The euro has fallen against most of its major counterparts as tension in Spain over how to recapitalise Bankia begins to take a serious toll on investor nerves. News emerged yesterday of a Spanish plan to use government debt instead of cash to bailout the nation’s third-largest lender, but according to reports, Prime Minister Mariano Rajoy has now backtracked. The move has sent the 17-nation currency plummeting against the dollar, sending it to the lowest level on live forex charts since July 2010.

At the time of the plan’s announcement, Spanish bond yields rose and investors criticized the idea, but a spokesman has now suggested that the government’s plan to avoid adding further to the burden on the sovereign is only a “marginal” option for the 19 billion-euro bank rescue. Many market analysts are now suggesting that, despite Rajoy’s back-and-forth, the bottom line remains: Spanish banks need help.

‘One way or another’

“It looks like Spain is going to have to tap an external balance sheet one way or another,” Andrew Bosomworth (pictured), managing director at Pacific Investment Management Co., said in an interview today with Bloomberg Television. “It clearly wants to avoid the form that the other countries have taken so far because their experience hasn’t been good.”

Spain’s 10-year yield has already risen 60 bps since the day before BFA-Bankia was nationalized on May 9, even as Rajoy said yesterday that the move had no impact on the nation’s risk premium. The yield was at 6.43 percent at 1 p.m. in Madrid. The bank has already taken advantage of a 4.5bn euro rescue in 2010 and requested this further 19bn euro injection at the end of last week. Spain’s bank-rescue fund, has already committed 18.7 billion euros to struggling banks, amounting to 1.8 percent of GDP, meaning that Spain’s ability to bail out Bankia now depends heavily on the Treasury’s access to markets.

Spain trumps Greece?

Greek voter polls – which emerged over the weekend – revealed renewed support for the pro-bailout New Democracy party and quelled sentiment over Greece’s plight early Monday. A further bank bailout arrangement has also managed to recapitalise the nation’s four largest banks, relieving stress in the short-term. Some traders and forex brokers are suggesting that Spain may now be top of the list for concerned investors.

“There are bullets flying from every angle and confidence is incredibly low, and that looks set to remain the case,” said Kit Juckes, head of foreign-exchange research in London for Societe Generale SA. Turning to live forex charts, he surmises: “Spain’s problems immediately replaced Greece. It’s just a matter of time before we head down to $1.20” per euro”.

Sarah Cox, Staff Writer