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As yields on 10 year bonds are flirting with the 7% mark, it’s a good opportunity to look at the  high dependency on banks and the sovereign and vice versa, thanks to the LTROs.

The ECB’s long term refinancing operations initially lowered Spanish yields and helped the banks. Spanish banks took cheap loans from the ECB to buy higher-yielding Spanish bonds, sometimes with leverage. The idea was to lower sovereign yields and give banks an easy arbitrage. Reality looks different.

However, as worries rose in recent months, Spanish bonds fell (yields rose). So banks were stressed with these losses.

If Spain doesn’t lend a helping hand to the banks, they might sell their Spanish bonds in the markets to get more cash, and this will just add more pain on Spain.

External help is already promised in the form of the 100 billion bailout, but this will eventually add to Spain’s debt and will not be enough for the banks. A quicker solution is resuming the ECB’s bond buying scheme. Spanish Prime Minister Mariano Rajoy, who already suffered a huge humiliation with the bailout, is begging for ECB aid, and is so far denied.

Will the ECB recognize its big mistake and offer direct aid to Spain? It already did it in the past.

Spain and its banks are too dependent on each other. In the current environment, the credit rating downgrades for Spanish banks seem unnecessary: the banks in Spain are always safe.

When will the Gordic Knot be cut loose? Perhaps the Greek elections will be the beginning.

Further reading: 3 Scenarios for the Greek elections.