Spain raises new loans, but at sharply higher rates

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The Spanish Treasury successfully borrowed 3.479 billion euros (4.305 billion dollars) by selling bonds on Thursday but at higher rates as investors sought more reward for lending after recent debt scares.

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

Despite 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 respectively 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 previously.

Analysts however said the auction may have reassured markets.

"The auction went well, with Spain issuing close to the maximum of the range announced," said Chiara Cremonesi, fixed income strategist at UniCredit Research.

"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.

"That said, 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 suggestions 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 such suggestions.

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

The Bank of Spain said on Wednesday 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.

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.

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.

© 2010 AFP

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