Spanish debt risk premium smashes records

15th November 2011, Comments 0 comments

Spain's debt risk premium shattered eurozone records on Tuesday on fears over the public deficit, a clear warning to the next government five days before a general election.

Investors punished Spain's debt, sending borrowing costs surging on the markets and in a government auction.

Reassurances from the conservative Popular Party, which is storming towards a landslide win over the ruling Socialists in November 20 elections, seemed to have no effect.

The risk premium -- the extra return investors demand to buy Spanish 10-year government bonds over comparable safe-haven German debt -- broke records for a second day, reaching 4.564 percentage points.

The benchmark Spanish 10-year bond yield, which pierced 6.0 percent the previous day for the first time since August, rose further to 6.309 percent.

"The first thing is to send a message of confidence," opposition leader Mariano Rajoy said in an interview published in centre-right daily El Mundo.

"We need to tell investors that they must invest and that they will have the government's support; and beyond Spain the message is that we will be serious, that we will do things properly and that we are betting on the euro."

But the words had little impact.

Rates on a 3.158-billion-euro ($4.3-billion) Spanish Treasury auction of 12- and 18-month bills soared to above 5.0 percent a year from less than 4.0 percent a month earlier.

On Thursday, the Treasury faces another critical test when it tries to sell up to 4.0 billion euros in 10-year bonds.

"I think the thing that is really going to surprise the politicians is that the Rajoy victory is already factored in," said Edward Hugh, independent economist based in Catalonia.

"There is not going to be a shockwave or anything from Rajoy arriving. What people want now is to see what he is going to do."

The European Commission may have fed market concerns by warning on Friday that Spain would miss its target of cutting the deficit to 6.0 percent of gross domestic product this year from 9.3 percent last year.

Spain had appeared to escape the wrath of the markets as traders were consumed by an unravelling Greek rescue plan and political chaos in debt-burdened Italy.

"The question is not really why do they now pick on the Spanish but why did they leave them alone for so long when it is obviously so vulnerable," Hugh said.

"Everybody has been focused on the deficits in the regional budgets since the middle of the summer, everybody knows that there is more money needed for the financial system and Spain is going into recession," he added.

"And there is no policy instrument available to put a brake on it."

The keys to Spain's problems were the predicted slippage on deficit-cutting goals, recession fears and the prospect of more state money being needed for the banking system, the analyst said.

Spanish brokerage Link Securities agreed.

"We can see in the behaviour of our bonds a clear message to the government that emerges from Sunday's elections, which will be forced to adopt measures to cut the public deficit and comply with the outgoing government's promises, which have now been placed in doubt," it said in a report.

"Moreover the new government will not have much time to present its proposals, because the market pressure will be strong."

© 2011 AFP

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