Euro Crisis Deepens as Bank of Spain Governor Resigns

Arthi Gupta
30 May, 2012
New York City

The European indexes extended losses as Spanish bond yield rose to a record high since joining the euro. Italy raised

[R]1:00 PM Frankfurt – The European indexes extended losses as Spanish bond yield rose to a record high since joining the euro. Italy raised €5.73 billion as yields rise and investor participation falters. UK mortgage approvals rose more-than-estimated in April.[/R]

The European indexes traded lower as the fear of contagion took a deeper hold in the region and peripheral nations’ bond yields rose again.

Spanish bond yields rose to a record high since joining the euro and investors sought the safety of the principal as Swiss government sold short term bills of 688.8 million francs at a negative 0.62% interest rate.

Investors have been selling bonds of Portugal, Italy, Spain and Ireland and replacing with short term bonds of Germany, Switzerland and UK. Banks in Spain are also witnessing rising deposit withdrawals that may force Spain to seek international bailouts.

The Spanish banking crisis is taking its toll with the resignation of the Bank of Spain Governor Fernandez Ordonez before the expiry of his term. Ordonez said the government is still not sure how much capital Bankia will need and how the government will finance the bailout.

Ordonez resigned after the governing People’s Party and opposition party and the banking industry inspectors criticized the handling of Bankia crisis in the last one month.

Bank of Spain inspectors called for Ordonez’s resignation in a letter to Prime Minister Rajoy that questioned the nationalization of Bankia days after the central bank approved its proposal to meet new banking rules.

Two days ago Jamie Garcia-Legaz, deputy minister for trade blamed Ordonez for the crisis at Bankia and the leader of Catalan CiU party Duran i Lleida said on May 11 that the governor had not “paid attention to banking supervision.”

Bankia, the fourth largest bank in Spain, had asked for €19 billion bailout from the government on May 25.

In economic news, euro-zone economic confidence and money supply growth fell unexpectedly.

In Paris trading, the CAC-40 Index declined 40.94 or 1.3% to 3,043.68 and in Frankfurt the DAX Index edged lower 67.53 or 1.1% to 6,327.53.

The yield on Spain’s benchmark 10-year bonds climbed nine basis points to 6.50% and the yields on the 10-year Italian bonds rose 12 basis points to 5.99%.

Italian Debt Auction

Italy sold €5.73 billion of bonds at higher borrowing costs.

The Italian Treasury sold €2.34 billion of 10-year debt at an average yield of 6.03% compared to an average yield of 5.84% at the previous auction on April 27. The bid-to-cover ratio fell to 1.4 from 1.48 last month.

The Treasury also sold €3.4 billion of a new five-year security at an average yield of 5.66% compared with 4.86% for a similar-maturity bond sold last month. The bid-to-cover was 1.35.

Euro-zone Economic Confidence Drops

Euro-zone economic confidence dropped to 90.6 in May from the revised 92.9 in April, survey results from European Commission showed on Wednesday.

In another report, euro-zone money supply growth slowed unexpectedly in April, data published by the European Central Bank showed.

M3 grew at a pace of 2.5% from a year ago in April, following a 3.1% rise in March.

Spanish Inflation Eases

Spain's inflation, as measured by the harmonized index of consumer prices eased to 1.9% in May from 2% in April, flash estimate released by the statistics office INE showed today.

UK Mortgage Approvals Climb

The number of home purchase mortgages approved in the United Kingdom rose to 51,823 in April from an upwardly revised 51,067 in March, data released by the Bank of England showed today.

Total lending to individuals rose by £1.4 billion in April, after growing by £1.7 billion in March.

Separately, M4, a measure of the quantity of UK money supply, dropped a seasonally adjusted 3.8% annually in April, after falling 4.8% in March, data from Bank of England showed.

Gainers & Losers

BG Group plc fell 2.3% to 1,254 pence after the British the oil and gas company agreed to sell its 40% stake in two gas-fired power generation plants in the Philippines to its partner, First Gen Corporation for $360 million in cash.

Booker Group Plc soared 8.6% to 85.90 pence after the food wholesaler agreed to acquire Makro UK, Metro Group AG’s wholesale business in the UK, in exchange for new Booker shares, representing 9.99% of the current issued share capital of Booker and a cash consideration of £15.8 million.

Deutsche Boerse AG dipped 0.4% to €38.65 after the operator of financial exchanges said it will buy back shares worth approximately €100 million before the end of July.

Deutsche Post DHL slipped 1% to €13.54 after the postal and logistics firm said that the German government has demanded that the company repay state aid including interests of €298 million.

Koninklijke KPN N.V. climbed 0.8% to €7.65 after América Móvil, S.A.B. de C.V., the Mexican telecommunications company launched an offer to acquire shares of the Dutch telecommunications company for €8 per share and boost its stake to 27.7%.

Voestalpine AG fell 0.5% to €21.15 after the Austrian specialty steelmaker said fiscal year revenue rose 10.1% to €12.06 billion from a year ago and profit slumped 30.5% to €413.3 million.