“A consequence of the (LTRO) is that the correlation between sovereign risk and banking risk increased all over Europe.”
Those comments came from the Spanish finance minister from earlier. He got that right. As Spanish bond yields surged today (after the extent of the Spanish banking system’s reliance on the ECB was highlighted), bank stocks took a drubbing in Europe.
Spanish stocks added to losses, falling another 3.5% today. Spreads between German bunds and Spanish 10s rose to 4.34% today, well above the 4.0% spread that deGuindos said yesterday would be a problem if it persists in the medium-term.
Keep an eye on the spreads next week. Either the ECB will begin to buy Spanish debt again, the EFSF will step into the secondary bond market for the first time, or Spain will be seen as on the brink of needing a bailout. None are particularly good places to be.
