FRANKFURT (MarketWatch) — Mounting concerns over Spanish banks and fears that Greece’s political vacuum could lead to an exit from the euro zone fueled fresh turmoil in European credit markets Wednesday.
Spanish government bonds tumbled, sending the 10-year yield ES:10YR_ESP-0.95% above the psychologically important 6% threshold for the first time since April. In recent action, the 10-year yield traded at 6.06%, up 28 basis points, according to FactSet Research.
The yield on Italian 10-year bonds IT:10YR_ITA-0.94% jumped as well, rising 21 basis points to 5.57%.
“The Spanish bond market is pricing in the risk of the government needing to bail out its banking sector, [which is] why its bond yields are flying higher,” said Kathleen Brooks, research director at Forex.com.
In a related development, Reuters reported that Spain will require its banks to raise an additional 35 billion euros ($45.5 billion) in provisions against bad property loans. The amount is in addition to the €54 billion banks must already raise.
Expectations the government may make a capital injection into troubled lender Bankia added to worries about the demands of the banking sector on the government’s finances, said Gavan Nolan, director of credit research at Markit.
The cost of insuring Spanish government debt against default via credit default swaps jumped, with the spread widening 19 basis points to 512 basis points, near its intraday record of 520, according to Markit data. That means it would cost $512,000 annually to insure $10 million of Spanish debt against default versus $493,000 on Tuesday.
Investors also considered the possibility of a Greek exit from the euro currency union as the country’s political parties scrambled to put together a government in the wake of Sunday’s splintered election results.
Alexis Tsipras, head of the Coalition of the Radical Left, or Syriza, was set to meet with conservative New Democracy leader Antonis Samaras and Evangelos Venizelos, head of the Socialist, or Pasok, party.
Tsipras has called for tearing up the terms of Greece’s bailout, contending the results of the parliamentary elections, which saw pro-austerity New Democracy and Pasok garner less than 40% of the total vote, amount to a repudiation of the deal.
Tsipras is seen as unlikely to succeed in cobbling together a government, making another election as early as next month a strong possibility. While Tsipras has said he favors staying in the euro, analysts said a potential victory by his party would force European leaders to make a choice between substantially relaxing their austerity demands or risking a potentially chaotic exit.
Late on Wednesday, the board of directors of the euro-zone rescue fund said in a statement it will hold back on disbursing €1 billion of aid to Greece which was supposed to be part of a €5.2 billion tranche.
As part of its international bailout, Greece will receive €4.2 billion on Thursday, the European Financial Stability Facility (EFSF) said. The remaining €1 billion “are not needed before June and will be disbursed depending on the financing needs of Greece,” the EFSF added.
The fund will transfer the €4.2 billion into a segregated account which will be used for debt-service payments.
William L. Watts is MarketWatch's European bureau chief, based in Frankfurt.