ForexSpace.com - Spanish bonds have dive-bombed on rumours that the Spanish region of Catalonia needs financing help from the central government. Forex traders will also note how the Catalan chatter has helped Bunds back into positive territory, reversing the risk-on tone of this morning’s trading. Spanish 10-year yields are up 12bps at 6.24 percent, having dropped below 6 percent earlier in the day, with June Bunds also up 18 ticks at 144.15.

Catalonia - the wealthiest region in Spain - says it has €13bn in debt to refinance this year. Its annual interest payments have doubled in the past two years to €2bn. The region’s president, Artur Mas (pictured), is reportedly saying Catalonia is running out of debt and financing options. "We don't care how they do it,” said Mas, “but we need to make payments at the end of the month. Your economy can't recover if you can't pay your bills".

Catalan’s capital, Barcelona, is the second largest Spanish city by population after Madrid. Furthermore, emphasizing the region’s importance, many of Spain’s savings banks are based in Catalonia, with 10 of the 46 Spanish savings banks being headquartered there.

"The Catalonia news was a big deal because it implies that the Spanish government may have to take on more debt and it cannot afford to do so," said Richard Franulovich, senior currency strategist at Westpac Securities in New York. "It looks like all the euros that were bought need to be resold. For now, it's all about contagion," he added. In pondering whether the Catalonian woes could be the catalyst for a 1.2500 break, at the time of writing, we’ve seen a lot of fast money selling the single currency with the plan of taking it back below 1.25 after the cut and calling it a week.

Banking on disaster

Prior to the Catalonian story broke, International Financing Review claimed that Spanish banks may need further long-term loans from the European Central Bank - citing bankers advising the lenders.

“Liquidity is a big concern,” said the head of Spain at one investment bank advising lenders. “Some have money to get them through the summer, but by the autumn if we haven’t seen additional measures then they could be in a very difficult situation. The only way out is another bazooka,” he added, insisting that some banks will need further loans from the ECB and a possible injection of capital.

The weakest spot in Spain's fragile banking system, where loan losses stemming from a 2008 property crash threaten to push the country into seeking international assistance, the recently partly-nationalized Spanish lender Bankia will reportedly ask the state for more than €15bn to bail it out when its new management team presents a restructuring plan. Trading in the bank has been suspended earlier today "due to circumstances that may affect the normal share trading", stock market regulator CNMV said. "The help needed to clean up the bank will be more than €15bn," a source, who spoke on condition of anonymity, told Thomson Reuters.

The addition cash would come on top of the €4.5bn in state loans that the government converted into equity in Bankia's parent company BFA as part of the state takeover, giving the government a majority stake in the lender.

Drew Hillier. Editor