Spain
Auctions may give Prime Minister Mariano Rajoy reason to believe he can avoid seeking a formal EU bailout

Spain sold more than its target of €2bn worth of bonds, after market participants perceived a countrywide bailout from Europe would be on the way.

The country sold three bonds, worth €2.07bn, and bid to cover spreads, which reveals the subscription rate - or appetite - for the offerings, was strong.

Bid to cover spreads remained healthy, with Spain's 4.25 percent 4.5-year bonds bid-to-cover spread at 2.56, a 5.85 percent 10-year bonds bid-to-cover at 3.29 and a 3.30 percent 2.5-year bonds bid-to-cover at 4.26.

Spain sold €638m of two-year bonds sold at a yield of 4.335 percent, up from 3.463 percent from the previous sale in April this year, €825m of four-year bonds sold at a yield of 5.353 percent, up from 4.319 percent, €611m of 10-year bonds sold at a yield of 6.044 percent, up from 5.743 percent.

Spanish CDS spreads, the cost of insuring Spanish government debt against a default, fell slightly by 16 basis points (bps) to 574, compared with Italy which stands at 531.4 -20bps.

On Wednesday, Spain's 10-year government bond yield was still well above the 5.8 percent level the markets saw in April this year. Yields have eased back to around 6.3 percent.

Economy minister Luis de Guindos will name the new Bank of Spain governor at 1600 GMT.

Spain's Painful Week

The auction comes at a time when the government is frantically scrambling for €80bn in cash to strengthen the banks' capital to keep them afloat in case of severe market conditions. The auction is also designed to relieve the pressure of seeking a full scale bailout for the country.

The last few days have been tough on the Spanish government after a raft of comments by senior officials suggested that Spain was in desperate need of European aid in order to prop up its ailing banks.

Spanish prime minister Mariano Rajoy pleaded with European institutions to help recapitalise the country's banks to help drag Spain out of a situation of "extreme difficulty," while also saying that Europe should prove that the unity of the European Union countries was strong and that the euro was "irreversible" by forging a banking union.

Meanwhile, the budget minister in the centre-right government, Cristóbal Montoro, highlighted fears that Madrid "does not have the door to the markets open" because the country has a high perceived risk of its sovereign debt. De Guindos was forced to quell market concerns and deny he had discussed intervention in Spain's banks today.

However, according to a report in the Financial Times, European officials were considering financial support for the Spanish banking sector.

In exchange, the newspaper says, Spain would not be required to implement additional measures beyond those already agreed with the European Commission (EC).

Spain on Watchlist for June

June will prove to be a pivotal time for Spain which,o like the rest of the PIGS (Portugal, Italy, Greece and Spain), has suffered greatly from the sovereign debt crisis.

De Guindos has vehemently denied that the country was looking for aid from the European Financial Stability Facility (EFSF) or European Central Bank (ECB). The ECB supported his comments that it had not been consulted nor expressed a position on plans by the Spanish authorities to recapitalise a major Spanish bank.

"The ECB stands ready to give advice on the development of such plans," it added.

The true test will come by the end of June after an IMF audit of all Spanish banks is completed.

The banks are already crippling to the country. Ratings agency Moody's cut the credit ratings of 16 Spanish banks and cut the debt rating on Santander UK, a subsidiary of the Spanish banking giant last month, citing Adverse operating conditions, reduced creditworthiness of the Spanish sovereign, rapid asset-quality deterioration and restricted market funding access as the reasons for the ratings action.

While Spain is clearly trying to fight off a bailout, analysts are illustrating just how bad the situation is for the country.

"Banks can break Spain's back," said a group of analysts at RBS. "We estimate bank liabilities may push Spanish debt/GDP to 110%, including regional and local authority debt and unpaid bills. Moreover, if a resolution regime is not implemented quickly, the potential capital creation effect from haircutting outstanding subordinated bonds will rapidly disappear.

"Spain alone cannot bear the weight of all its banks. Bank liabilities could be the straw that breaks the camel's back, bringing Spain's debt/GDP ratio well over 100% and resulting in more austerity, similar to what happened in Ireland in 2009," they added.

Does Spain Need External Aid?

Many market participants have waxed lyrical about an inevitable bailout of Spain, as many are doubtful that the IMF bank audit will reveal a rosy scenario.

In December 2011, the EBA's benchmark capital requirements report, which comprised its formal recommendation and the final figures related to banks' recapitalisation needs, made for frightful reading.

It said that European banks must raise €114.7bn of additional capital buffers by June - 8 percent more than its initial estimate of €106bn.

Spanish banks are vying for the worst set of results. According to the EBA, Spanish banks had a €26.1bn shortfall in banking capital requirements - the bufferzone needed to keep them afloat.

But Spain seeking a countrywide bailout from the EU will still prove to be difficult.

"Blanket support is unsustainable," said RBS analysts "We evaluate four possible options for the Spanish banking system: external help through EFSF/EC transfers; public help from Spain as in Bankia's recapitalisation; a bail-in resolution regime; and finally earnings redistribution from strong to weaker banks.

"A blanket support strategy from the Spanish government is clearly unsustainable: we estimate Spanish banks will need €134-180bn of capital over the next three years, on rising bad loans and increasing capital requirements. This is too much to bear for public finances. What banks need is external help conditional to a systematic resolution framework, including bail-in of subordinated bonds (€59bn), and earnings redistribution. But implementing such a policy strategy will take time."

Unnamed sources said on Wednesday that Bankia, Spain's fourth-largest bank, could get less than the €19bn in aid it had asked for, prolonging uncertainty surrounding a rescue that has added to fears that Spain itself would need a bailout.

The €19bn would be on top of about €4.5bn Madrid has already put into Bankia.

The troubled state-owned bank is also now facing more woes after Spain's public prosecutor's office opened an investigation, potentially heightening a backlash against the lender's bailout that has been spearheaded by small shareholders groups.