Spanish banks increased their holdings of the country's government bonds by more than 10 per cent in the first three months of this year, limiting the market fall out from inconclusive elections in Italy and the eurozone's bungled handling of the Cypriot bank crisis.
Bank holdings of Spanish government bonds rose from just over €200 billion in December to almost €225 billion in March, according to data from the Spanish Treasury. As a percentage of the total amounts outstanding, Spanish banks’ holdings increased from 38 per cent to more than 40 per cent. Spanish banks also built their holdings in early 2012. Then, they took advantage of more than €1 trillion in cheap three-year loans that had been pumped into the eurozone financial system by the European Central Bank.
The Spanish data suggest that one explanation was that the eurozone’s financial “fragmentation” – which has seen banks retreating behind national borders – had reduced the volatility caused by foreign investment flows. But fragmentation has also undermined the original objective of Europe’s monetary union, which was meant to promote the continent’s economic integration.
Yields on Spanish 10-year government bonds fell from more than 5 per cent to just above 4 per cent between late February and early May, although they have risen more recently. As well as domestic buying, yields have been pushed downwards by ripple effects of the ambitious bond buying programme launched by the Bank of Japan.
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