The path of Austerity leading to more Euro Defaults, Deleveraging Next

Spanish bonds rose for a second day as the extra yield that investors demand to hold 10-year debt instead of German bunds narrowed to 404.5 basis points from 413.7 basis points yesterday.

Rajoy's government announced plans in February to force banks to take their share of costs of 50 billion euros ($65.6 billion) for building provisions and capital to make them recognize losses on real estate piled up on their balance sheets during the country's housing bust.

The Bank of Spain said late yesterday that lenders will take a total of 53.8 billion euros to meet the new requirements, including 29.1 billion euros in provisions and 15.6 billion euros to create capital buffers. While most companies would be able to comply without major difficulty, the central bank would tighten its vigilance over lenders that may struggle to meet the requirements, it said.

The Stoxx Europe 600 Index (SXXP) retreated 0.3 percent to 258.57 as of 10:13 a.m. in London. The Stoxx 600 gained 2 percent yesterday, the biggest jump since Dec. 20, as demand increased at a Spanish debt sale. Futures on the Standard & Poor's 500 Index slipped 0.1 percent. The MSCI Asia Pacific Index climbed 1 percent.

Signs that China's economic slowdown is intensifying boosted speculation that the nation's central bank will cut lenders' reserve-requirement ratios for a second time this year. A report showed China's home prices falling in a record 37 of 70 cities tracked by the government in March. Foreign direct investment sank for a fifth month, while the economy expanded 8.1 percent in the first quarter, the slowest pace in almost three years.

Spain's surging bad loans are spurring doubt on whether the government can persuade investors that it can clean up the country's banks without further damaging public finances.

Non-performing loans as a proportion of total lending jumped to 8.16 percent in February, the highest level since 1994, from less than 1 percent in 2007, according to Bank of Spain data published today. The ratio rose from 7.91 percent in January as 3.8 billion euros of loans soured in February, a 110 percent increase from the same month a year ago. That takes the total credit in the economy that the regulator lists as doubtful to 143.8 billion euros.

Defaults are rising and credit is shrinking at a record pace as 24 percent unemployment corrodes the quality of loans built up in the country's credit boom and saps the appetite of banks to make new ones. Doubts about the extent of Spain's non- performing loans problem is hurting bank stocks and driving up the government's borrowing costs on investor concern that the expense of propping up ailing lenders may add to the debt burden.

Shayne Heffernan

Shayne Heffernan oversees the management of funds for institutions and high net worth individuals.

Shayne Heffernan holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reached a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.Read the Terms of Service