Spain Still in Focus

The euro is grinding lower in the North American morning. Traders here are talking about the Wall Street Journal article that reports talk that a large Spanish bank has been struggling to roll over $1 bln short-term funding in the US commercial paper market.

Dollar LIBOR crept higher today for the 11th consecutive session and is now at a new 10-month high. Clearly there is a party or parties are are still trying to secure dollar funding At today's ECB auction for dollars, three banks took down $5.4 bln. There continues to be talk that officials are considering cutting the punitive rate charged (100 bp on top of OIS). There is also talk that longer dated swaps might also be made available shortly.

Spanish and Italian bonds are under greater pressure than Greek and Portuguese bonds today and that is despite the the Italian cabinet approving another 24 bln euro in savings for the 2011-2012 period.

More developments in the Spanish banking system are likely in the coming weeks. Last year the Spanish government earmarked funds to help Spanish savings banks (cajas) restructure. That deadline is the end of next month and clearly more work is needed. Of the 46 cajas, 1 failed last weekend, 4 more merged to bulk up. The cajas account for about half of the Spanish banking system. They funding the real estate bubble in Spain and now are plagued with bad debt.