Spanish yields head higher as regions squeal for bailout

• Valencia and Murcia ask for funding with others expected to soon

• Newspaper reports IMF will no longer funds Greece

• Bank of Spain reduces growth estimates

• European markets tumble at Monday open

If you were to design a weekend that would hurt the euro come Monday trade then this weekend was a good start. A combination of peripheral debt issues plus speculative news reports from the core countries as to the further funding of Greece has pushed euro to fresh 2yr lows and is now homing in on the 1.20 mark like a missile.

On Friday, the single currency took a knock through the afternoon session after it became clear that the province of Valencia would need to ask for a bailout from the Spanish central government. The Budget Minister, Cristobal Montoro, initially denied the speculation but was forced to later concede that it was indeed true. It is hard to see why the market views Spain as clownish sometimes.

Over the weekend however, we have seen another province, Murcia, has also requested a bailout and the Spanish newspaper El Pais reported yesterday that another 5-6 provinces could now follow suit. This comes only days after the Budget Minister told reporters that the “coffers were empty”. You’ll only need one guess as to which direction Spanish bond yields are trading this morning.

We used to talk about a break of 7% as being particularly alarming; this morning they have gone supersonic and are within a whisker of 7.5% on a 10yr term. There is no way that Spain can fund itself at these levels on a long-term basis however the reaction at the short-end of the curve is all the more important and indeed, worrying. To borrow money for 2yrs Spain would have to pay 6.245%; over 5x what Germany has to pay for 10yrs. This divergence is what is killing the Eurozone.

We also heard from the Bank of Spain that they were revising their growth expectations for 2013 downwards. This is hardly a surprising development but the shift now puts Spain in a recession through the entire of 2013 (-0.5% expected) against the previous 0.2%. It is safe to say that most expectations on growth made during this period will be revised lower regardless of who they apply too.

Elsewhere, the German newspaper Der Spiegel published a story saying that the IMF would refuse to commit any further funds to Greece, in face of Greece’s recent appeal for another EUR50-60bn of funds. Der Spiegel does have a reputation as being rather sensationalist and needless to say, this story had no accompanying attributable quote. The troika is due to visit Greece later this week and so, until then, the story will remain in the bank of investors’ minds.

Although the data calendar is quiet this week, the publication of the PMIs from Europe tomorrow will be a very important to the extension of this euro-selling move. The market is expecting the recent declines to halt at current levels although how many times have we heard that?

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