Spanish Banks Borrow Record €126 Billion From ECB In June As Country's Funding Lock Out Enters Third Month

For all those celebrating that Spain and Greece can peddle a few billion in short-term Bills to the ECB and a few Chinese investors (did SAFE recover yet from the massive drubbing it suffered in its US stock holdings earlier this year when it was begging for more capital?) it may be prudent to consider that. as Bloomberg reports, Spanish banks borrowed a record 126.3 billion euros ($161 billion) from the European Central Bank in June. This represents a 48 percent increase from the €85.6 billion borrowed in May. Which is why we hope that anyone claiming liquidity conditions in Europe are anywhere even close to normal, will be brave enough to lend even one dollar to Spain's Cajas or appropriately tickered bank Santander (NYSE: STD), because nobody else has done so for over two months!

The southern European country’s banks haven’t sold any bonds publicly in the past two months amid investor concerns about the country’s ability to cut its deficit without hurting the economy. The yield on 10-year Spanish government debt relative to benchmark German bonds has more than tripled to 200 basis points since the start of the year. A basis point is 0.01 percentage point.

“The pressure for Spanish banks will keep rising as they can’t raise cash in the bond markets at reasonable prices,” said Thomas Nyegaard, a London-based analyst at F&C Investments, where he helps manage 4 billion euros of assets including Spanish bank debt. “The lenders can hardly provide any new lending under these conditions.”

The country’s lenders are increasing their dependence on the ECB as the European Union starts to examine banks’ resilience to losses after the debt crisis pummeled the bonds of Spain, Greece and Portugal. Europe’s deficit woes sparked concern about banks’ losses from sovereign debt holdings on top of the 438 billion euros already written down since the start of the global credit crisis in 2007.

Spain, saddled with the third-highest deficit in the euro region, pledged to provide as much as 99 billion euros through its Fund for Ordered Bank Restructuring, known as FROB, to help banks replenish capital. The fund has raised 9 billion euros from the government and sold 3 billion euros of bonds so far, according to Bank of America Corp. data.

The botton line: the bulk of Europe's periphery continues to be insolvent, have no access to capital markets, and would collapse into outright bankruptcy if the backstop of the euro printer were to be removed. And somehow the expectation is that bank "stress tests" are supposed to make any of this better?