Spain passes critical loan test, but debt still rings alarms

17th June 2010, Comments 0 comments

Spain got through a critical test to borrow money on Thursday by offering high interest rates, but analysts said strong demand may reassure markets alarmed about the nation's finances.

The sale of government debt bonds was seen as critical test for the country, hit this week by rumours it needs huge rescue funds from the European Union.

The sale also occurred on the day EU leaders meet in Brussels on the European debt crisis, and the day before talks here involving the head of the International Monetary Fund, Dominique Strauss-Kahn.

The treasury issued 3.0 billion euros in 10-year bonds and 479 million euros of 30-year bonds, to raise a total of 3.479 billion euros (4.305 billion dollars), at the top end of its expectations of 2.5 billion to 3.5 billion.

Investors submitted bids worth 6.83 billion worth of bids for the bonds.

But despite the strong demand for the two issues, Spain had to offer higher interest rates than at the last similar auctions on May 20 and March 18, with investors increasingly concerned about the country's public finances.

The maximum yield for 10-year bonds was 4.911 percent, up from 4.074 percent, and 5.937 percent for 30-year bonds, compared to 4.768 percent previously.

Analysts however said the auction may have reassured markets.

"The strong demand for Spanish bonds should help restore confidence," said Aro Razafindrakola, an analyst at Societe Generale in Paris.

Chiara Cremonesi, fixed income strategist at UniCredit Research, said "the auction went well, with Spain issuing close to the maximum of the range announced... Another positive factor was that both bonds were sold at an average yield way below secondary market level.

"Overall, all the elements point at a good result, although a note of caution comes from the fact that the amount sold was rather subdued if one considers that Spain sold two bonds.

"Even taking into consideration this, we would judge the result as reassuring, especially given that Spain has been under the spotlight over the last few days due to reported strains in its banking system and its bleak fiscal outlook."

Market sentiment has been affected by various rumours concerning possible strains within the Spanish banking system and reports that Spain might need help amounting to 200-250 billion euros (246-307 billion dollars) from the European Union.

EU and Spanish officials have strongly denied the reports.

The financial markets are awaiting clarification on these concerns from an EU summit starting in Brussels on Thursday.

But the speculation was fuelled when International Monetary Fund chief Dominique Strauss-Kahn announced on Wednesday he would hold talks with Spanish Prime Minister Jose Luis Rodriguez Zapatero in Madrid on Friday.

The Bank of Spain said on Wednesday that it intended to publish "stress tests" on the ability of its banks to sustain sudden financial shocks so as to calm market nerves about the strength of its financial institutions.

After Spain's public deficit swelled to 11.2 percent of output last year, the Socialist government has committed to an austerity drive to slash the shortfall between its revenues and its spending to three percent in 2013.

Sovereign debt bonds are issued with a fixed annual return or interest, called yield, which does not change in cash terms during the life of the bond. The only traded variable is the price of the bond.

As perceptions about the risk of the bond change, the price of the instrument rises or falls, automatically changing the fixed cash return as a percentage of the new price.

Spanish bonds have fallen recently, pushing up the effective yield as a percentage, and this is reflected in the rate the Spanish government has had to offer for this latest issue.

-- With Dow Jones Newswires --

© 2010 AFP

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