Spain defies ratings warnings with bond sale

1st July 2010, Comments 0 comments

Spain successfully raised money on the bond market at moderate rates on Thursday, despite a warning its credit standing was under review, but suffered a new blow when regional government debt was downgraded.

Spain successfully placed bonds to borrow 3.5 billion euros for five years, shaking off a warning from Moody's that the country's sovereign debt was under scrutiny for a possible downgrade, the government said.

The government borrowed the equivalent of 4.3 billion dollars at an average yield or interest rate of 3.657 percent, slightly higher than the yield of 3.532 percent at a similar transaction on May 6.

"The bond issue went rather well in a difficult context," said bond strategist Jean-Francois Robin at the French bank Natixis.

Moody's Investors Service warned Spain on Wednesday that it had placed the country's sovereign debt rating "on review for possible downgrade" due to the weak growth prospects of its fragile economy.

The credit rating agency said it could lower Spain's AAA rating by "one, or at most two, notches" at the end of a three-month review period.

But a Spanish economy ministry spokesman said on Thursday that the action by Moody's "was unable to move the market and demand was very strong."

"This issue was consistent with previous placements, a little more expensive but with strong demand."

Thursday's operation attracted bids worth 5.8 billion euros, according to Paris bond strategist.

The average yield was below that of five-year Spanish bonds, 3.752 percent, that prevailed at the close of trading on Wednesday.

With this emission, Spain has covered 52 percent of its 2010 financing needs and needs to raise 46 billion euros between now and the end of the year. The next issue is scheduled for July 15.

The economy ministry said in a statement that it did not expect an actual rating downgrade from Moody's "because the government is taking all necessary measures" to shore up public finances, notably deficit reduction and structural reform.

The Moody's warning followed a decision by another ratings agency, Fitch, on May 29 to cut Spain's credit rating one notch from the maximum AAA to AA+, arguing that the economic recovery would be more muted than that forecast by the government.

Spain, struggling with a big public deficit, plunged into its worst recession in decades at the end of 2008 following the collapse of a decade-long property boom.

Last month, it became the last of Europe's big economies to emerge from recession, with official data showing fragile growth of 0.1 percent in the first quarter.

The recession sent the unemployment rate soaring to more than 20 percent in the first quarter.

The Socialist government this year launched tough austerity measures aimed at shoring up the country's public finances in the face of concerns it could follow Greece into a financial crisis.

Spain is also pushing reforms to its rigid labour market to bring down the unemployment rate and slash jobless benefits.

And on Tuesday, the Bank of Spain said a consolidation process involving 39 of the country's 45 struggling regional savings banks was almost complete.

Moody's meanwhile followed up its warning on Wednesday with an announcement it had cut the credit rating of five regional Spanish governments.

Moody's downgraded from Aa1 to Aa2 the rating for four regions and from Aa2 to Aa3 for a fifth.

The agency said the outlook for all of these regions remained negative.

It explained its decision by saying that an expected fall in tax revenues in 2010-2011 would have a recurrent effect on their deficits in coming years.

This trend, together with a high level of debt, would be difficult to reverse given the weak level of expected growth in coming years.

© 2010 AFP

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