Spain pays higher rates to raise 3.225 bn euros

Spain paid sharply higher borrowing rates to raise 3.225 billion euros ($4.3 billion) in new short-term debt Tuesday, a sign of persistent market tension over its sovereign debt outlook.

The lucrative yields lured strong interest in the auction of three- and six-month bills, allowing the state easily to meet its target of raising 2.5-3.5 billion euros, a Bank of Spain statement showed.

The sale demonstrated Spain’s capacity to finance its debt but at a relatively high cost, despite a major European Central Bank programme of buying Spanish and Italian government debt on the market.

Spain’s central government and its powerful regions are struggling to cut costs to meet annual deficit-cutting targets, and to prevent the accumulated debt from rising too fast.

Cuts to health and education have become a serious concern in the run-up to November 20 elections, in which the conservative opposition Popular Party is widely expected to oust the ruling Socialists.

In the latest auction, Spain sold 1.604 billion euros in three-month bonds at a rate of 1.692 percent, up from 1.357 percent at the last comparable auction August 23. Demand outstripped supply by more than two to one.

It also sold 1.621 billion euros in six-month bills at a rate of 2.665 percent, up from 2.187 percent on August 23. Demand from investors was strong, outstripping supply by nearly four times.

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 — the EU limit — in 2013.

It is now scrambling to raise extra money in 2011 to meet those 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.

Earlier this month, the government passed a constitutional reform to limit future budget deficits and curb the accumulated debt, trying to prove its determination never to slide deep into the red again.