Spain sees firm demand but higher yields in bond issue

5th May 2011, Comments 0 comments

Spain saw strong demand at a bond auction that raised 3.354 billion euros ($4.99 billion) on Thursday but was forced to pay higher yields in a climate of concern over eurozone debts after a bailout deal for Portugal.

Spain has been caught up in new fears over sovereign debt levels, propelled by the problems in Portugal, which on Tuesday became the third eurozone country to do a debt-rescue deal with the European Union and IMF.

Higher yields are costly to Spain, where the central and regional governments and banks need to raise about 290 billion euros in gross debt including rollovers in 2011, according to Moody's ratings agency.

In the latest issue, demand was strong at 6.2 billion euros, allowing the Treasury to stay within its target range of 3.0 billion to 4.0 billion euros.

But the Treasury was forced to offer an average interest rate of 4.549 percent to attract investors for the five-year bonds, up from 4.389 percent in the last such issue on March 3 and from 4.523 percent at Wednesday's close.

The Madrid stock market fell 0.50 percent following the news.

The tender delivered an "adequate rather than resounding result," Richard McGuire, a strategist at Rabobank in London, told Dow Jones Newswires.

Spain, where the economy is the size of the Greek, Irish and Portuguese economies combined, has been battling to convince markets that it should not be lumped together with the three lame ducks now under EU and IMF rescue terms.

It has particularly sought to distance itself from the debt problems of its neighbour and close economic partner Portugal.

The Spanish authorities have enacted reforms to strengthen bank balance sheets, cut state spending, make it easier to hire and fire workers, lower the retirement age and sell off assets.

Prime Minister Jose Luis Rodriguez Zapatero has vowed to bring the country's annual public deficit below an EU ceiling of 3.0 percent of gross domestic product in 2013.

The public deficit hit 11.1 percent of GDP in 2009, the third-highest in the eurozone after Greece and Ireland, before falling to 9.24 percent last year.

The economy is struggling with an unemployment rate that soared to 21.29 percent in the first quarter, the highest in the industrialized world.

Portugal on Tuesday announced it had reached a deal with the EU and the IMF on a rescue package worth 78 billion euros.

The head of the International Monetary Fund, and the EU Economic Affairs Commissioner said in a statement in Brussels Thursday that Portugal had to make "major national efforts" to overcome its deficit and debt crisis in exchange for the bailout.

Portuguese Finance Minister Fernando Teixeira dos Santos said the country's economy is set to contract by around two percent in 2011 and 2012 before recovering in 2013 under the deal.

© 2011 AFP

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