Spanish debt sale eases market nerves

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Investors showed a healthy appetite for new Spanish bonds on Thursday, albeit at much higher returns, buoyed by a new privatisation drive to ward off the debt pressure threatening the country.

Strong demand for Spanish bonds, even at higher rates, will be a relief to a government battling to douse fears of a spreading debt crisis leading to an Irish-style economic bailout.

The Treasury raised 2.47 billion euros (3.26 billion dollars) in three-year bonds but the average yield -- the rate of return earned by the holder -- soared to 3.717 percent from 2.527 percent at the last similar sale October 7.

However, the rate was less than that the 3.970-percent yield on Spanish three-year bonds at Wednesday's close and there was strong demand with offers amounting to 5.56 billion euros, a government spokesman said.

The Madrid stock market jumped on the news, trading more than 3.0 percent higher just after the bond sale announcement, and closing up 2.78 percent.

The bond sale was helped by two factors -- the government's latest money-raising plans and expectations that the European Central Bank might take new and perhaps radical steps to bolster the eurozone economy.

In the event, it largely left policy on hold but did just enough to keep the markets happy that it was not about to start withdrawing some of its stimulus policies.

Given the concerns roiling the financial markets, the auction was reasonably well received, said UniCredit Bank strategist Chiara Cremonesi.

The sale "sends a reassuring message to investors, after the recent speculation on contagion of the sovereign debt crisis to Spain," she said, according to Dow Jones Newswires.

Prime Minister Jose Luis Rodriguez Zapatero said on Wednesday his Socialist government would sell 30 percent of the state-owned lottery, 49 percent of airport management company AENA, scrap a jobs subsidy and lower taxes on small- and medium-sized businesses.

To reinforce the message to markets, he cancelled a trip to Latin America so as to attend a cabinet meeting on Friday to approve the measures.

The government had planned to sell a smaller stake of 30 percent of AENA and as recently as January said it had no plans to privatise the lottery firm, one of the world's most profitable.

Spain could net as much as 5.0 billion euros from the privatisation of the lottery and 8.0 billion euros from the sale of the stake in AENA, reports said.

Finance Minister Elena Salgado said the sales would allow Spain to slash borrowing from the markets by a third in 2011, lowering debt issues to 30-31 billion euros from the 45 billion euros originally planned.

"That will allow us to reduce our stock of debt," she said in an interview with the Financial Times.

The government aims to rein in its public deficit from 11.1 percent of annual economic output last year, the third highest in the eurozone after Greece and Ireland, to 3.0 percent -- the EU limit -- by 2013.

Despite the reduction in new debt issues, the Financial Times said, Spain will still have to pay off about about 150 billion euros in existing debt that matures in 2011.

Some analysts voiced caution, however, given the strains on Spain and the wider eurozone which led Ireland to seek a bailout at the weekend.

Raj Badiani, an analyst with IHS Global Insight, warned that while "Spain's commitment to restoring fiscal discipline remains resolute ... investors are circling Spain again in the wake of Irish sovereign debt crisis.

"Any loss of fiscal credibility in current market conditions could result in ever higher bond yields, or even private investors avoiding Spain's sovereign and private debt at a time when it has substantial financing requirements, implying that it could be forced to seek outside financial assistance," he said in a research note.

© 2010 AFP

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