Debt bullfight

Spain, by European standards, does not have a very large, but rapidly growing public debt - in 2012 it will increase, according to IMF forecasts, from 68.5% to 80.9% of GDP. This is a consequence of a very large, second in Europe, current budget deficit (8.5% of GDP last year). The prospects for reducing it are very weak: this year the economy will shrink by at least 0.3%.
Recently, the Spanish government announced its intention to revise the budget deficit upwards - from 8.5% to 8.9%. This happened the day after the downgrading of 16 Spanish banks by the international agency Moody's. A little earlier, another rating agency, Standard & Poor's, downgraded Spain's sovereign rating by two points - from A to BBB +.
All this does not add confidence to investors in the continent's fourth-largest economy: ten-year bonds traded at a yield of 6.5% last week. The danger line is very close: with a yield that has exceeded 7%, Greece, Portugal and Ireland have already been forced to accept European assistance. In May, the Spaniards managed to borrow at 3%, but only half of the €3 billion they needed, and it is not known whether investors will be just as supportive in the summer, especially against the backdrop of the expected separation of Greece from the eurozone.
In the meantime, investors are predictably getting rid of Spanish securities in their portfolios - in the first quarter of this year alone, they reduced their volumes by 22%, to € 219.6 billion. And Spanish banks, which received cheap three-year money from the ECB, on the contrary, were forced to buy a lot government debt (their portfolios grew 1.8 times, to €170.6 billion). It is easy to imagine what kind of assistance banks will need in the event of a revaluation of public debt: they risk being left with debt securities that cost significantly less than the amounts spent on their purchase.
Meanwhile, the position of banks is already unenviable due to losses on loans issued for the purchase of real estate. The entire first half of May, the Spanish government spent in negotiations with their management and European officials, who can help the banks at the expense of the general funds of the eurozone. Prime Minister Mariano Rajoy does not rule out that banks will have to be helped at the expense of the budget. The Ministry of Economy of the country is preparing a program to create a "bad" bank, into which other credit institutions will be able to dump the most bad assets.
In total, the share of non-performing debts of Spanish banks over the past five years has increased exactly by an order of magnitude - up to 78%. Virtually the only resource available to banks is ECB funds. In March, these borrowings grew by half. Well, the Spaniards themselves, meanwhile, began to actively withdraw their deposits from banks.
The monetary authorities clearly underestimate the scale of the problem. The National Bank demanded that banks increase their capital by €54 billion, but in reality, in order to cover their losses, they will need at least five times more, according to the Brussels Center for European Policy Studies. Banks do not have this money, and the government, if it borrows it, will immediately need European assistance. In turn, if the situation with the public debt worsens even a little, the hole in the banks' balance sheets will increase. How Spain will get out of this whole situation is unclear. If we do not consider the scenario of the country's exit from the euro area, the only option is large-scale assistance from the eurozone. But Germany, and even more so France, are not yet ready to provide it: they already don’t have enough money for Greece.