Spain raises nearly €3.5B ($4.3B) in oversubscribed bond auction, but at higher interest rate

By AP
Thursday, June 17, 2010

Spanish debt sale sees high demand, but cost rises

MADRID — Spain, which is fighting speculation it will need a bailout, raised nearly €3.5 billion ($4.3 billion) Thursday as investors snapped up a bond offering — although at sharply higher interest rates that indicate they still view government finances with skepticism.

Markets welcomed the result, with the euro and stocks rising.

Spain is adamantly denying reports that its troubled public finances and banks’ credit problems are pushing it toward some sort of rescue similar to the one given to Greece by the European Union and the International Monetary fund.

Spain has only just crawled out of nearly two years of recession triggered by the collapse of a boom fueled by construction and flee-flowing credit. Its public coffers have been drained by spending to cope with a jobless rate that now stands at a eurozone high of 20 percent and economic stimulus measures.

Socialist Prime Minister Jose Luis Rodriguez Zapatero is under intense pressure to slash the oversized deficit that has raised fears of a Greek-style debt meltdown, and desperately needs to get the country’s 4.6 million unemployed working and paying taxes. Greece ultimately needed a bailout after being frozen out of credit markets by prohibitive high interest rates.

After enacting an austerity plan that only barely won lawmakers’ approval last month, the increasingly isolated government is seeking support in Parliament for a package of long-awaited labor market reforms designed to shake up the economy, encourage companies to hire and reassure investors.

Markets are also worried about Spain’s banking system. The government acknowledged this week that Spanish banks are having trouble obtaining credit on the interbank market.

The worry is that if Spanish banks start failing, the government might not have enough money to bail them out.

Big Spanish banks like Banco Santander and BBVA have weathered the global downturn relatively well due to strict provisioning rules imposed by the Bank of Spain, although the country’s unlisted, regionally-based savings banks took on much more exposure to the real estate sector and are saddled with billions of euros in foreclosed property.

A broad restructuring among these so-called ‘cajas’ is underway, with about half of the total 45 having merged or holding talks on doing so.

Unicredit analyst Chiara Cremonesi said Thursday’s auction in Spain went well, noting Spain had issued close to the maximum of the range announced and that demand was solid.

“Overall, all the elements point at a good result, although a note of caution comes from the fact that the amount sold was rather subdued if one considers that Spain sold two bonds,” Cremonesi wrote. “That said, even taking into consideration this, we would judge the result as reassuring, especially given that Spain has been under the spotlight over the last few days due to reported strains in its banking system and its bleak fiscal outlook.”

Spain’s Treasury auctioned off €3 billion in 10-year bonds at an average interest rate 4.86 percent, up from 4.045 in the last auction in May. It sold €479 million in 30-year bonds at an average interest rate of 5.9 percent, up from 4.8 percent in March.

The Treasury had hoped to issue between €2.5 billion and €3.5 billion in long-term debt.

The auctions were oversubscribed 1.89 and 2.45 times, respectively, suggesting investors retain an appetite for Spanish debt but demand a higher yield.

The Madrid stock market cheered the results of the auction, with the Ibex 35 index up 1.2 percent shortly after the figures came out.

The interest rate gap, or spread, between the 10-year Spanish bonds and their benchmark German equivalent also fell. The smaller the gap, the less investors think Spain’s debt is risky. Early in the day the gap had set yet another record at 2.33 percentage points, but after the auction the difference was down to 2.14 points.

Seeking to refute speculation concerning the health of Spanish banks, the Bank of Spain said Wednesday it has carried out stress tests on them and would publish the results. It gave no timeframe but suggested this would happen soon.

“The Bank of Spain has conducted stress tests to verify that all banks, savings banks and credit co-operatives will have sufficient capital available to get through the most reasonable scenarios, but also for complex growth scenarios in the near future,” Governor Miguel Angel Fernandez Ordonez said in a speech.

“The Bank intends to publish the results of these stress tests, to reveal the deterioration estimated, the consequent capital requirements and the capital funding committed, to provide the markets with a perfectly clear idea of the situation of the Spanish banking system,” he said.

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