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Spain pays sharply lower rates in bond issue

Spain paid sharply lower borrowing rates in a 4.499-billion-euro ($6.0-billion) bond issue Thursday, helped by European Central Bank bond purchases since August.

Demand for the three- and four-year bonds outstripped supply by nearly two-to-one even as yields fell compared to previous sales, which were executed before the ECB started intervening, the Bank of Spain said.

The lower yields mean Spain is able to finance its swelling sovereign debt at a lower cost.

Deep concerns over fragile eurozone economies’ annual deficits and accumulated debts had sent bond yields surging in July as investors demanded higher and higher returns to compensate for the perceived risk.

In August, the ECB finally stepped in, buying Spanish and Italian government bonds directly from the market so as to prevent borrowing rates reaching an unsustainable level.

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

But the prospect of health and education cuts has become a key concern ahead of November 20 general elections, in which the conservative opposition Popular Party is widely expected to oust the ruling Socialists.

In the latest bond auction, Spain sold:

— 1.120 billion euros in four-year bonds at a rate of 3.639 percent, compared to 4.230 percent in the previous comparable auction on June 2, before the ECB began buying Spanish and Italian government bonds;

— 2.398 billion euros in a three-year bond issue expiring April 2014 at a rate of 3.589 percent compared to 4.813 percent in the previous comparable auction on August 4;

— and 981 million euros in a second tranche of three-year bonds expiring October 2014 at a rate of 3.495 percent compared to 4.291 percent in the previous comparable auction on July 7.

Although the yields are down from the height of the crisis in July, they remain much higher than the levels Spain paid last year. In August 2010, for example, a three-year bond issue returned a yield of 2.276 percent.

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, 4.4 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.