Spanish Bond Sale Eases Funding Concern

Bloomberg | Jul 15, 2010

Investors bought all 3 billion euros ($3.8 billion) of 15-year bonds offered by Spain, with demand strong enough to ease concern the nation would struggle to cover debt payments after Greece’s bailout. “The Spanish auction went well,” said Chiara Cremonesi, a strategist at UniCredit Research in London. “Appetite for Spanish paper is alive.” Spain, which has to repay 24.7 billion euros of debt this month, has the third-largest deficit in the euro region and its banks are dependent on the European Central Bank for funds. Prime Minister Jose Luis Rodriquez Zapatero, risks losing power as he pushes through austerity measures including cutting workers’ wages, freezing pensions and reducing severance pay. Today’s auction raised the maximum offered at an average yield of 5.116 percent, compared with 4.434 percent at a sale of the same securities on April 22, the Bank of Spain said. Demand was 2.57 times the amount sold, compared with the bid-to-cover ratio of 1.79 in April. Spanish bonds rose and the euro strengthened. The government is hoping the publication of stress tests next week will allow its financial institutions to access capital markets. Spanish lenders borrowed a record 126.3 billion euros from the ECB in June, up 48 percent from the previous month, according to data compiled by the Bank of Spain. That compares with a drop of 4 percent to 496.6 billion euros for euro-area lenders as a whole.

Bonds Gain

The yield premium investors demand to hold Spain’s 10-year debt over comparable German bonds fell to 199.6 basis points after the auction, from 211 basis points earlier. The euro gained 0.4 percent to 1.2792 against the dollar. “People who expected the end of the world in July because of the redemptions have been proved wrong,” said Gianluca Salford, a fixed-income strategist at JPMorgan Chase & Co. in London. Spain’s auction follows Greece’s sale of Treasury bills on July 13, its first since the country accepted a three-year bailout plan from the European Union in May after its borrowing costs surged. Greece secured an interest rate at that sale below the 5 percent charged on the emergency European loans.   

July Redemptions

Portugal sold more debt than targeted in an auction yesterday, a day after Moody’s Investors Service cut the country’s credit rating, and Italy also sold 6.8 billion euros of bonds yesterday. The Spanish government has said it will have no trouble paying the July redemptions, particularly as repayment coincides with a period of increased tax revenue. “The markets know perfectly well that we have been executing our funding strategy beyond our needs with no particular concern,” Deputy Finance Minister Jose Manuel Campa said in an interview on June 22. As an example of the Treasury’s strategy, he said Spain didn’t have to go to the market to raise its portion of the emergency loan extended to Greece in May.

Fitch Ratings cut Spain’s credit rating to AA+ on May 28, citing concerns about the economy’s ability to grow. Standard & Poor’s Ratings Services ranks Spain AA, while Moody’s Investors Service put the country’s rating on review for a possible downgrade on June 30, citing deteriorating growth prospects and the risk the government won’t meet its fiscal targets. As a result of austerity measures including public wage cuts, a reduction in investment and a pension freeze, the government revised its growth forecast for next year to 1.3 percent from 1.8 percent. That’s still more than double the International Monetary Fund’s 0.6 percent forecast. Even with Spain’s budget deficit at 11.2 percent of gross domestic product, more than three times the EU limit its debt amounted to 53 percent of GDP last year lower than in Germany and less than the euro-region average of 79 percent.


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