* Spanish/German yield spread hits euro-era high 512 bps
* Rising Bankia bailout costs weigh, yield hits 6.5 pct
* Bunds ease as Greek polls give pro-bailout parties lead
By William James
LONDON, May 28 The risk premium on Spanish debt
hit a euro-era high on Monday, and looked set to keep rising as
investors factored in the growing cost to the public purse of
shoring up the country's banking sector.
A Spanish government source said the country may use
government debt to recapitalise its fourth-largest lender Bankia
, which last week asked for a 19 billion euro bailout
to stem losses related to soured property loans.
"Spain is under a lot of pressure right now on Bankia and
the never-ending cost of the bailout there," a trader said.
The plan could bump up Spain's national debt, adding
pressure to public finances already strained by stifling
austerity and weak growth. On Friday, the country's wealthiest
autonomous region said it would need government help to plug a
The gap between Spanish and German 10-year
bond yields, which measures the risk investors
attach to holding Spain's debt rather than safe-haven German
Bunds, widened to 512 basis points - its widest in the 13-year
history of the euro.
The 10-year Spanish bond yield rose to 6.5 percent, reaching
its highest since November 2011 when the European Central Bank
was forced to step in and buy the country's debt to bring yields
As borrowing costs climb towards their record high of 6.8
percent, investors will grow increasingly wary of the added
burden of refinancing maturing debt at such high levels.
"It will take a bit of time before it drives up the average
cost of funding, but we're talking about only being comfortable
with that for a month or two," said Elisabeth Afseth, analyst at
Investec in London.
"If it goes on for much longer it just adds to the burden of
fiscal consolidation. If a large part of that is spent on paying
a premium to borrow, it just makes it so much harder."
Ireland and Portugal were frozen out of capital markets and
forced to seek international bailouts soon after their yields
topped 7 percent. It is unclear whether current bailout
provision would be enough to rescue Spain.
Trading volumes were low with parts of Europe closed and the
U.S. market shut until Tuesday due to a public holiday.
GREEK RELIEF, FOR NOW
Despite the rising concern about Spain, worries over Greece
and its future in the euro zone were calmed by signs the country
may be able to form a pro-bailout government following its June
German Bund futures eased 17 ticks on the day to
144.06, after hitting a record high of 144.55 last week, when
Greek voters looked to be backing parties that might abandon the
terms of its bailout deal ahead of a June 17 election.
Opinion polls over the weekend showed Greece's conservatives
have regained a lead that could allow them to form a government
committed to keeping the country in the euro
Nevertheless, few in the market saw German debt falling far
in the run-up to the elections while policymakers continue to
make little progress towards a longer-term solution to the
"I don't know if it makes sense in the medium to long term
to have Bunds at these expensive levels, but until we get some
kind of decent shot at a resolution in Europe they're going to
remain very well-bid," the trader said.