Spain forced to double rates at bond auction

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Spain was forced by market pressures to almost double the interest paid to investors at a bond auction which raised 3.26 billion euros on Tuesday.

The bonds were issued in tranches of three and six months, and demand was strong totalling 7.98 billion euros.

But the rates offered were sharply higher than at the last similar auction on October 26, at 1.743 percent for the three-month bonds, up from 0.951 percent previously.

The yield on the six-month paper jumped to 2.111 percent from 1.285 percent.

These yields were also higher than those quoted late on Monday by the market for bonds already in circulation. The market yield then was 0.950 percent for three-month paper and 1.150 percent for six-month.

This reflected greatly heightened concerns about the debt of some countries in the eurozone.

Rates or yields on bonds issued by Ireland, now the subject of an EU orchestrated rescue, by Portugal, Greece, and Spain and to a lesser extent Italy, have risen as their public finances come under increasing strain.

As members of the eurozone, the tension reflects concerns about underlying weaknesses in those seen being weaker members even though Portugal and Spain have stressed that they are not at risk of needing help.

The Spanish treasury intended to raise 3.0-4.0 billion euros with the auction on Tuesday.

The governor of the Bank of Spain, Miguel Angel Fernandez Ordonez meanwhile said on Tuesday that the effects of the debt crisis in Ireland "have spread" in a "rapid" way to some other eurozone countries and that this "has been felt" on the Spanish debt market.

The difference, or spread, between the rate that Spain must pay to attract funds for 10 years, and the rate paid by Germany which represents the benchmark rate in the eurozone, also rose on Tuesday to 220 basis points or 2.20 percentage points.

The Spanish stock market slumped 1.35 percent by mid-day, having dropped by 2.68 percent on Monday, as investors digested the implications of the rescue for Ireland.

Experts note that the Spanish economy is showing almost zero growth, that the unemployment rate of 20 percent is the highest in the eurozone, and that in some quarters reforms of the labour market and of savings institutions are considered insufficient to correct overburdened public finances.

Spain is a member of the eurozone and has the fifth-biggest economy in the European Union, far bigger than the economies of eurozone countries Greece and Ireland.

The issue of bonds enables a country to borrow from the pool of global savings. They are issued for a fixed period with a fixed interest, but may then be traded continuously.

As perceptions of risk attached to them change, for example if risk rises, money moves out of the bonds. This depresses the price and the fixed income return or yield automatically rises, signalling that the government will have to offer higher interest the next time it borrows.

© 2010 AFP

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