Spain faces higher rates in new bond issue

7th July 2011, Comments 0 comments

Spain had to offer higher returns on Thursday to sell nearly three billion euros ($4.3 billion) in bonds as investors fretted over sovereign debt burdens in the euro zone.

Demand outstripped supply by more than two to one, but only in return for rates of return of well over four percent even for bonds expiring in just three years.

Finance Minister Elena Salgado has said the risk premium Spain pays on the debt markets is not justified by its economic perfomance.

"Our economic fundamentals do not justify this high risk premium so it should come down," Salgado said in an interview with AFP on Wednesday.

But Salgado said the markets also were demanding higher rates to lend to other countries such as Italy, not just Spain.

"That is to say that it is not a Spanish question. It is an instability, a volatility that is effecting the debt markets in general," the finance minister said.

Despite the higher interest rates Spain had to pay to borrow on the markets, Salgado said the country had no difficulty financing itself.

In the latest bond auction, Spain raised 2.997 billion euros in three and five-year bonds.

A total 1.5 billion euros in three-year bonds went at 4.291 percent, compared to 2.839 percent at the last comparable auction January 14.

Another 1.497 billion euros in five-year bonds went at 4.871 percent, compared to 4.549 percent at the previous comparable auction May 5.

Investors had placed bids for 7.7 billion euros of bonds.

The Spanish risk premium -- the extra return investors demand before investing in Spanish 10-year bonds over safer-bet German bonds -- surged to 2.693 percentage points Thursday, near a November 2010 peak of 2.83 percentage points.

© 2011 AFP

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