Spanish debt costs ease, euro zone hopes rise

Spain saw its borrowing costs ease on Thursday at its first debt sale of the year, reflecting broader signs of financial recovery in crisis-hit eurozone economies.

A year and a half ago, repayment rates on Spanish debt were in danger territory, sparking warnings that the country would have to be bailed out like Portugal and Ireland.

But rates on the three countries’ debt have eased, and the yield on Spain’s five-year bond on Thursday hit the lowest rate since the launch of the euro currency.

Separately, in its first debt auction of 2014, Spain’s treasury sold 5.287 billion euros ($7.12 billion) in a sale of five- and 15-year bonds, with demand more than double the supply, the central bank said.

“This strong bond sale shows that market confidence in these countries is so strong now that they can probably withstand some volatility as well,” said Christian Schulz, an economist at Berenberg bank.

The repayment rate on Spain’s 15-year bond declined strongly to 4.192 percent from 4.809 percent in the previous comparable sale on September 19.

On the five-year bonds, the rate fell to a rate of 2.382 percent from 2.697 percent reached on December 19.

On the secondary markets that reflect day-to-day investor appetite for buying up Spanish debt, its benchmark 10-year bond yield slipped further into the comfort zone, to 3.71 percent from 3.79 the previous evening.

The yield on Spain’s five-year bond hit the lowest rate since the launch of the euro, easing to 2.235 percent on Thursday morning from 2.326 percent the evening before.

Schulz said there was “a broad, strong market sentiment which is getting ever more robust and resilient, which is positive for the eurozone periphery, not just Spain but also Italy and so on”.

After international authorities bailed out Portugal and Ireland in 2010 to stop their public finances collapsing, economists warned that Spain or even Italy could be next.

The jitters prompted the European Central Bank to promise it would prevent struggling countries dropping out of the eurozone.

That move is now credited with restoring confidence and driving a recovery over recent months, along with tough economic reforms by governments in Spain and other indebted countries.

“The ECB’s safety net has allowed this recovery to start,” said Schulz. Now, he added, “Ireland, Portugal and Spain are racing ahead because they have done their homework.”

Spain timidly emerged from recession in the third quarter of 2013, official data show, but the unemployment rate remains painfully high at about 26 percent.

Meanwhile Spain’s risk premium, which measures how much its 10-year yield exceeds that of safe-haven Germany, eased to 1.78 percent on Thursday — far below the dangerous levels above six percent reached in 2012.

On Tuesday, Ireland took a major step on the road to economic recovery with its first bond issue since exiting its international rescue programme.

It raised 3.75 billion euros in a sale of 10-year bonds, with the yield at 3.543 percent, while demand reached 14 billion euros — hailed by the authorities as a sign of renewed appetite for Irish debt.

“Ireland led the way for sure, exiting the bailout arrangements,” Schulz told AFP.

“Spain and Portugal look really strong now as well. They have very balanced recoveries, export-led, manufacturing-led — not in any way credit bubbles building, but solid recoveries.”

Portugal was due later on Thursday to issue medium-term debt in its first such operation for a year. It is due to exit its rescue programme on May 17.

However Greece, the first eurozone country to need a bailout, while making substantial progress in dealing with its deep problems, still has a mountain to climb in dealing with a huge overhang of debt.