Spain Update

Spanish sovereign bonds have been trading better and the market is still in relief of news that Spain's top two banks have fared well in the recent stress tests. However, S&P has taken action on seven different financial institutions today, mostly shifts to negative outlooks. In addition, S&P has increased the 2009-2011 loan loss assumptions for the entire Spanish banking sector and appears to have cut its forecast for Spanish growth.

Tomorrow Spain is looking to raise 3-4 bln euros in 3- and 6-month bills. Recent auctions of bills and bonds have done fairly well, but at the cost of dramatically higher yields. Spain's parliament is also set to vote on the labor market reforms that were proposed earlier this month and have begun going into effect.

Separately, note that according to the latest BIS data, banks headquartered in the euro zone account for about 62% of all international bank exposures to Greece, Ireland, Portugal and Spain.

France's exposure to Spain is estimated at $248 bln, but almost 40% (~$97 bln) is accounted for by the non-banking private sector. German exposure is a bit different. A little more than half of Germany's $202 bln exposure to Spain is to Spanish banks (~$109 bln).

BIS data also indicates that Germany, France and Belgium banks have a combined nearly one eighth of their Tier 1 capital in Spanish bonds.