Spanish stocks sank and its borrowing costs rose on Friday after the government released data showing the country’s banks borrowed a record 316.3 billion euros (US$415.9 billion) from the European Central Bank (ECB) last month.
Bank of Spain data showed that ECB lending to the country’s financial institutions almost doubled since February when their reliance was 169.8 billion euros.
With unemployment nearing 23 percent, concern is mounting over Spain’s ability to cut its national debt and lift its struggling economy out of recession.
The ECB gave more than 1 trillion euros in emergency three-year loans to banks in two batches in December last year and February, lifelines to Spain’s troubled banks that find it hard to secure short-term financing elsewhere.
The cash injection spurred lenders to buy up battered government debt, driving Spanish borrowing costs down. However, the positive effects of the cheap loans across Europe have since dissipated and Spain is bearing the brunt of market distrust.
Some of that distrust is misplaced, said analyst Manuel Escudero, who added that much of Spain’s industrial sector appeared to be riding the crisis quite well, instead of heading toward a major downturn in production.
“I see much of Spain’s industrial sector beginning to internationalize instead of heading toward stagnation, it has slimmed down and is looking reasonably muscular,” said Escudero, who heads Deusto University business school in the northern Basque region.
Klaas Knot, a member of the ECB Governing Council, also said he did not see a need for the ECB to buy up Spanish bonds or launch a third batch of low-rate loans to European banks to steady the markets.
Last week’s spike in the interest rate of Spanish government bonds was due to “awkward communication” by its government about its plans for budget cuts, Knot said.
To boost confidence in its finances, the government unveiled an austerity budget last month with 27 billion euros in tax hikes and spending cuts due this year.
Spain is expected to enter its second recession in three years this quarter, with the country’s central bank forecasting its economy will contract 1.7 percent this year.
The IBEX 35 stock index in Madrid was down 3.6 percent at close of trading on Friday and 10-year government yields rose 0.2 percent to 5.93, according to FactSet.
Just five years ago, Spain was one of Europe’s most buoyant economies, but a nose-dive started in 2008 when the international financial crisis coincided with the bursting of a real-estate bubble that had buoyed the economy for more than a decade.
The government ordered banks to strengthen capital levels to cover exposure to bad real-estate debt. Investors fear that sustained bank weakness, coupled with rising public debt and high funding costs could force Spain to apply for even more European aid.