Spanish Banks Indicating Further Financial Stress

Published: Monday, May 28 2012 6:51 p.m. MDT

For most financial institutions, one of the more critical indicators of corporate health is the ability to access ongoing financing. Whether through deposits received from individuals, issuing corporate debt obligations or additional equity, or borrowing from other financial institutions, diminishing financing options generally indicate an erosion of confidence in an entity.

As these financing options become less available, the costs generally increase rather quickly. Where more risk is perceived by the market, a higher return is demanded. A general belief is if the bigger European banks have financial problems, the yields on the sovereign debt where those banks are headquartered will reflect these financial concerns.

In the case of many of the larger Spanish banks, some depositors are beginning to withdraw their funds due to credit concerns about the banks and due to general economic unease. Other large financial entities are becoming less willing to provide these Spanish institutions ongoing liquidity. An indicator of the overall confidence level in a country's financial health is the relative yield on its sovereign debt securities.

Currently, the yield on a bond issued by the Spanish government with a 5-year maturity has a yield of approximately 5.5 percent. One month ago, this same Spanish government 5-year bond had a yield of about 4.6 percent. Comparing this one month yield increase of 0.9 percent to the change in the market yields of the German sovereign debt with a similar 5-year maturity shows the relative concern with the Spanish debt.

German 5-year sovereign debt is currently yielding approximately 0.45 percent. One month ago, the yield on this same sovereign debt was about 0.7 percent. While many domestic and global factors influence these yield levels, this decrease in German bond yields of 0.25 percent at a time when the similar Spanish yields are increasing indicates, in part, the concerns about Spain and the relative comfort with the credit risk of owning a German government issued bond.

Heightened concerns about the financial health of the Spanish banking sector are compounding the existing sense of unease from Greece's financial difficulties. Global equity markets will continue to react dramatically as these situations unfold.

Kirby Brown is the CEO of Beneficial Financial Group in Salt Lake City.

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