The yield on 10-year Spanish bonds has fallen for the second day in a row, and now sit at 6.4% according to Bloomberg.

Yesterday's news was ECB to relax loan rules for Spanish banks

Benoît Cœuré, an ECB executive board member, told the Financial Times in an interview this week: “We certainly have to make sure that sound counterparties have the means to access our liquidity, including in terms of collateral availability.“

He warned that collateral buffers had “become more strained in some places” and added: “There is an ongoing reflection on how to alleviate these tensions.”

However, the debate is sensitive within the ECB council, with many of its members worried about the risks involved and the dangers of substituting actions by governments to strengthen public finances.

The decision on the use of asset-backed securities – bonds backed by loans – was taken separately from the wider review of collateral rules and appears designed to buttress efforts by eurozone authorities to strengthen Spain’s banks. Under the new rules, such securities will be eligible for use as collateral providing they have a credit rating of at least BBB (minus), according to eurozone officials. Previously, the minimum requirement was for at least an A rating.

In his FT interview, Mr Cœuré warned that changes to the ECB’s collateral rules would “have to come with strict risk control, in particular with haircuts”.

Lie of the Day

It's more like lie of the day than laugh of the day as Madrid moves to ease bailout fears

Spain has sought to ease investors’ fears that it needs a full-scale international bailout of its economy by publishing two “stress tests” showing that Spanish banks need between €16bn and €62bn in new capital.

The estimates of how much extra capital its banks might need fall well within the sum of up to €100bn that Spain requested for its financial system from its eurozone partners this month.

Fernando Restoy, deputy governor of the Bank of Spain, said the numbers were “a long way from the maximum that the eurogroup agreed to make available to Spain”.
“The three biggest groups in the country don’t need assistance in the form of new capital, even in the stressed scenario,” he said in a reference to Santander, BBVA and Caixabank.

Got That?

Allegedly the three largest banks, created by mergers of smaller insolvent banks do not need any capital at all even though Spain asked for €100 billion and Citigroup thinks the banks need €350 billion.

For the past few days, yields in Spain have plunged from 7.28% down to 6.4% on a packet of lies and junk. It won't last, not that 6.4% is remotely sustainable in the first place.

Credit Risk

Meanwhile, yield on the 10-year German bond is creeping up.

Why shouldn't yields on German bonds rise? Every step by the ECB to add leverage or accept lower rated securities as collateral puts more credit risk on Germany.

For a discussion of credit risk, please see ...

·         "Germany is a Credit Risk" Says Bill Gross; Germany Exiting Eurozone is One of Very Few Scenarios in Which German Bonds Do Well

·         Discussion of Target2 and the ELA (Emergency Liquidity Assistance) program; Reader From Europe Asks "Can You Please Explain Target2?"

The only realistic way yields can fall in Italy and Spain is if they rise in Germany.

Meanwhile, please recall that on Tuesday we saw this announcement Spanish