Spanish sale of $4.3 billion in bonds is oversubscribed a day after credit downgrade warning

Spain sells bonds a day after downgrade warning

MADRID, Spain — Spain succesfully raised €3.5 billion ($4.3 billion) Thursday in an oversubscribed bond sale, a reassuring sign for markets a day after ratings agency Moody’s warned it may join others in downgrading the country’s debt.

The average interest rate for the five-year bonds was 3.65 percent, up from 3.53 percent at the last such auction in May, and the sale was 1.7 times oversubscribed, the Treasury Department said. The government had hoped to sell between €2.5 and €3.5 billion of the bonds.

A Treasury official said the oversubscription ratio showed the Moody’s warning went “totally unnoticed.”

Moody’s Investors Service sent a shudder through financial markets when it said late Wednesday it has placed Spain’s AAA sovereign rating under review for a possible downgrade because of worsening economic prospects.

The agency said it will re-evaluate Spain’s credit rating over the next three months, adding it expects that any cut would only be by “one, or at most two, notches”.

Spain’s borrowing costs have risen significantly this year, deepening worries among investors already fretting over the country’s ability to climb out of an economic slump while enacting deep spending cuts to reduce its budget deficit.

Fitch downgraded Spain’s sovereign debt from AAA to AA+ on May 28, saying austerity measures taken by the Socialist government will slow growth in the Spanish economy. Standard & Poor’s lowered Spain’s rating from AAA to AA+ in January 2009 and again in April this year to AA.

The government’s last auction, which was for 10-year bonds and was held on May 20, saw bids more than double expectations, boosting market confidence in the country’s finances and significantly calming speculation of a default.

Spain on Thursday also raised its value added sales tax from 16 percent to 18 percent, upping the cost of goods ranging from gasoline to clothing and cars. Some experts are worried that the move could slow an eventual economic recovery because the higher prices may reduce consumer spending

“Consumers continue to fear for their jobs and feel that emerging from this crisis is not going to be at all easy,” said Ileana Izverniceanu, spokeswoman for the country’s principal association that lobbies for consumers.

A subway strike also continued Thursday in Madrid, though on a lesser scale than during previous days. Almost no trains ran Tuesday and Wednesday but train workers on Thursday started complying with a law requiring them to keep at least half of the subway system up and running.

The resumption of service alleviated huge traffic jams and commuting delays, but the train workers threatened to resume a complete subway shutdown on Monday.

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Associated Press Writer Daniel Woolls contributed from Madrid.