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Spain pays higher rate for new short-term borrowing

Spain paid a higher borrowing rate on Tuesday to raise 4.457 billion euros ($6.1 billion) in new short-term debt, as tensions grew over the eurozone debt crisis.

The auction of government bills was a major test, coming just hours after Standard & Poor’s cut the sovereign credit rating of Italy, which together with Spain is a major source of concern for the debt markets.

Spain auctioned 12- and 18-month bills to easily meet its target of raising 3.5-4.5 billion euros, the Bank of Spain said in a statement.

Demand by investors outstripped supply by more than two to one, with requests amounting to 12.3 billion euros.

But Spain lured them by paying higher rates of return, meaning costs are rising to finance its debt, which grew to 65.2 percent of gross domestic product as of June 30 from 57.2 percent of GDP a year earlier.

The Treasury paid a return of 3.591 percent on the 12-month bills, up from 3.335 percent at the last similar auction August 16; and 3.807 percent on the 18-month bills, up from 3.592 percent August 16.

As markets reel after Standard & Poor’s cut Italy’s credit rating, Spain is waiting nervously to hear from Moody’s Investors Service, which has promised to decide by the end of October on a possible downgrade.

“I hope Moody’s will take into account the reforms that are ongoing such as the constitutional reform,” Finance Minister Elena Salgado told Antena 3 television on Tuesday.

This month, the government passed a constitutional reform to limit future budget deficits, trying to prove its determination never to slide deep into the red again.

It is now scrambling to raise extra money in 2011 to meet a deficit-cutting target: telling firms to pay tax installments early, lowering state spending on medicines and stimulating new home purchases with a tax cut.

Spain has promised to reduce its annual public deficit from the equivalent of 9.2 percent of gross domestic product last year to 6.0 percent of GDP this year, 4.0 percent in 2012 and 3.0 percent in 2013.