Spanish debt sale sends relief through markets

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Investors showed a healthy appetite for new Spanish bonds but at greatly increased interest rates on Thursday after the government announced fresh privatisations to ward off 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 Spanish Treasury raised 2.468 billion euros (3.256 billion dollars) for three-year bonds but the average yield surged to 3.717 percent from 2.527 in the last similar auction on October 7.

Nevertheless, there was strong demand with offers amounting to 5.599 billion euros, a government spokesman said.

And the rise in the yield was far less than that in a sale of short-term bonds on November 23, Spain's first following the Irish bailout, when the interest rate almost doubled.

Stock markets surged, trading more than 3.0 percent higher just after the bond sale announcement. By early afternoon Madrid's Ibex 35 index of leading shares was up 1.61 percent at 9,833.9 points.

The bond sale was helped by two factors: the Spanish government's latest money-raising plans and expectations that the European Central Bank may step up purchases of sovereign debt, analysts said.

Given the concerns roiling 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 Loterias y Apuestas del Estado, 49 percent of airport management company AENA, scrap a jobs subsidy and lower taxes on small and medium sized businesses.

To reinforce the message, 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 lottery groups.

Spain reportedly expects to net as much as 5.0 billion euros from the privatisation of the lottery firm and 8.0 billion euros from the sale of the stake in AENA.

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 lower its public deficit from 11.1 percent of annual economic outpout last year, the third highest in the eurozone after Greece and Ireland, to 3.0 percent in 2013.

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

"Today's auction confirms the appetite for non-core bonds with market expectation on ECB buyings and probably the good news from public finances," Jean Francois Robin, a strategist at Natixis in Paris, told Dow Jones Newswires.

The ECB's governing council meets Thursday to grapple with debt turmoil in the euro zone.

Many in the markets think the ECB could maintain or even boost its supply of cheap funding for the banks by buying government bonds from them rather than beginning to rein in the measure.

Such a signal would tend to reduce the risk for investors who buy government bonds. Investors have been alarmed by signs that eurozone finance ministers intend to increase bond holder risks after 2013.

© 2010 AFP

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