Spain passes critical debt test

13th January 2011, Comments 0 comments

Spain passed a major test on Thursday in its first bond auction of 2011, bolstering its case that it has no need for an emergency bailout that would rock the entire eurozone.

Spain sold its maximum target of 3.0 billion euros ($3.9 billion) in five-year bonds with demand oustripping supply by two-to-one.

The Treasury had to fork out an average interest rate of 4.542 percent to lure investors, a competitive rate when compared to the previous day's market close of 4.767 percent.

Nevertheless, it was sharply up from the 3.576 percent Spain paid at the last year five-year bond auction on November 4, a few weeks before a banking catastrophe forced Ireland to accept a bailout.

Spain, the fourth-biggest economy in the eurozone, equal in size to Ireland, Greece and Portugal combined, had to demonstrate it could access market financing at affordable rates.

Analysts agreed it managed to do so.

"Yes, the auction has been a success with strong pricing against the secondary market levels," said David Schnautz, analyst at Commerzbank AG in London.

"The current outright yield levels are sustainable."

UniCredit strategist Chiara Cremonesi told Dow Jones Newswires that the auction "went well," with Spain managing to sell the maximum in its target range of 2.0-3.0 billion euros.

Portugal, widely feared to be the next victim of a European debt quagmire, had eased the way with a bond auction the previous day when it raised 1.25 billion euros and kept rates below a key threshold of 7.0 percent.

Spain's auction represents only a small proportion of this year's financing needs.

Spain's central and regional governments and its banks combined need to raise about 290 billion euros in gross debt including rollovers in 2011, according to Moody's Investors Service.

Analysts are divided on the chances of a bailout for Spain, a prospect that could stretch the eurozone to breaking point.

Finance Minister Elena Salgado said Spain had no need of an EU bailout in an interview with US network CNBC shortly before the bond auction.

"If you are talking about financial assistance, for sure, not," she told CNBC.

"But of course any of the countries of the euro area, we need all the others because we have to improve our economic governance so we have to work together. But if you are talking about a bailout, definitely not."

She added that Spain could raise money without support from European Central Bank.

"As you know we normally do not know because the European Central Bank, they say how many bonds they are going to help but not the countries of origin but we think we are capable to do by our own means," she said.

Spain still faces tough tests this year including rolling over 21.79 billion euros of sovereign bonds and bills in April, 20.2 billion euros in July and 23.40 billion euros in October.

Underlying the market fears are Spain's high annual deficits and sluggish economy, encumbered by an unemployment rate of nearly 20 percent.

Prime Minister Jose Luis Rodriguez Zapatero vowed this week to meet his goals of cutting Spain's deficit from 11.1 percent of economic output in 2009 to 9.3 percent in 2010 and 6.0 percent in 2011.


© 2011 AFP

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