Spain pays high rates in first bond sale since downgrade

20th October 2011, Comments 0 comments

Spain paid high borrowing rates to raise 3.9 billion euros ($5.4 billion) in a bond auction Thursday, its first since Moody's slashed the country's sovereign debt rating.

The Treasury sold a mix of five-, eight- and 10-year bonds to raise a combined 3.9 billion euros, comfortably meeting its target for the auction, the Bank of Spain said.

But rates were generally higher.

Moody's on Tuesday cut Spain's rating by two notches to A1 from Aa2, with a negative outlook, "to reflect the downside risks from a potential further escalation of the euro area crisis".

A breakdown showed Spain's Treasury sold:

-- Five-year bonds for 1.082 billion euros at an annual rate of 4.782 percent, up from 4.489 percent at the last comparable sale on September 1;

-- Eight-year bonds for 1.036 billion euros at a rate of 5.110 percent, up from 4.969 percent at the previous comparable auction September 15;

-- And 10-year bonds for 1.788 billion euros at a rate of 5.433 percent, down from 5.896 percent at the previous comparable auction July 21, which was before the European Central Bank began buying Spanish and Italian bonds to support the market.

In early trade Thursday, Spanish benchmark 10-year government bonds were changing hands on the secondary market for a yield of 5.449 percent, representing a risk premium of 3.426 percentage points over safe-bet German bonds.

Spain has promised to reduce its annual public deficit from the equivalent of 9.3 percent of gross domestic product last year to 6.0 percent of GDP this year, 4.4 percent in 2012 and 3.0 percent in 2013.

But Moody's Investors Service, like other rating agencies, cast doubt on those targets because of slower-than-expected economic growth as it downgraded the Spanish sovereign debt this week.

"Moody's expects the budget deficits for the general government sector to be above target both this year and next," it warned.

"In particular, Moody's continues to have serious concerns regarding the funding situation of the regional governments and their ability to reduce their budget deficits according to targets."

Spain is scrambling to raise extra money in 2011 to meet the targets -- telling firms to pay tax installments early, lowering state spending on medicines and stimulating new home purchases with a tax cut.

Each year of deficit pushes up overall debt, which grew to 65.2 percent of GDP as of June 30 from 57.2 percent a year earlier.

© 2011 AFP

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