker of the record high of 474 bps hit in June, according to CDS provider Markit. BBVA CDS rose 24 bps to 493 bps, also within sight of the record peak of 499 bps.

"The banking sector remains closely linked with the sovereign that's why we're seeing banking CDS coming under pressure," a trader said.

RBS credit strategists recommended selling five-year CDS protection on Italy's UniCredit and buying 5-year protection on BBVA due to its relatively high exposure to peripheral euro zone sovereign debt and to Spanish local authorities."We calculate that BBVA holds over 11.4 percent of total assets in peripheral sovereign debt, the most in Europe after Monte Paschi, BPI and Bankia. In addition, half of its loan book is in Spain," said RBS credit strategist Alberto Gallo."Consistent with this, Moody's and S&P cap BBVA at Spain's rating. BBVA is poised to underperform on rising bad loans and downgrades risk contagion from its sovereign holdings," he added.